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50sQuiff

The price of gold is going to crash

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The 1997 revelation that the LBMA was trading 100 times annual production every year?

So what? Look how much gold Bubb buys and sells all the time, but effectively he owns nil. Just trading the stuff frantically does not mean that it isn't there. I am happy to believe that certain 'bank' LBMA member do everything in their power and interest to divert interest in gold from physical purchases. But that does not mean that the LBM has no actual physical transactions. In brief: I don't think you can sell paper gold in the AM or PM Fixing. The stuff really has to change hands immediately (re-allocated in a vault) AFAIK. COMEX is different, there you can just dump empty future(s) promises.

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The 1997 revelation that the LBMA was trading 100 times annual production every year? Everything Adrian Douglas has ever written about the LBMA? It's a giant fractional reserve system that sells notional bullion, except to those who take delivery.

 

http://www.gata.org/node/8820

 

You know all this already but posting for those that don't. Sure, some bullion moves, but not much.

Yes the spot price is used to settle paper contracts, but it is also used to settle physical contracts currently. You can buy a contract and take delivery of that metal, so it is a physical market. The fact is that 100 of times more metal trades on the exchange than actually exists but not many actually take delivery.

 

At times more attempt to take delivery than is available, but they are persuaded to take paper instead by by being offered premiums. The holders of those contracts don't have to take paper instead, they have the right to insist on delivery, but they do as they are just using the system as a fiat trading mechanism rather than actually wanting the bullion.

 

This is not to say that the system will not come unstuck at some point, I fully expect it to do so. But when it does that doesn't mean that holders of physical metal will only be able to sell it at the manipulated paper price that an exchange in default has set. IMO there will always be a market for physical metal, maybe it will move somewhere else like the new Pan Asia Gold Exchange which is to be 100% backed by physical gold.

 

 

 

 

 

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I feel there is a confusion on this thread about:

(1) trades of LBMA members with other LBMA members,

(2) people trying to buy 'gold' from LBMA members (banks) who get stuffed with paper.

These are two different things.

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That's awesome Pixel8r.

Maybe JT will make another GoldMoney video. I like them, very informative and clear.

Just to make things completely clear, the post above is my thoughts and not what JT has replied to me. JT should reply on this next week.

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http://www.greenenergyinvestors.com/index.php?showtopic=2874&view=findpost&p=55468

 

Here's James answer to me from 2008 on this topic.

 

QUOTE (Gatesy @ Aug 15 2008, 06:34 PM) <{POST_SNAPBACK}>

I just sent this to goldmoney:

 

Dear Mr Turk

 

GATA, with whom you are closely associated, have published the view that the US Mint's suspension of silver and now gold eagles is "overwhelming evidence that the futures contract price of gold on the commodities exchanges is substantially below the physical market price". Please could you lay out for me your plan for ensuring that the mechanism for selling physical gold and physical silver via Goldmoney reflects prices for the physical metals rather than 'paper' markets as we see further divergence between the two. I would like to post your response on the Global Edge Investors (globaledgeinvestors.com) website with which you may be familiar, for the benefit of members there.

 

ref:

http://www.gata.org/node/6489

 

Kind regards

 

I have a response from James Turk, with my repsonse below that. Very impressed with the personal attention given to my query.

 

 

QUOTE

Hello xxxxx

 

Sorry for the slow response, but I have been travelling.

 

GoldMoney only offers to its customers gold and silver in the form of LBMA bars. Consequently, GoldMoney always bases its prices on the spot market for LBMA bars. This spot market is comprised of several major bullion banks, and they quote throughout the day from Monday-to-Friday from their various branch offices in different time zones throughout the world.

 

When a transaction is completed, the seller has the obligation to deliver to the buyer -- upon payment by the buyer -- physical bullion in the form of LBMA bars. To my knowledge there has never been a default by any trading member selling LBMA bars in the spot market.

 

Transactions in GoldMoney are never priced off the futures market or any paper-based trading market. Further, we have no intention to ever price them off the paper market. We will only transact in a market where we will receive LBMA bars, not paper promises.

