There appears to be no way out for the bullion banks deteriorating bn short gold futures positions (bn net) on Comex. An earlier attempt between January and March to regain control over paper gold markets has backfired on the bullion banks. Unallocated gold account holders with LBMA member banks will shortly discover that that market is trading on vapour. According to the Bank for International Settlements, at the end of last year LBMA gold positions, the vast majority being unallocated, totalled 2bn — the London Mythical Bullion Market is a more appropriate description for the surprise to come. An awful lot of gold bulls are going to be disappointed when their unallocated bullion bank holdings turn to dust in the
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There appears to be no way out for the bullion banks deteriorating $53bn short gold futures positions ($38bn net) on Comex. An earlier attempt between January and March to regain control over paper gold markets has backfired on the bullion banks.
Unallocated gold account holders with LBMA member banks will shortly discover that that market is trading on vapour. According to the Bank for International Settlements, at the end of last year LBMA gold positions, the vast majority being unallocated, totalled $512bn — the London Mythical Bullion Market is a more appropriate description for the surprise to come.
An awful lot of gold bulls are going to be disappointed when their unallocated bullion bank holdings turn to dust in the coming months — perhaps it’s a matter of a few weeks, perhaps only days — and synthetic ETFs will also blow up. The systemic demolition of paper gold and silver markets is a predictable catastrophe in the course of the collapse of fiat money’s purchasing power, for which the evidence is mounting. It is set to drive gold and silver much higher, or more correctly put, fiat currencies much lower.
This is only the initial catalysing phase in the rapidly approaching death of fiat currencies.
Sections to this article
- The rescue attempt has already failed
- The financial system depends entirely on inflationary fiat
- Forget currency resets
- Transition pains on Comex
- London’s hidden liabilities
Measured in dollars, the current bull market for gold started in December 2015, since when the price in dollars has almost doubled. Other than the odd headline when gold exceeded its previous September 2011 high of $1920, only gold bugs seem to be excited. But in our modern macroeconomic world of government-issued currencies, which has moved on from the days when gold operated as a monetary standard, it is viewed as an anachronism; a pet rock, as Jason Zweig of the Wall Street Journal called it in 2015, only a few months before this bull market commenced.
Despite almost doubling, Zweig’s view of gold is still mainstream. His comment follows the spirit of today’s macroeconomic hero, John Maynard Keynes, who called the gold standard a barbaric relic in his 1924 Tract on Monetary Reform. Keynes went on to invent macroeconomics on the back of his 1936 General Theory, and whether you profess to be Keynesian or not, as an investor you will almost certainly kowtow to macroeconomics. It has been well-nigh impossible to have a successful career in the investment industry unless you subscribed to inflationist Keynesian theories. You are required to substitute the economics of aggregates for those of the human action of individuals, upon which classical economics was based. And with it, you must unquestionably accept the state theory of money.
Well, we are now witnessing the cataclysmic ending of the Keynesian fallacy; the destruction of macroeconomics in a systemic failure centred on paper markets for gold and silver.
The rescue attempt has already failed
You may have missed the establishment’s last-ditch attempt earlier this year to save itself. Figure 1 below shows its failure.
Comex open interest peaked in January, when the gold contract was being overwhelmed by global demand. Never before had open interest been this high: the previous all-time record had been in July 2016, when it hit 658,000 contracts. At that time, the market had recovered strongly from a deeply oversold condition, the price rallying from the December low in our headline chart, from $1049 to $1380. That was successfully crushed with open interest taken down to 392,000 and the gold price to $1120. However, the take-down which commenced in earnest in January this year did not succeed.
There is no question it was a coordinated attempt by the bullion bank establishment to contain a developing crisis. From its peak of 799,541 contracts on 15 January open interest fell to 553,030 on 23 March. Initially, the gold price continued rising to $1680 on 9 March, but by 18 March it finally reacted, falling to $1471 in only nine trading sessions. But while open interest went on to fall to 470,000 in early-June, the price exploded higher with unprecedented price premiums developing on Comex from 23 March onwards. The bullion banks’ short exposure net of longs on Comex in a rising market had risen to $35bn and the gross position was $53.5bn before the attempt to drive the market lower. Today, the respective figures are $38.3 and $53bn.
The failure of this well-worn tactic precludes it from being used again. We look at the seriousness of the current position on Comex and the LBMA later in this article.
The financial system depends entirely on inflationary fiat
In the investment industry it is monetary debasement that gives you your living. For the rise in the general level of prices of financial assets, measured by various indices, is little more than a reflection of the loss of purchasing power of your state’s currency. The world has been enjoying the phenomenon particularly from the mid-1970s, four years after the last vestiges of Keynes’s barbarous relic, when President Nixon removed pet rocks from the monetary scene. A continual decline in the dollar’s purchasing power ensued. Apart from the occasional hiccup, from 1982 when the S&P500 Index rose from 291.34 to today’s 3,270 the general public has appeared to make money.
It has not been an easy environment to convincingly challenge, being populated by group-thinkers believing their stock and property gains have been the consequence of their individual financial acumens. But one of those periodic hiccups is now upon us, threatening to be more disruptive than anything seen hitherto in our lifetimes, which the macroeconomists in the central banks and governments tell us will require virtually unlimited inflationary finance to resolve.
The distinction between unlimited fiat currency being issued by the state compared with gold is important, because gold was always the money of the people, disliked by governments because its disciplines are limiting. History has always seen the right to issue money taken away from the failures of kings, emperors and governments and handed back to the people, so the empirical evidence is that it will happen again. But macroeconomists argue that their science is an advance on former economic science, so what went before is irrelevant. Therefore, so is gold.
