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Gresham's Law Predicts the LBMA's End

Interview of David Jensen by Jay Taylor on February 11, 2015

1. Definition: Gresham's Law

Gresham's Law is a monetary principle stating simply that "bad money drives out good." In currency valuation, Gresham's Law states that if a new coin ("bad money") is assigned the same face value as an older coin containing a higher amount of precious metal ("good money"), then the new coin will be used in circulation while the old coin will be hoarded and will disappear from circulation because of its greater inherent value.


By definition, gold and silver are money.

Alan Greenspan in the fall of 2014 said that gold is superior money to all fiat currencies including the USD.

2. The LBMA is trading digital or fiat gold (unallocated gold) that the LBMA states accounts for the vast majority of spot gold trading.

The LBMA represents 85% of global daily gold trading volume and the LBMA's (and LPPM ) daily pricing is, according to the LBMA, the basis for "virtually all transactions in gold, silver, platinum and palladium". What happens on the LBMA impacts the global price of silver and gold, so it is our focus.

The open interest in London can be varied to digitally increase and decrease gold and silver positions creating supply of gold and silver to market when account holders hold their 'positions' in the LBMA. Due to the leverage of claims vs fractional metal available for satisfaction of the claims, this dictates ulitimate market dislocation.

According to Gresham's Law, by creating and trading virtual 'bad money' (i.e. unallocated or virtual gold and silver positions ), the LBMA is guaranteeing its own demise as the 'good money' (i.e. real gold and silver physical bars) will simply disappear from the exchange resulting in market dislocation. Virtual metal created on the LBMA short-circuits the pricing mechanism for precious metals by creating artificial supply.

The markets flow and choose a path to solve problems and the markets will flow around the LBMA and leave it stranded as it is a trading platform that has been used to short-circuit market pricing of gold and silver.

We can see from our discussion last week that the LBMA has an estimated open interest position (claims) of 400M to 600M oz of gold and 3.5 to 5.0 billion oz of silver. These open positions are completely unsustainable as the impossibility of delivery into these positions is clear to the market.


LBMA Gold and Silver Volume

3. Dubai intends to open spot gold trading by the end of March 2015


Goal of the new Dubai gold exchange is to "set it as a benchmark Loco Dubai price for all stakeholders in China, India, and Africa etc."

Dubai wishes to develop benchmark gold pricing for Asia and Africa.

Other physical exchanges in Singapore, Hong Kong, Shanghai, Moscow, etc. are going to rapidly bypass the LBMA's pricing and will ultimately make the LBMA an historic artifact.

4. Some commentators say that the BRICs hold a nuclear bomb on the West which will detonate if they move to a sound money (gold) system

In reality, the LBMA and COMEX are nuclear bombs that are guaranteed to detonate because they are used to distort markets (and have been used to suppress gold and silver markets while fueling decades of financial bubbles with loose monetary policy) and according to Gresham's Law, these exchanges will, by definition, fail as 'good money' leaves these exchanges with only the 'bad money' (digital gold and silver claims) remaining behind unsatisfied.

5. We have seen complete market failure before.

Kuwait's "Souk al-Manakh" also dubbed the Kuwait Camel Market (KCM).

In the early 1980s, the KCM market did a round trip from $5 billion to $100 billion in market cap and back again - at its peak it had the third highest total market capitalization in the world.

Used leverage to explode the value of the Camel Market to astronomical heights (think about the 3.5 billion to 5.0 billion ounce silver open interest (claims on silver) on the LBMA)

"Adding fuel to the fire was the type of informal margin financing through the use of postdated checks, which were accepted as a cash equivalent, as per Kuwaiti custom. This type of personal credit didn't require a bank balance; the "receiver hopes that there will be one when the due date rolls around."... ...As the Souk al-Manakh market soared to incredible new heights, many speculators became willing to issue postdated checks for double or triple a stock's purchase price, confident that the share prices would rise by that much by the time they had to pay. (1) An informal futures market arose in postdated checks as investors, upon receiving their shares, used them as collateral to borrow even more money for stock speculation. ... By September 1982, the Ministry of Finance ordered all dubious checks to be turned in for clearance, tallying the value of worthless checks at $91 billion."


In the end, the KCM opened and there was simply silence at the Kuwait Camel Market with stocks going with zero bid. The market had seized and this is what the LBMA is heading for due to the unsatisfiable open interest claims for gold and silver created on that Market.

"It did not take a trigger to burst this bubble; it simply crested sometime in the dreadful heat of the Middle East's summer. Its decline was so discontinuous it cannot be called a crash. There were simply no bids."



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