 

There is also another aspect to your question. It is, what is the relationship between the market for LBMA bars (which is a market made by LBMA trading members, http://www.lbma.org.uk/assocn/mktmembs) and the market for coins and small bars (which is a market made by thousands of coin dealers, jewellery shops and bullion retailers globally)?

 

Right now, the market for coins and small bars is largely frozen as GATA, me (http://www.goldmoney.../commentary.php) and others have written. However, the LBMA market continues to function normally as near as I can tell (not being a trading member myself). LBMA bars (both gold and silver) can still be had in reasonable quantities. Barring any government intervention and/or government dictates, I would expect the LBMA market to continue operating, regardless what happens in the paper market for gold.

 

Right now the demand for physical metal in the form of LBMA bars has been very strong. I can only wonder where all the bars are coming from to meet the soaring demand at the current low price. For example, Resource Investor notes http://www.resourceinvestor.com/pebble.asp?relid=45611 "In fact, just since August 15, SLV has added a huge 308.839 tonnes to hold 6,474.04 tonnes of average 1,000 ounce silver bars." There are only about 25,000 tonnes of silver mined in one year. Yet over the past 10 days, SLV reports that it has added 308.9 tonnes, which is an annual rate of 11,120 tonnes, or 44% of this year's newly mined silver. And that's just SLV, not to mention all the other LBMA bars acquired by other sources during this same 10-day period.

 

Lastly, paper is used by the gold cartel acting under the direction of central banks to force prices lower. When prices in the paper market drop, prices in the physical market follow paper prices lower until prices become too cheap. We've reached that point with coins and small bars. We may also some day reach that point in the LBMA market, which means that gold would go into backwardation, i.e., the price in the spot market is above a future price of gold.

 

I trust this answers your question, but please let me know if I can be of further help.

 

Regards

James

 

QUOTE

Thank you James for your comprehensive reply and taking the time personally to attend to my query. I take much confidence from your clear explanation and guess I hadn't really thought this through fully. My immediate reaction to recent price action in the futures markets vs coins/small bars was "here's the divergence yet Goldmoney is tracking paper prices", which had me a little concerned. Of course, a continued supply of the LBMA bars explains why there actually is no such gaping divergence visible between goldmoney spot rates and futures prices, yet.

 

As I mentioned in my initial query I will post your response on GEI as I think it will be of great interest to members there.

 

Kind regards

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The important part is (and that is what I have tried to explain earlier):

... GoldMoney always bases its prices on the spot market for LBMA bars. This spot market is comprised of several major bullion banks, and they quote throughout the day from Monday-to-Friday from their various branch offices in different time zones throughout the world.

 

When a transaction is completed, the seller has the obligation to deliver to the buyer -- upon payment by the buyer -- physical bullion in the form of LBMA bars. To my knowledge there has never been a default by any trading member selling LBMA bars in the spot market.

 

Transactions in GoldMoney are never priced off the futures market or any paper-based trading market. Further, we have no intention to ever price them off the paper market. We will only transact in a market where we will receive LBMA bars, not paper promises.

So, if you trade in the LBM and take the bullion and run, you are fine. If however you buy 'gold' from one of the gold bullion banksters and 'store it with them', you have to be very careful and better read the small print. GM has allocated segregate storage, so that's fine (they took it and ran, so to speak).

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I feel there is a confusion on this thread about:

(1) trades of LBMA members with other LBMA members,

(2) people trying to buy 'gold' from LBMA members (banks) who get stuffed with paper.

These are two different things.

 

Is it just wishful thinking to treat paper and physical as separate markets currently though? They're both traded by the same banks at the same price and the vast majority of the trade is based on unallocated gold. You can take delivery on the COMEX too, but we treat that market with disdain and suspicion. Why not the LBMA?