For these reasons, the investment industry is not attuned to gold. Physical gold is not even a regulated investment, which means that government regulators do not permit the funds they license to hold physical metal beyond, if permitted at all, a small exposure. The uncontentious position, taken by nearly all compliance officers, is for investment managers not to hold any. But besides mining stocks, today there are exchange-traded funds that do offer some investment exposure to gold for fund managers. Assuming, that is, they are willing to contradict the Keynesian views of their colleagues.
But even then, the context is wrong. Gold is not an investment but money, driven out of circulation over the last hundred years by the steady encroachment of gold substitutes evolving into pure unbacked fiat. It is no one’s liability, unlike the dollar, for instance, backed only by the full faith and credit in the Donald — or will it be Joe Biden. In the case of the euro or the yen, with negative interest rates and having banking systems arguably on the point of collapse, their central banks are similarly committed to accelerating debauchment of their currencies.
Even semi-official gold bugs, like the World Gold Council, promote gold as a portfolio investment, with its income arising from the securitisation of gold through the GLD ETF. An audience of professional investment managers, which subsists on an intellectual diet of macroeconomics, does not readily accept that gold is money, and if the World Gold Council argued that it is money and not an investment, they would doubtless fail to attract institutional investors.
But an understanding that gold is money is a vital distinction. When you regard it as an investment, you expect to sell it when its positive trend ends. You assume your government’s currency will always have the objective transactional value and gold is the subjective variable. Accounting conventions force investment managers and advisors to ignore the reality that it is the currency failing and not the price of gold rising. Even the overwhelming majority of gold bugs cheer a rising gold price, instinctively treating it as an investment which rises in value, measured in fiat.
The objective/subjective confusion is the most important concept to understand when it comes to gold. If the wider public begins to understand that measured in goods, the state’s currency is no longer fit for an objective role in day to day transactions, it will be doomed. For that marks the point where fiat money begins to be discarded, and the public then ultimately decides what is its preferred money. That is where all this is going.
Forget currency resets
In recent years, suggestions that a monetary reset, centred on the dollar, is planned by the monetary authorities have been made by a number of observers. Central bank research into blockchain solutions have added to this speculation, but a recent paper by the IMF shows there is no consensus in central banks as to how and for what purpose they would use digital currencies — the central banking version of cryptocurrencies.[i]
In any event, it is likely to take too long for a central bank digital currency to be implemented, given the speed with which monetary events are now unfolding. Empirical evidence suggests that once initiated, a fiat currency collapse happens in a matter of months. Today, the Fed has tightly bonded the future of financial asset values to the dollar — one goes and they both go. The credibility behind financial asset values is already stretched to the limit, and the inevitable collapse, taking fiat money with it, is likely to be sudden.
As a side note, the last time a collapse in financial assets took the currency down in similar circumstances was exactly three hundred years ago — in 1720 when John Law’s Mississippi bubble failed. Interestingly, Richard Cantillon made his second fortune by shorting Law’s currency, the livre, and not his shares. His first fortune was made acting as a banker lending money to wealthy speculators taking in Mississippi shares as collateral, which he then promptly sold, pocketing the proceeds.
An attempt at a currency reset, with or without blockchains, can only be contemplated after the public has begun to abandon existing currencies. But the speed with which events unfurl when fiat currencies die precludes advance planning of currency replacements. Any attempt to produce a new fiat money after the existing one has failed will also fail — rapidly. The idea that the state can take control of the valuation of a new currency in a fiat reset in order to make it durable is the ultimate conceit of macroeconomics, the denial of personal freedom to make choices in favour of the management of the aggregate.
One of the specious arguments that arises time and again is that inflation reduces the true burden of debt. This is true for existing debt, but its advocates as a remedy for government indebtedness fail to understand that it also increases the cost of the government’s future debt. And while it similarly reduces the burden on private sector debtors, by destroying savings inflation leads to capital starvation and hampers any recovery.
It is possible, and desirable, that the ills of fiat currencies will be properly addressed. But that will require an abandonment of inflationism, and a commitment to balanced budgets. It requires governments to rein in their spending, reducing their role in the economies they oversee. Statist interventions, both regulatory and mandated by law have to be axed, and full responsibility for their actions handed back to the people. And only then, sound money, preventing governments from reverting to their inflationary ways, can be successfully introduced.
Assuming all this is possible, the only sound money is one with a track record and where governments have no control over it as a medium of exchange. In other words, metallic money. They will have no alternative to turning their currencies into substitutes fully convertible into gold, with silver in a subsidiary coinage role. Coins in both metals must be freely available on demand from all banks at the fixed rate of exchange for gold, and for silver equating to its monetary value.[ii] The circulation of gold and silver coins ensures the public fully understands their monetary role, thereby deterring future governments from inflationary policies. Bank credit must also be backed by gold, and not expanded by banks out of thin air.
But the pervasive and mistaken beliefs in macroeconomics appear to be an unsurmountable impediment to an orderly change towards sound money. Imposing their fervent denial of economic reality, macroeconomists are in charge of both economic and monetary policy in America, Europe and Japan — and by extension those of almost all other nations. It is not even certain that a currency collapse will dislodge them from their position of power, prolonging the chaos that will ensue.
Talk of a monetary reset only makes any sense if those doing the resetting understand what they are doing. And one thing will become immediately clear: the Americans, who stand to lose power over global affairs, will be the most reluctant of all nations to accept that the days of its hegemonic currency are numbered and that a return to a credible gold standard is the only solution.