One of the writers we feature regularly (and follow closely) is J.S. Kim. Below he is interviewed by the often over the top but also informative Max Keiser in what is quite an advanced account of the goings on in the paper futures market for gold and silver. An interesting point in the video is the concept of how the European Parliament is looking to accept gold as collateral from EU nations in exchange for EU debt. While conversely over in the New York futures market they will happily give paper settlement of futures contract. Just another example of the serious transfer of (real) wealth currently going on globally, where the top 1% swap their paper wealth for real wealth like gold, silver, land and collectables at the end of every year…
By J.S. Kim – Chief Investment Strategist for SmartKnowledgeU
Please find below my interview with Max Keiser and our discussion regarding the Greek crisis and continued banker price suppression and manipulation schemes executed against gold and silver to prop up the US dollar and prevent a US dollar collapse. Max raises the issue of the European Parliament’s move to accept gold from EU nations as collateral as reported on Zero Hedge here, which I believe is a step towards making gold acceptable as money for the purposes of debt repayment. However, this step is nothing new as Bankers have long been known to make loans in weak currencies and demand repayment in much stronger currencies before, even when dealing with fiat currencies. For example, the World Bank, which has long dispensed loans in US dollars to struggling nations, started a program in the early1990s whereby it asked nations to repay their USD loans in local currencies, fully aware of the fact that the US dollar was falling against many global currencies very rapidly. The World Bank aggressively instituted this “we lend you money in junk US dollar fiat currency and repay us in better currency” program in 15 different currencies in the early 1990s and aggressively pushed it further in the 2000s. So it is no surprise at all that the European Parliament has extended and refined this World Bank program for their own use into a “collateralize your debt with real money (physical gold) but continue to take out loans in our junk fiat currencies”.
I also discuss the shenanigans of the gold/futures silver market with Max. Here is the link to the evidence and the letter I sent to CFTC Commissioner Bart Chilton in late summer of 2008 of Banker fraud in the gold futures markets and his reply to me. Mr. Chilton replied that the enormous arbitrage opportunities daily for several months in the summer of 2008 of $20, $30, $40 and $50 an ounce higher prices of gold futures in Asia versus the New York COMEX was due to Chinese banker manipulation of gold prices higher and not due to Western banker manipulation of gold prices lower. You can read, in that same article, my further line of questioning of Mr. Chilton’s response that went unanswered by the CFTC. Furthermore, I discuss with Max the recent shenanigans in gold and silver futures markets where nearly 99% of all daily transactions for the month of May, 2011 consisted of paper for paper swaps in the form of EFP (Exchange of Futures for Physical) and EFS (Exchange of Futures for Swaps). While at first the Exchange of Futures for Physical transaction may sound legitimate in name, all legitimacy disappears when one realizes that paper may be substituted for the “physical” component of this transaction.
Exchange Rule 104.36 enacted on February 18, 2005, which allows for the substitution of gold ETFs for physical gold, states that the “physical” part of the transaction “need only be substantially the economic equivalent of the futures contract being exchanged” and that “the purpose of this Notice is to confirm that the Exchange would accept gold-backed exchange-traded funds (‘ETF’) shares as the physical commodity component for an EFP transaction involving COMEX gold futures contracts, provided that all elements of a bona fide EFP pursuant to Exchange Rule 104.36 are satisfied. Thus, acceptable gold-backed and exchange-traded ETF funds include, but are not limited to, the iSharesCOMEX Gold Trust (ticker: IAU), which began trading on the American Stock Exchange on January 28, 2005.”