 

The bullion banks who are obligated to deliver physical gold are also the same banks that trade and hold unallocated bullion on behalf of clients - some 98% of their 'bullion' per Jeff Christian. I would not be surprised if many central banks only hold unallocated gold in the LBMA system, as the recent case of the Mexican journalist highlighted. We know that Brown's Bottom was all about enabling a bullion bank to meet their obligations and stay solvent. So the system was almost at breaking point 11 years ago.

 

Both operations currently have an identical price, as far as I know. I've not read anything to suggest there is a two-tier pricing system currently, although perhaps this is where I am confused. The crux of the matter is that in a physical squeeze, will this bullion bank price still hold true? How will LBMA handle a transition to a physical market only? Will they publish unallocated and allocated prices? I am not convinced at all that the status quo will continue. Can James Turk continue to "take the bullion and run", when the Bank of Mexico and Goldman Sachs want their gold?

 

As you say, maybe it will be business as usual and there will be an AM and PM fix based on deliverable bullion and the unallocated holders will just get screwed. But therein lies the contradiction. If the unallocated holders get the shaft, that implies the bullion banks making a market in physical bullion are also screwed. Major dislocation could ensue. How will GoldMoney price your holding throughout? I'm not saying this to slam GoldMoney. I plan to buy some gold from them soon, but in the meantime I have some questions that I think need to be answered.

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Is it just wishful thinking to treat paper and physical as separate markets though? They both trade based on one price and the vast majority of the trade is based on unallocated gold. You can take delivery on the COMEX too, but we treat that market with disdain and suspicion. Why not the LBMA?

Again I sense a lot of confusion. The major difference between a futures market like the COMEX and the LBMA is that at COMEX most 'gold' never gets delivered and the futures are often cash settled, while in the LBM a trade if done with/from an allocated account is with prompt delivery of physical bullion. Where the bullion lies is a different matter, so often the stuff does not even get moved but just 'marked' differently (for a different owner). LBM is a spot market. That's why people like Bubb shuffle (maybe indirectly) paper on COMEX, and he never intends to take delivery, while people like I buy bullion through GM and the stuff needs to be directly delivered and moved over to GM's stack (because they take delivery in a private vault; and as long as it was not GM first place who sold me the bullion, but that's a different story).

 

I would not be surprised if many central banks only hold unallocated bullion in the LBMA system, ...

What does that mean?

 

Both operations currently have an identical price, as far as I know. I've not read anything to suggest there is a two-tier pricing system currently, although perhaps this is where I am confused. The crux of the matter is that in a physical squeeze, will this bullion bank price still hold true? How will LBMA handle a transition to a physical market only?

LBM is physical. The transition you are referring to would be a disconnect between futures prices (COMEX) and physical prices (LBM), where the COMEX default would of course be entirely 'voluntary' and no insurance would pay anything (just like in Greece).

 

Will their be an unallocated and an allocated fix?

Again, that's just confusion. If you hold unallocated 'gold' or a certificate with a LBMA member, that is your personal problem. If the party defaults in a gold melt-up, your gold has a higher chance of being gone. If it's allocated, it's there, because they just were a custodian.

 

What you don't seem to appreciate is the difference between, say, buying a 'gold certificate' or 'unallocated gold' directly from HSBC as compared to e.g. GM buying physical gold from HSBC in the LBM. In the first case, you have a nice paper promise. In the second case, you get the gold immediately against your payment. That's why you should buy the stuff through GM or BV rather than through some banksters if you don't want to have it under the pillow.

 

The difference is essentially like walking into an HSBC branch and buying a 'gold certificate' versus walking into an HSBC branch and buying a Krugerrand for cash and walking straight out. That's a MAJOR difference.

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Again I sense a lot of confusion. The major difference between a futures market like the COMEX and the LBMA is that at COMEX most 'gold' never gets delivered and the futures are often cash settled, while in the LBM a trade is with prompt delivery of physical bullion. Where the bullion lies is a different matter, so often the stuff does not even get moved but just 'marked' differently (for a different owner). LBM is a spot market. That's why people like Bubb shuffle (maybe indirectly) paper on COMEX, and he never intends to take delivery, while people like I buy bullion through GM and the stuff needs to be directly delivered and moved over to GM's stack (as long as it was not GM first place who sold me the bullion, but that's a different story).

