Rehypothecation and Dangers of Paper or Bank Held Gold

This week:

 

MF Global for Dummies

If you’ve had trouble following the goings on with the MF Global collapse (nothing to be ashamed of!), this morning we came across the simplest explanation of the situation at PeterLBrandt.com. And make no mistake it is serious for a number of reasons:

In a nutshell, this is “MF Global for Dummies.”

 

Summary

1.  You deposited funds in a protected segregated bank account with J. P. Morgan to serve as an escrow for trades in regulated markets to be cleared by a futures commission merchant (FCM).

2.  The FCM was not allowed to access your escrow funds for its own trades in use.

3.  The FCM stole your escrow money and lost it in a bet on European debt.

4.  The Commodity Futures Trading Commission has the responsibility to insure that this very thing never happens.

5.  You are left holding the bag as the default counter-party to the FCM’s bets, without your approval or knowledge and in violation of the very laws the U.S. government is responsible to uphold.

6.  The U.S. government is taking no responsibility for what happened and is expecting you to take the loss.

7.  The fact you are holding the bag harms the integrity of the entire market structure. It is the hole in the dike that will eventually flood the city.

If you want it, there is a slightly more detailed but nevertheless simple explanation on the website.

 

Word of the week: Re-Hypothecation

Due to the MF Global collapse you may have come across the term hypothecation.  From investopedia: Hypothecation – “When a person pledges a mortgage as collateral for a loan, it refers to the right that a banker has to liquidate goods if you fail to service a loan.  The term also applies to securities in a margin account used as collateral for money loaned from a brokerage.”

The word comes from the root word “hypothetically” as in the bank or the brokerage “hypothetically” controls the collateral even though you still own it.

So re-hypothecation is when the bank/brokerage uses the collateral that you have pledged to them, as collateral for their own borrowings.  So the problem arises when your bank/brokerage fails the lender that you bank/brokerage borrowed from then has first claim on your collateral.  This is what occurred in the case of MF Global clients through no fault of their own as they all thought they had segregated accounts, meaning MF Global couldn’t re-hypothecate their collateral to another lender.

Clear as mud???

 

Dangers of Paper or Bank held gold

If you got the gist of all that, then this Bloomberg story from earlier in the week should make sense.  In short HSBC is suing the MF Global brokerage trustee in order to get a judgement as to who is the owner of $850,000 worth of gold and silver it holds.

“An HSBC Holdings Plc (HSBA) unit sued the MF Global Inc. brokerage trustee to establish whether he or another person is the rightful owner of gold bars worth about $850,000 and silver bars underlying contracts between the brokerage and a client.

 

Five gold bars and 15 silver bars underlie eight Comex contracts between the brokerage and its client Jason Fane of Ithaca, New York, the unit of London-based HSBC said in a court filing yesterday. Both parties have asserted claims to the bars, creating difficulties for HSBC, which is storing them, the bank said. HSBC asked a judge to decide who the rightful owner is.”

So basically there is confusion over whether the individual who thinks he owns the bars still does or whether MF Global “re-hypothecated” his gold to someone else.

So beware bank held gold, Comex futures gold, paper gold etc.  After all the point in holding gold is that it has no counter-party risk.  It seems more and more that the only way to be sure of this is to take possession and arrange storage yourself.

>> Learn more about the dangers of paper gold. See Paper Gold vs Physical Gold – What Should You Buy?

and Confusing Investing with Wealth Protection – The Risks of Paper Gold vs Physical Gold

 

James Rickards – Currency Wars

We’ve just started reading Jim Rickards’ book “Currency Wars: The making of the next global crisis” .  It’s been storming up the Amazon best seller charts.

So far it’s been an interesting read as it begins with his account of a financial “War Games” organised by the pentagon that he was involved in during late 2008.  We’ll have a full review for you in the new year, but given he has been somewhat of a Wall Street insider it’s sure unveil a few interesting tidbits yet.

Do you have a USD, AUD, EUR or Pound account you’d like to buy gold or silver from?

If you have funds offshore that you are looking to repatriate back to NZ to buy gold and/or silver.   Or for that matter in a New Zealand based banks AUD, USD, EUR and GBP foreign currency denominated account, one of that our suppliers also has accounts in these 4 currencies.

What we’ve learnt is that this can save you a fair bit on the steep foreign currency exchange rate charges you’d normally get hit with from the banks in transferring back to an NZD bank account before buying.  If you’d like to know more about that give David a call on +64 9 281 3898 or email orders@goldsurvivalguide.co.nz.  And as usual for locals you can call 0800 888 465.

XMAS Hours

Reminder: We will be open over the holidays in the days between the stats (although David hardly ever is away from his phone!) but only with access to one supplier, so you can still get a quote then but if you want the full choice get in before the 23rd December.

Have a golden week!

 

Glenn (and David)

Gold Survival Guide

P.S.  As usual this weeks article are linked below.

 

Start Thinking in Terms of Gold Price

2011-12-08 16:02:05-05The following looks at pricing your investments (mainly shares) in terms of gold.  It’s something we make a point of doing ourselves and have written in the past on using this methodology for housing also. So have a read and change the way you value not just investments buy everyday items too… Jeff Clark, Casey Research […] read more…

Pullbacks in Perspective

2011-12-11 17:32:17-05A picture’s worth a thousand words, so a good chart must be worth a few thousand.  Here’s 4 simple charts and very few words needed in this short read to explain them… By Jeff Clark, Casey Research If you’re bullish about the long term for gold and silver, it’s mouthwatering to watch them undergo a major […] read more…