The Governor of the Bank of England Mark Carney has a problem and it is a severe problem. For decades, the Bank of England has acted as a coordinating market-maker for bullion banks in the City of London that trade 'unallocated' or unsecured gold and silver contracts through the London Bullion Market Association (LBMA). The market is uncovering that the Bank of England (BoE) has in effect been facilitating what amounts to a kiting operation in maintaining the structure of the London metals market where the vast majority of spot claims for gold and silver can never be settled with actual metal delivery. The irony is not lost when one considers that the BoE operates the Prudential Regulation Authority that regulates 1,700 UK banks to ensure their "safety and soundness".
By facilitating unsecured, or unbacked, paper gold and silver spot ownership contracts that are held by a host of private, corporate, financial, and sovereign wealth fund interests, paper claims for ownership of an estimated 400 million to 600 million oz. of gold and 4 to 6 billion oz. of silver have been created through the LBMA. These spot metal contract holders, deflected into holding paper promises for metal instead of metal itself, hide true metal demand with the result that real price discovery is thwarted and precious metal prices are held at artificially low levels.
Former US Treasury Secretary Larry Summers wrote that a phenomenon called Gibson's Paradox identified that rising gold prices have historically forced interest rates higher. These rising rates thwart prolonged inflationary money and debt creation by central banks. The scheme of suppressing global gold and silver prices for decades has allowed loose monetary policy globally by central banks over this period and has created a secular global bond bubble with worldwide bond holdings now exceeding $220 trillion and 340% of GDP - twice the historically sustainable level of 150% of GDP.
Estimated leverage at the LBMA for spot metals claims vs the amount of metal available for delivery range from 100:1 and higher for gold and are much higher for silver. If we consider gold and a 100:1 leverage ratio, the result is that 1% of spot claimants for gold in the London spot market can receive metal or 100% of claimants can receive 1% of the metal that they believe they own - or somewhere in between.
With all of the world's refined silver stockpiles estimated at approximately 1 billion oz. (including holdings by investor Exchange Traded Funds or ETFs), the situation created in the silver market is extraordinarily unstable. Each of the 1 billion oz. of refined physical silver in global stockpiles is held by claimants and is not available for sale unless the holder decides to dispose of the asset. And with annual mine supply of the order of .850 billion oz. already being consumed by industry and investors taking delivery of the metal, the silver spot market claimants in London face a disturbing realisation. The spiking silver price that we see today warns us of impending exceedingly large price spikes and market disruption as the metals market deleverages.
To date, the LBMA, bullion banks and the BoE have created the appearance of a liquid market using leased gold from sovereign metal holders and central banks and also using the metal flows from the global gold and silver miners who themselves are enabling this price suppression by selling their physical metals through the LBMA to the detriment of shareholders and society at large.
A number of data points now indicate increasing crisis in the global metals market:
1) In 2013 virtually all of the available gold outside the Bank of England holdings and ETF holdings was withdrawn from the City of London vaults leading the LBMA in 2015 to revise refinery statistics that showed this metal withdrawal and reprocessing in 2013;
2) Deutsche Bank admits gold and silver price manipulation with other bullion banks;
3) Draw-downs of New York COMEX metal exchange registered silver holdings have dropped to historical lows reflecting silver metal stress in the North American market; and
4) Mark O'Byrne of GoldCore has reported unprecidented "panic" in the inter-bank gold market due to bar shortages due to factors other than Brexit.
The leverage created by the Bank of England along with its partner bullion banks can prolong suppression of gold and silver prices for a long time but, when the tide turns and metal is pulled from the LBMA, the scheme unravels in a small fraction of the time that it was in place due to the outsized impact of the reversal of the leverage. Leverage works in both directions. The end result is spiking metals prices, interest rates, and consumer goods prices (inflation), as wealth flees from market artifice into goods of innate value coupled with market and social upheaval as discontinuous interest rate movements disrupt the $100s of trillions in the interest rate derivatives market and collapse the global banks that hold them.
Governor Carney, the BoE and Brexit
Which brings us now back to Governor Carney. As the LBMA metals scheme is now rapidly unwinding in London, Governor Carney has engaged himself both during and after the Brexit campaign warning that a financial crisis will ensue if Britain leaves the European Union. Carney well knows that a financial crisis is mounting right now due to the failure of the LBMA's levered structure enabled to a large extent by his own institution.
But the BoE's tack is creating a different narrative. Tory MP Jacob Rees-Mogg recently challenged Governor Carney in Committee on his behaviour of hyping Brexit consequences during the recent Brexit campaign - behaviour which directly contradicts BoE policy of remaining apolitical during elections. Carney's response to Rees-Mogg's direct questions was evasive, styling his argument by using distinctions without a difference. After a thorough Mogging, Governor Carney was left sitting threadless in his loafers.
Governor Carney followed-up his Brexit campaign performance with a June 30 2016 speech titled "Uncertainty, the economy and policy" . In the speech, Carney argues that the markets suffer from "economic post traumatic stress disorder" (PTSD) from prolonged uncertainty using ten dollar terms such as "affect heuristics" to explain the developing crisis - a crisis that has been developing for some time as the London metals rig unwind accelerates with metal being withdrawn through the LBMA. The FT and other financial press jumped on the PTSD catch phrase trumpeting it in their headlines.
Carney further states on pg. 12 of the prepared text of his speech that "The Bank conducts policy consistently, transparently, and accountably." and on pg. 16 that the BoE has a plan and that "Part of that plan is ruthless truth telling." (Governor Carney deviated from the prepared text by saying "Part of that plan will continue to be ruthless truth telling."). The metals market doesn't see it that way.
In all of the above, Carney does not address the pending LBMA and global financial market disruption from the LBMA market rig unwind that will impact the global bond and derivatives market. Instead, Governor Carney and the BoE hype Brexit and PTSD thereby structuring a different narrative for the coming financial and monetary system disruption.
It is not PTSD or affect heuristics that are driving this developing crisis. It is time for ruthless truth telling and stabilising monetary system change, Governor Carney.
Until that time, the BoE remains threadless on Threadneedle Street.