 

 

What does that mean?

 

 

LBM is physical. The transition you are referring to would be a disconnect between futures prices (COMEX) and physical prices (LBM), where the COMEX default would of course be entirely 'voluntary' and no insurance would pay anything (just like in Greece).

 

 

Again, that's just confusion. If you hold unallocated 'gold' or a certificate with a LBMA member, that is your personal problem. If the party defaults in a gold melt-up, your gold has a higher chance of being gone. If it's allocated, it's there, because they just were a custodian.

 

What you don't seem to appreciate is the difference between, say, buying a 'gold certificate' or 'unallocated gold' directly from HSBC as compared to e.g. GM buying physical gold from HSBC in the LBM. In the first case, you have a nice paper promise. In the second case, you get the gold immediately against your payment. That's why you should buy the stuff through GM or BV rather than through some banksters if you don't want to have it under the pillow.

 

The difference is essentially like walking into an HSBC branch and buying a 'gold certificate' versus walking into an HSBC branch and buying a Krugerrand for cash and walking straight out. That's a MAJOR difference.

 

Your senses are so attuned to my apparent confusion that you seem to be missing the big contradiction in your response. Let's substitute 'LBMA' and 'LBMA system' with the major player:

 

* The price of HSBC 'gold certificates' are currently the same as physical gold delivered by HSBC to James Turk.

 

* This is based on the assumption that HSBC are willing and able to meet their gold obligations.

 

* The historical record suggests that the ability of bullion banks to meet their obligations is suspect.

 

* If there is a run on physical bullion by owners of unallocated gold currently 'held' on their behalf by HSBC, will HSBC still be willing and able to deliver to James Turk? I note that unallocated holders might be heavy-hitters.

 

* If HSBC CAN continue to deliver, the LBMA price will remain a physical price and your GoldMoney holding will go to the moon.

 

* If HSBC CANNOT deliver, the LBMA price will become a paper price and your GoldMoney holding will crash.

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OK, I should possibly stress again that I was referring to settlement on allocated and segregated gold accounts (stacks in vaults, so to speak). Let's go to the LBMA themselves to clear up a few things.

 

http://www.lbma.org.uk/pages/index.cfm?page_id=3&title=the_london_market

The London Market

 

London is the focus of the international Over-the-Counter (OTC) market for gold and silver, with a client base that includes the majority of the central banks that hold gold, plus producers, refiners, fabricators and other traders throughout the world.

 

Members of the London bullion market typically trade with each other and with their clients on a principal-to-principal basis, which means that all risks, including those of credit, are between the two counterparts to a transaction. This is known as an ‘Over the Counter’ (OTC) market, as opposed to an exchange traded environment.

 

The London bullion market is a wholesale market, where minimum traded amounts for clients are generally 1,000 ounces of gold and 50,000 ounces of silver.

 

Unlike a futures exchange – where trading is based around standard contract units, settlement dates and delivery specifications – the OTC market allows flexibility. It also provides confidentiality, as transactions are conducted between the two principals involved.

So, this market is very different from a futures market. But lets look into clearing.

 

http://www.lbma.org.uk/pages/index.cfm?page_id=18&title=clearing

Clearing

 

The London bullion market relies on a daily clearing system of paper transfers.

 

Members offering clearing services utilise the unallocated gold and silver accounts they maintain between each other for the settlement of mutual trades as well as third party transfers. These transfers are conducted on behalf of clients and other members of the London bullion market in settlement of their own loco London bullion activities.

 

This system avoids the security risks and costs that would be involved in the physical movement of bullion.

So, most trades of the large bullion banks are with unallocated accounts. However, this is those banks' problem, they have to trust each other. :)

 

http://www.lbma.org.uk/pages/index.cfm?page_id=19&title=bullion_accounts

Bullion Accounts

 

Unallocated Accounts

 

This is an account where specific bars are not set aside and the customer has a general entitlement to the metal. It is the most convenient, cheapest and most commonly used method of holding metal.

