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LBMA Implosion By Reversal of its Own Gold Leverage

MP3: Discussion between Jay Taylor and David Jensen on Monday December 3, 2014.

Discussion notes:

1. Gold Market: GOFO negative, surging gold lease rates, gold price backwardation

  • 1-month GOFO or Gold Forward rate (GOFO = LIBOR - gold lease rate) has been negative for 30 days now and 6-month GOFO has been negative for 14 days for the first time on record.

  • 1 month gold lease rate surged from 0% on Sept 17 to 0.72% on December 1 - indicator of physical gold shortage both in London and NY.

  • Price backwardation, where the gold spot price is higher than the near-dated forward contract price, was theoretically argued not to be possible because of high gold stock-to-flows ratio (i.e. 5+ billion gold ounces already above ground).

- Gold should immediately be sold on spot market and bought with forward contract to extinguish the backwardation to secure guaranteed dollar profit - yet this isn't happening.

Gold price backwardation is a condition where gold is not bidding for dollars - guaranteed profit should be taken in dollars - an indication we are building toward currency crisis.


"... This is the key to EVERYTHING!!! It is not "gold liquidity" that the bullion banks create... it is DOLLAR LIQUIDITY. Dollars bidding on MSFT stock set the value of that stock. If dollars are frantically bidding on MSFT (high velocity), the stock skyrockets. If dollars stop bidding for MSFT all at once (low velocity), the price falls to zero. This is true for everything in the world except gold.

Gold bids for dollars. If gold stops bidding for dollars (low gold velocity), the price (in gold) of a dollar falls to zero. This is backwardation!

Fekete says backwardation is when "zero [gold] supply confronts infinite [dollar] demand." I am saying it is when "infinite supply of dollars confronts zero demand from real, physical gold... in the necessary VOLUME." So what's the difference? Viewed this way, can anyone show me how we are not there right now? And I'm not talking about your local gold dealer bidding on your $1,200 with his gold coin. I'm talking about Giant hoards of unencumbered physical gold the dollar NEEDS bids from.

Think about it. You can't make it cold in July by simply rigging the thermometer....

2. Gold market trading volume

  • NYSE stock trading volume is averaging $50 billion per day spiking to $120 billion per day.

  • LBMA (80% of daily global gold trading) trades 160 M oz. of gold in gross daily trading volume in September 2014 using the LBMA's 10:1 ratio of daily gross trading volume to daily net settled trading volume http://www.lbma.org.uk/assets/Loco_London_Liquidity_Surveyrv.pdf

  • $192 billion per day of gold gross trading volume (vs. NYSE $50 billion) on the LBMA is AVERAGE dollar value of trading in September 2014.

  • In June 2013, LBMA traded 290 million oz. per day on average or $406 billion per day of gross daily trading volume.

3. Leverage in the LBMA will destroy the LBMA

  • Current implied open interest using 2x 160 M oz. daily trading volume is 320 million oz.; using 3x trading volume open interest is 480 million oz.

  • The LBMA refuses to divulge gold and silver open interest to the public.

  • Primarily 'unallocated' (virtual) gold contracts being traded with only notional gold backing (compare this to the Shanghai Gold Exchange where 1 kg of gold must be deposited for each 1 kg spot contract that is created).

  • LBMA indicates that 90% of daily trading is spot trading - you can create the price but cannot create the metal with virtual trading and gearing of trading instruments.

  • Two examples of creating leverage in the LBMA gold and silver market (i) Unallocated positions as well as (ii) rehypothecation of forward contracts creates exceedingly high claims per gold oz. available for delivery.

  • This paper leverage (multiple claims per physical gold oz.) quickly puts the LBMA into distress as physical metal is called for delivery and withdrawn collapsing gold backing by an estimated 100x for each gold oz that is withdrawn.

  • Many countries now accumulating gold in size and hearing of houses that have borrowed forwards and sold spot (shorting gold) are being called to deliver gold.

  • Swiss vote was a transient factor (1,500 tonnes to be accumulated over 5 years) but the global secular trend for physical delivery and withdrawal from artificially manipulated markets continues. A crisis at the LBMA will grow as physical gold and silver continues to be withdrawn at an accelerating rate due to the impact of reverse application of the virtual gearing of physical metal contracts that have been used to manipulate precious metals at the LBMA. The LBMA will in the end be detonated by this reverse application of the LBMA's own paper manipulation of precious metals using leverage of trading instruments (which price manipulation has also allowed manipulated of global interest rates).

  • The price action of gold despite the physical gold shortage as visible through backwardation, high lease rates etc., is indicative of just how disconnected the LBMA is as a gold market.

  • Ignore the 'wave action' of daily price action of gold and other precious metals and be aware that a massive tide is rising for all precious metals which will overwhelm paper manipulation of physical precious metals.

4. Deflationary Collapse and John Exter's Warning


  • Physical gold is being withdrawn from the financial system especially at the London Bullion Market Association (LBMA) metals market

  • Reversal of the estimated 100:1 paper-to-physical metal gearing at the LBMA will lead to an accelerated collapse of the LBMA

  • Withdrawal of physical gold from the market is a secular trend that is accelerating due to the mispricing of gold and silver through the leveraged paper trading on the LBMA and NY COMEX markets

  • Investors should ignore the daily 'wave action' from the paper metals markets and focus on the unstoppable 'rising tide' that will lift precious metals to enormous heights


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