GATA’s Adrian Douglas first brought to my attention Exchange Rule 104.36 in his article, “Commodity Exchanges Can Dump Gold Debts on ETFs”, prompting me to search the CFTC database even further. My search revealed a further amendment to the “exchange of future for physical” transactions enacted onMarch 11, 2005. This amendment stated that “for purposes of this Rule 414, the term ‘Related Position’ [Physical] shall include, but not be limited to, a security [a group or basket of securities], an option, [or] any commodity as that term is defined by the CEA or a group or basket of any of the foregoing. The Related Position [Physical] being exchanged need not be the same as the underlying of the Futures transaction being exchanged, but the Related Position [Physical] must have a high degree of price correlation to the underlying of the Futures transaction so that the Futures transaction would serve as an appropriate hedge for the Related Position [Physical].” This amendment not only opens up PM ETFs as substitutes for the “physical” component of a gold/silver futures transaction but even other metal ETFs or physical metals that have a “high degree of price correlation” to gold and silver.
Furthermore, remember that an EFP transaction can be used to either initiate or liquidate a futures position. Thus, from this amendment, though not specifically mentioned, it is obvious that SLV shares could be used in an EFP transaction to represent the “physical silver” part of a futures transaction. If you look at my below diagram, this may also explain why a huge number of spread positions in the gold/silver futures markets are initiated from time to time in the COMEX. I have illustrated how an EFP in silver futures may work below:
In recent months, the number of EFP transactions in silver AND gold, as opposed to the number of contracts settled in cash or settled in physical delivery, has exploded. When the majority of gold/silver futures contracts are settling in EFP and EFS transactions versus cash settlement or physical settlement, this points to a pronounced manipulation of this market and an absence of any true price discovery in gold/silver futures markets.
ZeroHedge recently reported that JP Morgan was one of the largest owners of the likely bogus SLV ETF, holding 3,600,000 shares as of the end of the 2010 fiscal year calendar. ZeroHedge also reported that bullion banks, in early May, moved 20% of COMEX physical silver out of the registered category that is available to satisfy requests for physical delivery and into the eligible category that is not “eligible” for physical delivery. Scottia Mocatta followed this significant move by transferring 186,000 of their physical silver ounces from registered to eligible as well. JP Morgan, as of the May 27th CME report, held ZERO ounces of registered silver in the COMEX vaults.
In the meantime, selling of SLV shares reached an all time high in May. What does this all mean? I’m not quite sure I have the full answer yet as I keep digging, but I’m quite certain that whatever is going on in these paper for paper swaps in the gold/silver futures markets on the COMEX is not kosher and an attempt to hide physical shortages of precious metals that exist versus the open interest numbers in gold/silver futures. The CME makes it very difficult to compile stats regarding EFS and EFP transactions because while they provide a running total of month-to-date transactions for gold/silver futures contracts settled in cash and settled through physical delivery, they do NOT provide a running total of EFS and EFP transactions month-to-date in their daily metal reports nor do they respond to any requests for such information. When one of my staff members wrote the CME and inquired if running totals were available each month for EFS and EFP transactions in gold/silver futures, the CME staff answered no. Thus, one of my staff compiled the daily totals for EFS and EFP transactions for the month of May by pulling every daily report for gold/silver futures. This is what the totals looked like from May 2 to May 26, 2011.
For gold futures, from May 2 until May 26, 2011, 0.01% of transactions settled in cash, 0.27% in physical, 78.22% in EFP and 21.50% in EFS (for a combined 99.72% of all gold futures transactions in EFP and EFS). For silver futures, from May 2 until May 26, 2011, 0.19% settled in cash, 0.93% in physical, 85.39% in EFP, and 13.49% in EFS (for a combined 98.88% of all silver futures transactions in EFP and EFS). Thus these paper for (possibly) paper swaps, if that is indeed what is happening in the EFP transactions, are casting huge distortions in the price of gold and silver to the downside.
About the author: JS Kim is the Chief Investment Strategist for SmartKnowledgeU, a fiercely independent investment research, education, & consulting firm that helps clients position themselves properly to profit from the ongoing global monetary crisis being executed by the world’s Central Banks. The returns of his Crisis Investment Opportunities newsletter since launch in June 15th 2007 are as a follows. Half a year, 2007: +23.78%; 2008 +3.21%, 2009: +63.32%; 2010: +32.59%; and YTD as of the end of May 2011: +5.79%. Cumulative return since launch to May, 2011: +192.66%.