 

The units of these accounts are one fine ounce of gold and one ounce of silver based upon a 995 LGD (London Good Delivery) gold bar and a 999 fine LGD silver bar respectively. Transactions may be settled by credits or debits to the account while the balance represents the indebtedness between the two parties.

 

Credit balances on the account do not entitle the creditor to specific bars of gold or silver, but are backed by the general stock of the bullion dealer with whom the account is held. The client is an unsecured creditor.

 

Should the client wish to receive actual metal, this is done by ‘allocating’ specific bars or equivalent bullion product, the fine gold content of which is then debited from the allocated account.

 

Allocated Accounts

 

These accounts are opened when a customer requires metal to be physically segregated and needs a detailed list of weights and assays. The client has full title to the metal in the account, with the dealer holding it on the client’s behalf as a custodian.

 

Clients’ holdings are identified in a weight list of bars showing the unique bar number, gross weight, the assay or fineness of each bar and its fine weight. Credits or debits to the holding will be effected by physical movements of bars to or from the client’s physical holding.

This is the important difference.

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* If there is a run on physical bullion by owners of unallocated gold currently 'held' on their behalf by HSBC, will HSBC still be willing and able to deliver to James Turk? I note that unallocated holders might be heavy-hitters.

 

* If HSBC CAN continue to deliver, the LBMA price will remain a physical price and your GoldMoney holding will go to the moon.

 

* If HSBC CANNOT deliver, the LBMA price will become a paper price and your GoldMoney holding will crash.

NO!

 

If HSBC (or anyone else) can't deliver any physical gold to J.Turk (or anyone else) anymore when he wants it THEN the price is on the moon indeed (plus infinity).

 

Keep in mind that any GoldMoney balance is not any bullion bank's promise or anything. It is simply gold lying in GM's vault.

 

You seem to think that a GM holding is a (unallocated) liability of some bullion bank. This is WRONG. GM has their on allocated segregated holdings in a private vault. This is like GM having it under the pillow at home, but with high security. Has nothing to do with any bullion bank.

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OK, I should possibly stress again that I was referring to settlement on allocated and segregated gold accounts (stacks in vaults, so to speak). Let's go to the LBMA themselves to clear up a few things.

 

http://www.lbma.org.uk/pages/index.cfm?page_id=3&title=the_london_market

 

So, this market is very different from a futures market. But lets look into clearing.

 

http://www.lbma.org.uk/pages/index.cfm?page_id=18&title=clearing

 

So, most trades of the large bullion banks are with unallocated accounts. However, this is those banks problem, they have to trust each other. :)

 

http://www.lbma.org.uk/pages/index.cfm?page_id=19&title=bullion_accounts

 

This is the important difference.

 

Thanks for taking the tim to post those snippets - probably very interesting for new readers. I've read the same things as you have. I've read everything GATA have written on the LBMA system.

 

My problem is when we imagine a world where things are not operating smoothly at the banks that comprise this OTC market. HSBC have sold 50 times more unallocated gold than they actually hold. There will be uproar and a massive run on the remaining gold they do have for sale when it dawns on major institutions (possibly including some central banks) that they were just unsecured creditors and don't own any gold.

 

I doubt there will be much supply coming to HSBC from private hands at this point and Britain no longer has any gold to bail them out. So if the major participant on your market can no longer deliver and ends up settling in cash, what has your market become? What happens to the price you are quoting every day at 10.30 AM?

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NO!

 

If HSBC (or anyone else) can't deliver any physical gold to J.Turk (or anyone else) anymore when he wants it THEN the price is on the moon indeed (plus infinity).

 

Keep in mind that any GoldMoney balance is not any bullion bank's promise or anything. It is simply gold lying in GM's vault.

 

You seem to think that a GM holding is a (unallocated) liability of some bullion bank. This is WRONG. GM has their on allocated segregated holdings in a private vault. This is like GM having it under the pillow at home, but with high security. Has nothing to do with any bullion bank.

