The LBMA market makers are the big boys: https://www.lbma.org.uk/membership/current-membership#%7B%22filters%22%3A%5B%7B%22property%22%3A%22membershipcategory%22%2C%22label%22%3A%22Market%20Maker%22%7D%5D%7D
Bullion banks operate with banking rules for bullion. Just like banks loan mone…
Bullion banks operate with banking rules for bullion. Just like banks loan money into existence, it means (by definition) bullion banks loan paper gold into existence. They are legally short gold (selling gold they don't own) by the very nature of running double entry accounting ledgers denominated in bullion. But whereas USD banking has a lender of last resort (the Fed), there is no longer a lender of last resort for bullion banks.
This sets up a thought experiment. If the LBMA is going to fail, will they allow the price to run high and get financially hammered and some go bankrupt? Or will they aid the price in crashing and settle out their short positions at a big profit? As sure as the sun rises in the east, if they can they will do the later. It would be easy:
"Due to sanctions which prevent access to gold supplies from Russian refiners we declare Force Majeure; we will can no longer settle claims in bullion. We will cease bullion operations on 31 May and settle all open positions at that day's closing price."
Given that a paper claim for gold, that explicitly can't be exchanged for gold, is akin to the value of a circus ticket when the circus has left town (zero). they then just lean on the price and sell paper gold all the way down till 31 May and then close out their shorts with USD at a massive profit. Perfectly legal.
The only limit to how far they push it is the calculus of the present value of the profit vs the prospects of future lawsuit expenses and small probability of incremental penalties many years later.
Only when the LBMA system is dead and there is a physical only gold market will we get true price discovery and learn the value of gold.
Thank you for the information, handyman. Even if the 2nd Smartest Guy already knows the above, I did not, and learned some things in the process of reading your comments.
All your comments have been enlightening, thank you very much.
There's a 'special place in hell' for those that invented 'paper gold'
It just is a fact of history at this point...the LBMA system was created with a reasonable intent. It was supported by the Fed, BOE, and European central banks to keep the wheels on the bus of the IMF USD world reserve system till the Euro could be stood up.
When the Euro stood up, providing another currency system of similar weight to the USD, the LBMA should have been wound down tapering the USD role as THE world reserve. The world would have been better off. Instead powerful interests maneuvered to keep it going for their benefit, despite the growth in externalities (financial bubbles, fragile system, world manufacturing imbalances, massive malinvestment). Now the transition off the system will likely be by things breaking rather than a taper...
Same as Pixie above, I've learned something and thank you for that :)
I do have a question though and it goes to your assertion that: "only when the dust settles and physical gold price discovery emerge will the true price be known. I hold physical gold for this eventuality, and look forward to the price drop as a sign of stress in the LBMA system." - weren't there times in history when holding physical gold was deemed illegal (even in the 20th century)? Can you give some pointers on how to navigate the landscape if that sort of fuckery happens again?
Most of my thoughts are heavily informed by Another, FOA, and FOFOA. A guess:
The 1933 ban was enacted to help control the dollar peg to gold under a gold standard. I don't think nations would or can go back to a gold standard in this modern era.
Under a gold standard when there is more demand for gold than the currency the peg breaks unless the central bank accepts currency and issue gold, thereby decreasing supply of currency and increasing the gold supply. So to be on a gold standard is synonymous with the central bank supporting convertibility. I point this out because on forums people often talk about a gold standard or gold peg but they don't seem to be aware this requires a central bank to manage that peg by buying and selling gold and currency.
What would happen if, say, Russia pegged to gold. The US could print dollars, exchange them for Rubles in the Fx market and then send the Rubles to the CBR and request gold. If they maintain their gold standard they would take in rubles and send gold. The result is that the ruble would strengthen compare to the dollar, their positive trade balance would erode, ruble denominated debts would get harder to pay, and their gold reserves would decay. Countries don't wants any of these things, they want to competitively devalue, have the options to print, and make debts easier to pay.
This is all just to say that the prior conditions that incentivized an ownership ban (as part of controlling a gold standard) have near zero chance of reoccurring. We may see lots of schemes to defraud people, thefts, and perhaps temporarily a huge windfall tax rate. One should be prepared to hold physical for the duration and in the words of FOFOA, to "lay low" and be quiet until all the fuckery dissipates.
Apologies for stating things you may know well...
