Wednesday, December 9, 2009

Gold: "Is The Comex The Next Madoff Disaster?" (Has fund manager John Paulson brought a butter knife to an automatic weapon fight?) GLD; SLV; IAU

Interesting take on the recent action.
I was about to do a post on the fact that gold equities are back to June levels when this popped up.
From The Golden Truth:
To start, wouldn't it be ironic if now-famous hedge fund manager John Paulson, who made billions betting against the real estate using derivatives, gave most of those profits back if I'm right about GLD and GLD implodes like Enron? Judging from Paulson's investment activity in the gold market, he has entered his "horse" into a lucrative race, only his horse is crippled. His stock picks are pathetic and his choice of using GLD as a proxy for physical gold speaks volumns about his lack of understanding of the precious metals market. I will circle back around to this after I address the accelerating train wreck at the Comex.

My colleague "Jesse" of Jesse's Cafe Americain has posted a must-read piece about how the Comex now permits gold/silver contracts to be settled using ETF's, like GLD, IAU and SLV. Those of us who have been watching the Comex for many years have wondered with bewilderment, albeit horrified amazement, as the Comex and its regulators have allowed the short positions controlled by the big banks like JPM and Goldman to build up way beyond the ability of the Comex to settle those contracts with gold and silver, should there come a time when those holding those contracts from the long side decide to stand for actual delivery. This is the definition of a Ponzi scheme. Keep issuing paper claims and hoping that those claims either expire worthless or enough of the holders do not ask for actual settlement, which has been the case all along. But what if....?

It has long been suspected that the reported inventory at the Comex is being fraudulently reported such that the Comex would be in trouble even if a portion of the contract longs were to stand for delivery. Recently, there has been some unexplained inventory occurrences which lend credence to the fraud theory. More recently, the Comex issued a regulatory change which would permit ETFs to be delivered to contract longs instead of the actual metal. This quote from Jesse's commentary sums up the situation nicely:

"Comex is putting forward the offer of paper in the form of money or ETF positions very aggressively, and making it the much easier alternative. Delivery of physical gold from the Comex is no longer as straightforward or even as semi-convenient as it had been in the past. In fact, it is difficult, and one must be very persistent and wait long periods of time" Here is the link: Exchange For Physical

I can attest from personal experience that the Comex has indeed made it very burdensome to stand for physical delivery. We waited 7 weeks past "last delivery day" to receive delivery on one measely silver contract. The person who manages our depository told us were lucky, that he has other clients waiting over 2 months for delivery.

The point here is, why would the Comex be doing this if they were not concerned about a "run on the bank" in which traders stand for delivery of more gold/silver than the Comex is able to produce? The point of acquiring gold/silver on the Comex is that it enables the buyer to acquire a large quantity of gold/silver which meets specific size, weight and quality specifications at the spot price. Why now offer paper instead?>>>MORE