 

Oh come off it. Do you really think I believe your GM holding is a liability of a bullion bank? Don't be absurd.

 

Let me be just as patronising as you for a second. GoldMoney quote you a price that enables you to value your holding. This is not an arbitrary price based on the price of bars at CoinInvestDirect.com. It is a bid/ask spread based on a market made by GoldMoney's dealing desk, in turn based on the availability of physical bullion via the LBMA system (HSBC and others).

 

WHAT HAPPENS TO THIS PRICE IN A BULLION BANKING CRISIS?

 

It's unpredictable. It's scary. That's the basis for my thread!

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I doubt there will be much supply coming to HSBC from private hands at this point and Britain no longer has any gold to bail them out. So if the major participant on your market can no longer deliver and ends up settling in cash, what has your market become? What happens to the price you are quoting every day at 10.30 AM?

As I pointed out above, the price for your own physical bullion (either at home or in an allocated segregated account) will become plus infinity. Physical gold will not ab available at any price. Your GM balance will be on the moon.

 

If however a LBMA member had an unallocated account with another member, they will be super-fudged, because they were an unsecured creditor.

 

I have to agree, you are on to something insofar as many of the members trade with each other through unallocated accounts. But not GM, and that makes all the difference. So, in the case you are describing, your GM balance would be insanely high. An unallocated holding with a bust bullion bank however would be worth nil. At that stage, no one in the LBM would trade on unallocated accounts anymore (like no one wants to have Greek debt anymore). There would be only trading with allocated accounts, and the outright holders of gold would rule.

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Oh come off it. Do you really think I believe your GM holding is a liability of a bullion bank? Don't be absurd.

 

Let me be just as patronising as you for a second. GoldMoney quote you a price that enables you to value your holding. This is not an arbitrary price based on the price of bars at CoinInvestDirect.com. It is a bid/ask spread based on a market made by GoldMoney's dealing desk, in turn based on the availability of physical bullion via the LBMA system (HSBC and others).

 

WHAT HAPPENS TO THIS PRICE IN A BULLION BANKING CRISIS?

 

It's unpredictable. It's scary. That's the basis for my thread!

I think you have to distinguish here between a technical question and an economic question.

 

The economic answer is: plus infinity.

 

The technical answer is: whatever GM will put on their webpage.

 

EDIT: As I wrote before, I think LBM would become a direct delivery market (into allocated accounts), so I am not concerned. Independent of LBM, GM could ship the gold wherever they want and sell it there. Essentially, they could open a street stall on Threadneedle Street (if they obtained a licence) and sell gold bars there to the highest bidders.

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I think you have to distinguish here between a technical question and an economic question.

 

The economic answer is: plus infinity.

 

The technical answer is: whatever GM will put on their webpage.

 

And THAT is the basis for my thread.

 

Sorry for being rude in the previous post but your response was way off base. As I said way earlier on the thread, that pixel price is very important to people. Only hardcore 'bugs are capable of measuring their wealth in ounces. The on-screen price IS the price in this digital world.

 

If the price on the webpage goes to the moon because GoldMoney's desk is dealing on the PAGE, then great. But if it plummets, because LBMA bullion banks go tits-up and GoldMoney are not prepared, then people may PANIC SELL.

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But if it plummets, because LBMA bullion banks go tits-up and GoldMoney are not prepared, then people may PANIC SELL.

Now, that would be the mistake of a lifetime.

 

I didn't mean to be rude either, it just seemed totally absurd to me that the price of a good that suffers a short squeeze should go to zero. I think if GM realized that the LBM would not properly function anymore, they would commicate this to their clients. They'd possibly start accounting just in ounces/grams and would quote prices (not necessarily LBM prices) whenever someone wanted to buy or sell.

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I think you have to distinguish here between a technical question and an economic question.

 

The economic answer is: plus infinity.

 

The technical answer is: whatever GM will put on their webpage.

