Alchemists in Action

by Rob Kirby, Kirby Analytics. July 13, 2009

On Saturday, July 11, 2009, GATA board member Adrian Douglas published a paper titled, The Alchemists. Disturbingly, what this paper chronicles is how the New York and Tokyo commodity exchanges have been permitting their gold futures contracts to be settled not in real metal but in shares of gold exchange-traded funds (ETFs) in a transaction known as an Exchange of Futures for Physicals (EFP).

Douglas points out that,

“this means is that contracts can essentially be settled without going through the COMEX warehouse. Futures contracts and a physical commodity equivalent can be exchanged outside of the exchange and an EFP form can be filed to the clearing department at the COMEX. What's more, the physical commodity doesn't have to meet the specification of the COMEX Gold Contract of being a 100 troy ounce bar or three 1Kg bars of .995 fineness.”

It used to be that the COMEX standard for good delivery gold was .995 fineness ONLY.

So, why was this standard altered?

Douglas also points out how the COMEX amended its rules back on Feb. 18, 2005;

Exchange Rule 104.36, which governs exchange of futures for physicals ('EFP') transactions on the COMEX Division, refers to a 'physical commodity' as one of the required components of an EFP transaction but also indicates that the physical commodity need only be substantially the economic equivalent of the futures contract being exchanged.

I’d like everyone to stop and think about the verbiage this statement: “substantially the economic equivalent.”

Sounds pretty vague, doesn’t it?

Coin Melt Qualifies as a “Substantially Economic Equivalent”

22 Carat Coin Melt: Interestingly, anecdotal reports began surfacing around the world in recent years that gold bars of less than .995 fineness have been appearing with increasing regularity. It is also a matter of historical fact that the U.S. sovereign gold reserve is understood to be the world’s largest repository of gold less than .995 fineness; resulting from President Roosevelt’s gold confiscation back in 1933. Circulating gold coins were struck in 22 carat gold – the addition of hardening alloys gave the coins more durability. Could this twisted / ambiguous verbiage be the means by which Sovereign U.S. coin melt [22 Carat gold] was / is being mobilized in an attempt to satiate growing international demand for gold bullion?

If such were the case, that would necessarily imply that the U.S. Treasury / and the private Federal Reserve [they are one and the same, aren’t they?] have “swapped” their less than .995 fineness gold, eh?

Interestingly, back in October, 1997, James Turk reported;

“We now have more evidence that all may not be well in Fort Knox. Many thanks go to Bill Rummel of Charleston, South Carolina for bringing the following to my attention.
The US Treasury quietly made a subtle change to its weekly reports of the US International Reserve Position, which includes the US Gold Reserve. This change was first made on May 14th. The differences can be seen by comparing the report’s old format release on May 8th to the new format used the following week. Here are the links:
http://www.treas.gov/press/releases/2007581342179779.htm http://www.treas.gov/press/releases/20075141738291821.htm
Note the additional description of gold provided in the new reporting format. It says the US Gold Reserve is 261.499 million ounces and importantly, that the gold is now reported “including gold deposits and, if appropriate, gold swapped” [emphasis added].
This description provides clear evidence that the US Gold Reserve is in play. Gold has been removed from US Treasury vaults and placed on deposit, presumably in the couple of bullion banks the Treasury has selected to assist with its gold price capping efforts.
Gold placed on deposit gets loaned out by these bullion banks, and then sold into the spot market to try capping the gold price. The same thing happens with swaps, but the vague language in the note to the Treasury reports makes it uncertain whether they are in fact being used at the moment.

Speaking of ambiguous verbiage where gold is concerned, let’s not forget how the U.S. Treasury “reclassified” its definition of sovereign U.S. gold stocks back in 2001; first from Sovereign Gold to “Custodial Gold” and then from “Custodial Gold” to “Deep Storage Gold.” The former change is highly suggestive of a change of ownership and the latter further suggesting that sovereign physical gold stocks have been mobilized.

The notion that sovereign entities would swap physical gold for yet-to-be-mined gold, or, gold-of-one fineness for another should come as no surprise to anyone. It is a matter of historical fact that “gold quality swaps” are part of the deceptive means by which sovereign entities shroud their price suppressive dealings in gold [definition footnoted on the bottom of page 6 here]:

“Under a gold location swap, gold stored in a particular physical location is swapped with a market counterparty for specified period with gold stored in another physical location. Under a gold quality swap, gold of a particular quality [fineness] is swapped with a market counterparty for a specified period with gold of different fineness. In each case a fee is built into the transaction.”

Whether or not the U.S. Treasury is / has employed gold swaps, a picture is beginning to emerge that, given the obsequious COMEX rule changes, at least some of the world’s precious metals ETFs have perhaps been created with the expressed purpose of creating “stealth supply” – aiding in the suppression of the gold price.

As for the newly created precious metals ETFs, their biggest claim to fame is that they “track” the price of the underlying precious metal. The negatives, if they are not already apparent, are nicely summed up by James Turk when he pointed out the disadvantages of holding one of the most popular, highly touted gold ETFs – StreetTracks GLD:

GLD does not prove the gold exists [or its quality] with independent third party audits.
The same gold in GLD may be owned by two people because of short selling.
Even if GLD were in reality backed by gold, there are too many parties between you and the gold to claim that you really own it. So while you may have “access” to the gold price through GLD, you do not have access to any physical metal that it may be holding.

Remember folks, all ETFs are not created equal.

Buyer beware!

Today’s Market

Overseas equities began the week on a sour note with Japan’s Nikkei Index falling 236 points to 9,050. North American markets brushed that sentiment off with the DOW ahead by 185.20 to 8,335.70, the NASDAQ up 37.16 to 1,793.21 and the S & P adding 21.90 to 901.05. NYMEX crude oil futures were unchanged at 59.88 per barrel.

On foreign exchange markets the U.S. Dollar Index fell .07 to 80.07.

In the interest rate complex the benchmark 5 yr. government bond finished the day at 2.26% while the 10 yr. bond ended the day at 3.35%.

Precious metals ended the day in positive territory with COMEX gold futures adding 7.20 to 921.20 per ounce while COMEX silver futures added .17 to 12.86 per ounce. The XAU Index gained 1.64 to 131.63 while the HUI Index added 5.93 to 319.82.

On tap for tomorrow, at 8:30 a.m. June PPI data is due. Headline number expected +.7% vs. prior +.2%. Core PPI expected +.1% vs. prior -.1%. Also at 8:30 a.m., June Retail Sales data is due. Headline number expected +.4% vs. prior +.5%, ex-Autos expected +.4% vs. prior +.5%. At 10:00 a.m. May Business Inventory data is due, expected -1.0% vs. prior -1.1%.

Wishing you all a pleasant evening!

Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
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