The LBMA market makers are the big boys: https://www.lbma.org.uk/membership/current-membership#%7B%22filters%22%3A%5B%7B%22property%22%3A%22membershipcategory%22%2C%22label%22%3A%22Market%20Maker%22%7D%5D%7D
Bullion banks operate with banking rules for bullion. Just like banks loan money into existence, it means (by definition) bullion banks loan paper gold into existence. They are legally short gold (selling gold they don't own) by the very nature of running double entry accounting ledgers denominated in bullion. But whereas USD banking has a lender of last resort (the Fed), there is no longer a lender of last resort for bullion banks.
This sets up a thought experiment. If the LBMA is going to fail, will they allow the price to run high and get financially hammered and some go bankrupt? Or will they aid the price in crashing and settle out their short positions at a big profit? As sure as the sun rises in the east, if they can they will do the later. It would be easy:
"Due to sanctions which prevent access to gold supplies from Russian refiners we declare Force Majeure; we will can no longer settle claims in bullion. We will cease bullion operations on 31 May and settle all open positions at that day's closing price."
Given that a paper claim for gold, that explicitly can't be exchanged for gold, is akin to the value of a circus ticket when the circus has left town (zero). they then just lean on the price and sell paper gold all the way down till 31 May and then close out their shorts with USD at a massive profit. Perfectly legal.
The only limit to how far they push it is the calculus of the present value of the profit vs the prospects of future lawsuit expenses and small probability of incremental penalties many years later.
Only when the LBMA system is dead and there is a physical only gold market will we get true price discovery and learn the value of gold.
Thank you for the information, handyman. Even if the 2nd Smartest Guy already knows the above, I did not, and learned some things in the process of reading your comments.
All your comments have been enlightening, thank you very much.
There's a 'special place in hell' for those that invented 'paper gold'
You're welcome.
It just is a fact of history at this point...the LBMA system was created with a reasonable intent. It was supported by the Fed, BOE, and European central banks to keep the wheels on the bus of the IMF USD world reserve system till the Euro could be stood up.
When the Euro stood up, providing another currency system of similar weight to the USD, the LBMA should have been wound down tapering the USD role as THE world reserve. The world would have been better off. Instead powerful interests maneuvered to keep it going for their benefit, despite the growth in externalities (financial bubbles, fragile system, world manufacturing imbalances, massive malinvestment). Now the transition off the system will likely be by things breaking rather than a taper...
Same as Pixie above, I've learned something and thank you for that :)
I do have a question though and it goes to your assertion that: "only when the dust settles and physical gold price discovery emerge will the true price be known. I hold physical gold for this eventuality, and look forward to the price drop as a sign of stress in the LBMA system." - weren't there times in history when holding physical gold was deemed illegal (even in the 20th century)? Can you give some pointers on how to navigate the landscape if that sort of fuckery happens again?
There sure is a lot of fuckery afoot.
Most of my thoughts are heavily informed by Another, FOA, and FOFOA. A guess:
The 1933 ban was enacted to help control the dollar peg to gold under a gold standard. I don't think nations would or can go back to a gold standard in this modern era.
Under a gold standard when there is more demand for gold than the currency the peg breaks unless the central bank accepts currency and issue gold, thereby decreasing supply of currency and increasing the gold supply. So to be on a gold standard is synonymous with the central bank supporting convertibility. I point this out because on forums people often talk about a gold standard or gold peg but they don't seem to be aware this requires a central bank to manage that peg by buying and selling gold and currency.
What would happen if, say, Russia pegged to gold. The US could print dollars, exchange them for Rubles in the Fx market and then send the Rubles to the CBR and request gold. If they maintain their gold standard they would take in rubles and send gold. The result is that the ruble would strengthen compare to the dollar, their positive trade balance would erode, ruble denominated debts would get harder to pay, and their gold reserves would decay. Countries don't wants any of these things, they want to competitively devalue, have the options to print, and make debts easier to pay.
This is all just to say that the prior conditions that incentivized an ownership ban (as part of controlling a gold standard) have near zero chance of reoccurring. We may see lots of schemes to defraud people, thefts, and perhaps temporarily a huge windfall tax rate. One should be prepared to hold physical for the duration and in the words of FOFOA, to "lay low" and be quiet until all the fuckery dissipates.
If you haven't read FOFOA I'd recommend it, his old (free) blog is http://fofoa.blogspot.com/