 

EDIT: As I wrote before, I think LBM would become a direct delivery market (into allocated accounts), so I am not concerned. Independent of LBM, GM could ship the gold wherever they want and sell it there. Essentially, they could open a street stall on Threadneedle Street (if they obtained a licence) and sell gold bars there to the highest bidders.

 

I don't doubt it. That's why I mentioned PAGE as earlier as the first post on the thread. GoldMoney will eventually be able to make a market in real physical and I don't doubt that. I've said it several times on the thread.

 

But this transition or crisis phase may be prolonged. Emotions will be high and technical problems are likely. It all hinges on how GM are prepared and the fate of the banks involved. I presume this is why James Turk deemed my question 'important'.

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Now, that would be the mistake of a lifetime.

 

I didn't mean to be rude either, it just seemed totally absurd to me that the price of a good that suffers a short squeeze should go to zero. I think if GM realized that the LBM would not properly function anymore, they would commicate this to their clients. They'd possibly start accounting just in ounces/grams and would quote prices (not necessarily LBM prices) whenever someone wanted to buy or sell.

 

Remember how about a year ago, GM changed their T&Cs to allow for a sales fee in case of market dislocation? GoldMoney seem to view the scenario I've painted as a serious operational risk. I don't doubt they will have a plan.

 

Also note that people are prone to making big mistakes with their investments.

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But this transition or crisis phase may be prolonged. Emotions will be high and technical problems are likely. It all hinges on how GM are prepared and the fate of the banks involved. I presume this is why James Turk deemed my question 'important'.

OK, I now see that this was more a technical question. Well, let's see if they have contingency plans.

 

Personally , I think LBM will continue to function. A gold meltup would be papered over. Unallocated losers would be stuffed with some freshly printed paper (never enough, though), and physical holders would just get very wealthy. That's what I have expected for years. Now, if this thing stays as slow as it is, the (slow) hidden bank runs will also turn all these unallocated accounts into allocated ones as mistrust grows and grows. You know we're there when Bubb will finally hoard coins and bars.

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I am keying in to both Quiffs and GF's comments here. These are questions/thoughts that have crossed my mind also over the last few months and particularly the last few weeks. Thanks for starting this thread Quiff as I think this is really worth fleshing out.

 

I agree with the conclusion GF has come to that the GM holdings are 'safe' in that they are sitting on privately stored, physical, numbered, recorded and audited metal. So to my mind the metal already in the valut is safe and not a counter party promise to deliver or a 'piece of paper'.

 

However I am unclear on 2 things and would like to see JT explain these things. We may want to coordinate further specific questions through this forum so GM/JT does not get inundated with similar but separate questions:

 

1. Pricing of existing holdings. GM currently quote spot prices which values your holding in real time based on the LBMA market. GF has shown from the LBMA extracts that this market is based on a mix of unallocated and allocated transactions. ie a mix of paper and physical trades. My question is how does this dichotomy play itself out when the SHTF and the impact on the firstly the value of one's existing holdings and therefore on your ability to sell at a physical price. Surely the LBMA pricing mechanism needs to make a distinction between paper and physical trading somehow. I think GM moving to the new Asia exchange for pricing and trading could be a solution to this. it wouldn't surprise me if GM were in the process of offering the Asia exchange as an option somehow on their platform.

 

2. Risk during a purchase transaction. When you place an order for gold on GM my understanding is that order has to be placed via the LBMA and you are then for a period awaiting delivery. Whose risk is it during this period of awaiting delivery, mine or GM's? If the LBMA is in any way a paper market (which the unallocated side seems to be) then who knows what shenanigans are taking place and what the outcome of one's order will be in a SHTF scenario, even though my trade was supposed to be 1-2-1 OTC. Equally I suppose it is quite likely that the opposite side of my transaction (the seller) is also a paper trader even if they may in this instance be selling real gold, so what likelihood that they actually are able to deliver? I think i am getting a little sidetracked with this point but something niggles me every time i am waiting for a transaction to complete which is in an way associated with a market that in any way plays the paper games.

