Image: Several thousand 28lb bars of 24-carat gold stored in the Bank of England's massive underground vault.
It is said that if everyone would just take delivery on the gold contracts they buy, then the price of gold would shoot the moon. This is because there is not enough gold in the warehouse to cover all the outstanding contracts.
And the reason there are more contracts than gold is because the banks like to sell contracts "short", meaning they will sell you a contract for some gold they do not have because they know you will not take delivery.
They do have some gold for the small percentage of people that take delivery. And they will gladly tell you all about this gold to prove to you that your contract is backed by the real thing. But this is still very much like "fractional reserve banking".
In fact, fractional reserve banking began with gold. The banks realized that they could issue receipts for the gold they stored and those receipts would circulate just like money... just like gold!
One of the things that Another first brought to our attention was that in today's gold market, there are perhaps 100 times as many receipts trading as there is real gold available for delivery. This was an incredible revelation. This is from the introduction to Another's (Thoughts!)...
When the once highly secretive London Bullion Market Association (LBMA) -- its venerable membership comprising the world's largest gold dealers -- published its daily clearing volume for the first time in January 1997, it rocked the tight-knit world of international gold traders and analysts...
Now this first LBMA report forced analysts, investors, and brokers to reassess their understandings of the gold market. While some reveled in the glow of the large LBMA numbers, others began to raise some very important and rather unsettling questions. First, Why was this much gold on the move? Second, Where was all this gold going? And third, Where was all this gold coming from?
Then, in October of 1997 at the internet's only gold discussion forum of the day (hosted by Kitco), a series of remarkable postings began appearing under the pseudonym "ANOTHER", offering plausible answers to those questions. What followed in a seemingly incongruous stream of thought over many months was, in the fullness of time, seen to blend into a logical whole by many astute readers following the complete text.
What Another revealed was a "deal". A deal between the dollar faction (Washington and London) and a few MidEast oil producers. This deal was meant to keep the dollar strong in the absence of a gold standard by "backing it with oil". In other words, all oil in the world would be priced in dollars, and the dollar would remain strong through usage demand.
In exchange, the dollar faction would keep the price of gold low so that these oil producers could exchange their dollars for gold, kind of like before Nixon closed the gold window. Here is more from the intro...
If ANOTHER's claims are true -- that a consortium of oil states has cornered the gold market (and given the impressive circumstantial evidence, this could very well be the case) -- these "footsteps of giants" become the most salient and persuasive case for gold ownership I have seen in the past decade, if not the full twenty-eight years I have been in the gold business.
Now the way you would "corner the gold market" in a deal like this is to take delivery of your gold while the rest of the world is caught up in a game of paper gold. A game that is meant to give YOU a good price on physical gold in exchange for cheap oil.
There are a couple ways to "take delivery". One way is to bring your gold home. The other is to insist on delivery of physical, but to allow the bank to hold it for you. So the gold never actually moves, physically.
One other thing to consider is that not all the MidEast oil producers were in on the deal. This is to say that they were not privy to the valuable knowledge of the intentional suppression of the price of physical gold through the issuing of abundant paper gold.
What happened in the mid-to-late-90's that caused this "deal" to start to fall apart was that a "Big Trader" in Hong Kong found out about the deal, and began to partake to the same extent as the original parties to the deal. This put a certain stress on the system which first forced the LBMA to admit (albeit not quite a full admission) to evidence of the shenanigans. Secondly, it eventually caused the price of gold and oil to start to rise, putting downward pressure on the dollar.
According to Another, we were very close to a full collapse of the system right around the turn of the century. This collapse may have been delayed by several years because of the massive support the US received following 9/11, and then by the subsequent blowing up of bubbles until the pin prick of 2007.
Today the whole dollar system is more fragile and unstable than it has ever been. Even more than in the late 90's. Today there is no room for a rescue of the dollar by another disaster or through quantitative easing or anything else they may try. Today we come full circle back to 1999. Only this time Y2K is real!
Gulf Nations to take back their Gold from London
A few days ago this story hit the wires out of Dubai:
Gulf ETFs, nations may take their gold back from London
Much of the region's gold that has so far been held in London may soon return...
Prominent gold dealers in Dubai say that it's "only natural" for the central banks in the region to store their gold in DMCC instead of London, where they have typically held their bullion reserves so far...
Almost immediately, Michael Kosares (MK, who wrote the above intro to Another) posted this on his website:
Over the coming weeks and months the Dubai story may turn out to be bigger than it appears on the surface.
Aleksandar also made several astute observations:
1. "What has been holding us back is the difference in gold specification between London and Dubai"
I wonder what gold specification means.
2. "While the gold allocated to DGS is kept at HSBC's vaults in London, the gold reserves held by the Gulf Cooperation Council's central banks are held by various other vaults in London, market sources said."
Reading between-the-lines, this story is REALLY about the GCC and the Arab Central Bank reserves! Not some silly ETF.
3. Have these banks [holding the Gulf's gold] been practicing the "gold carry trade"? [If so, they may owe gold to the western Central Banks as well as the Arabs] This call from the Arabs is effectively asking for delivery of the physical. Scary stuff.
[Alek had a couple more, but I paraphrased and edited his Thoughts for the purpose of this post]
So what does this mean? The MidEast oil producers have decided to form their own currency union, their own central bank, and their own reserve currency for pricing oil. And now they want their gold!
Every couple months the gold writers get all worked up over "taking delivery" from the Comex. But is it possible that "oil" is about to take delivery of 30 YEAR'S WORTH OF GOLD PURCHASES?
Do you think the shorts will have to cover? Will there even be enough physical gold to cover? And what if the CB's have to cover for the banks [like the ECB recently did for DB], will they? Another said they would not:
"The US$ has risen on a flight of fear. That will now end as the LBMA shorts are given to wolves. If this fire burns too hot, gold will turn and it's trading halted. The price of oil will explode as gold becomes the "world oil currency"! Even now oil has locked the IMFs gold, Asia will bid against them no more. We come to extreme times.
Risk not your wealth in paper, we enter a period of truth."
Either way, whether they take all the gold or if they are denied delivery, we are very close to what Another was trying to say!