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OK, I now see that this was more a technical question. Well, let's see if they have contingency plans.

 

Personally , I think LBM will continue to function. A gold meltup would be papered over. Unallocated losers would be stuffed with some freshly printed paper (never enough, though), and physical holders would just get very wealthy. That's what I have expected for years. Now, if this thing stays as slow as it is, the (slow) hidden bank runs will also turn all these unallocated accounts into allocated ones as mistrust grows and grows. You know we're there when Bubb will finally hoard coins and bars.

 

Let's not forget that with GM we're talking about a best-of-breed allocated product. There are many more gold vehicles that are going to crash, even if GM stands strong. We just hold GM more accountable.

 

 

2. Risk during a purchase transaction. When you place an order for gold on GM my understanding is that order has to be placed via the LBMA and you are then for a period awaiting delivery. Whose risk is it during this period of awaiting delivery, mine or GM's? If the LBMA is in any way a paper market (which the unallocated side seems to be) then who knows what shenanigans are taking place and what the outcome of one's order will be in a SHTF scenario, even though my trade was supposed to be 1-2-1 OTC. Equally I suppose it is quite likely that the opposite side of my transaction (the seller) is also a paper trader even if they may in this instance be selling real gold, so what likelihood that they actually are able to deliver? I think i am getting a little sidetracked with this point but something niggles me every time i am waiting for a transaction to complete which is in an way associated with a market that in any way plays the paper games.

 

Really good question. I would like to think GM can only sell metal they own, so they are bearing all the risk. I presume they expand and contract their holding based on demand and use paper hedges to somehow manage this exposure. Now we're getting beyond my technical understanding of hedging vehicles. But I wonder how much of GoldMoney's operational risk is managed by using paper gold vehicles. If GM buy a shipment and then there's a huge 24-hour takedown, GM are probably out a significant sum when they come to sell this gold at a lower price. I assume in the meantime they have to have hedged this somehow?

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Really good question. I would like to think GM can only sell metal they own, so they are bearing all the risk. I presume they expand and contract their holding based on demand and use paper hedges to somehow manage this exposure. Now we're getting beyond my technical understanding of hedging vehicles. But I wonder how much of GoldMoney's operational risk is managed by using paper gold vehicles. If GM buy a shipment and then there's a huge 24-hour takedown, GM are probably out a significant sum when they come to sell this gold at a lower price. I assume in the meantime they have to have hedged this somehow?

In the past, I have given this some thought too. First of all, think about it: there are only two gold fixings a day and one silver fixing, but GM lets people buy and sell 24/7 -- at least that's what I have experienced and with a global customer basis they certainly feel the need to do so.

 

Therefore, I also think that GM sells/buys gold to/from customers on their own account and/or they hedge via futures or derivatives. A clear sign that this is so is that for large (and I suppose that means REALLY large) amounts they tell you that they can't give you the price before the next actual London AM or PM Fixing happens. Meaning, in the case of large transaction they DON'T take the risk and instead the bid/offer of the customer becomes a direct part of the next London Fixing. This way, they guarantee liquidity for largest volumes. Essentially, a central bank could store their bullion with GM. For small fishes, they can do the hedging and/or bear the risk. It's a very clever system, that's also why it is so important for them to be a LBMA member.

 

DISCLAIMER: This is just a guess, I have no idea what GoldMoney actually does.

 

EDIT: I am not sure who carries the risk during the settlement period so to speak. It could be on GM's side, but in the end it is always the customer who is endangered, say if GM went bankrupt just while a customer order is pending. Therefore, one should always buy/sell in smaller tranches, same is true for cash withdrawals. This way the risk becomes possibly really negligible, and the holdings are simply a highly secured but very liquid physical gold position. That's why I like it.

 

EDIT2: Similar comments would apply to BullionVault, I suppose. Only with the trading platform etc. their business model is slightly different anyway.

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BTW, the title of this thread is highly misleading, since we have established that the price will go to da moon and wayyyyy beyonnnnnd. :)

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