Thursday, February 6, 2014

Gold news and views February 6 , 2014 ......... The Farce Is Complete: Blythe Masters Joining CFTC ..... May the FARCE be with you ! 61 tons of gold bullion flow out of Western ETFs and Exchanges in January 2014...... Gold Daily and Silver Weekly Charts - Word for the Day: Rehypothecation ........ Gata items of the day including Germany's continuing effort to fend off well earned suspicions about its gold allegedly vaulted in the US ......

The Farce Is Complete: Blythe Masters Joining CFTC

Tyler Durden's picture

We thought today's newsflow and "market action" ranked pretty high on the absurd surrealism scale. And then we saw this.
That's right - you read it correct: "Blythe Masters, head of JPMorgan Chase & Co.’s commodities division, is joining an advisory committee of the U.S. Commodity Futures Trading Commission, said Steve Adamske, a spokesman for the regulator. Masters, 44, was invited by acting Chairman Mark Wetjen to sit on a global markets committee at the Washington-based regulator of futures and swaps, according to a person with knowledge of the matter. Masters is scheduled to participate in a CFTC meeting on Feb. 12 to discuss cross-border guidance on rules, the person said."
Ok - ignore, if you will, all allegations about Blythe Masters "interventions" in the precious metals markets.
But don't ignore Blythe's CNBC interview in which the soon to be former JPMorganite said, days before the London Whale fiasco was exposed and so were JPM's attempts to corner the bond market, that JPM has "offsetting positions. We have no stake in whether prices rise or decline. Rather we're running a flat or relatively flat matched book" - a statement that was a bold faced lie, and was followed up with "what is commonly out there is that JPMorgan is manipulating the metals market. It's not part of our business model. it would be wrong and we don't do it."
No, Blythe had much greater manipulative ambitions, namely becoming the next Enron, which we learned after than the FERC fined JPMorgan - and the group ran by Blythe Masters - for manipulating electricity prices in California and other states.
Fast forward to today when we learn that this certified commodity market manipulator just got a job with none other than the head commodity regulators in the US?
In other words, you too can get a job at the CFTC if only you can answer yes to the following two questions (h/t Manal):
  • Has your bank manipulated energy markets under your watch, and
  • Have you been found guilty of commodity price manipulation
We could ask what Elizabeth Warren would think about this hilarious rotating door out of the most punished for its legal transgressions bank - with about $25 billion in legal fees, expenses and settlement charges - the same Warren who earlier today was parading with pandering populism at the Senate hearing, as a result of which nothing would change...

... but we won't. Because as we noted: nothing will ever change. Actually correction - now it will be Blythe Masters on top of the one regulators that is supposed to enforce a fair, honest and efficient commodities market.
It's almost as if they are explicitly telling the handful of people who still care about this entire charade a resounding "fuck you."


Bundesbank still fending off suspicions about gold vaulted in U.S.

Germany Repatriating Its US Gold Reserves in Mini-Shipments
From Deutsche Presse-Agentur
via Europe Online Magazine
Weiden, Germany
Thursday, February 6, 2014
FRANKFURT, Germany -- The 300 tons of gold that Germany is bringing home from a New York strongroom is being transported little by little and will take until 2020 to complete, the German central bank said Thursday.
Emotions have regularly flared in Germany about why 45 per cent of the country's 3,391 tons of gold bars is stashed deep beneath the Federal Reserve Bank of New York in Manhattan.
The original reason was that West Germany earned it through trade surpluses in the 1950s and 1960s and never moved it out of the United States to ensure that it did not lose the lot in the event Germany was invaded by the Soviet Union.
The German central bank, or Bundesbank, was responding Thursday to a report in the Handelsblatt newspaper claiming there were mysterious delays in the repatriation programme.
The newspaper quoted a conservative politician, Peter Gauweiler, who has repeatedly raised the issue, as doubting the gold was as instantly available in New York as claimed.
A spokeswoman for the central bank in Frankfurt said this was not true and that small shipments back to Germany were preferred for security reasons.
The spokeswoman also rejected charges that Germany was not watching the gold in New York closely enough.
"We have no doubts about the reliability of our partners," she said.
The bank said 5 tons were repatriated from New York last year, along with 32 tons brought home from Paris, and the project was proceeding apace.
Handelsblatt noted that insurers will cover gold shipments only by air, not by ship, and will not insure shipments of more than 1 ton at a time.
Germany aims to ultimately keep only 37 per cent of its gold at the Federal Reserve in New York, where most of the world stores gold. Multi-billion-dollar transfers are easily done by simply carting the gold from one country‘s cubicle to another inside the vault.
Falls in the price of gold reduced the value of the total Bundesbank gold reserves last year by 31 per cent to 94.9 billion euros as of December.

With valuations disconnected from fundamentals, Sprott expects shock to financial system

6:25 SRT Thursday, February 6, 2014
Dear Friend of GATA and Gold:
Market valuations today have no relationship with fundamentals, Sprott Asset Management CEO Eric Sprott tells King World News, so he expects some shock to shake the world financial system. An excerpt from the interview is posted at the King World News blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

Central banks seek to disconnect the gold alarm, Kaye tells KWN

2:55p SRT Thursday, February 6, 2014
Dear Friend of GATA and Gold:
Hong Kong-based fund manager Bill Kaye tells King World News today that governments intervene in the gold market to prevent gold from acting as an indicator of irresponsible financial policies. But, Kaye adds, "I think gold will be liberated this year." An excerpt from the interview is posted at the King World News blog here:
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

05 FEBRUARY 2014

61 Tonnes of Gold Bullion Flow Out of Western ETFs and Exchanges In January 2014

“Gold is a possession and not a promise.”

William Rees-Mogg, The Times 12 Dec 1979

Here is the data for gold bullion outflows from ETFs and Exchanges in January of this year.

As you can see, it is a more general phenomenon than some have implied in their remarks about the Sprott redemptions and its discount to NAV the other day.

And this was in a month of generally rising prices for gold. 

So the trend continues.  There were 942 Tonnes that left the Western repositories in 2013. 

Gold is moving from West to East.  What does it mean?

And what is left is all that prowling paper, empty of value, looking for more wealth to devour.

The bankers' boys say not to worry.  But do not ask to see what remains behind the central banks doors.

Trust, and believe, for the good of the system. Our system, the one that keeps us rich.

If you open your eyes, you'll spoil everything.

Dead bankers and hollowed vaults.

Such goings on.  My, my, my.

06 FEBRUARY 2014

Gold Daily and Silver Weekly Charts - Word for the Day: Rehypothecation

"The commercial world is very frequently put into confusion by the bankruptcy of merchants that assumed the splendour of wealth, only to obtain the privilege of trading with the stock of other men, and of contracting debts which nothing but lucky casualties could enable them to pay; till after having supported their appearance a while by tumultuary magnificence of boundless traffic, they sink at once, and drag down into poverty those whom their equipages had induced to trust them."

Samuel Johnson, Rambler #189, January 7, 1752

This is not a technically precise description of rehypothecation, but the terminology has been simplified a bit for the sake of understanding by the lay person.

I thought of this when I read a question that a reader had about how fractional reserve bullion banking works.  Like so many other things financial, it can seem almost foolproof on paper.  Somewhat like the efficient markets hypothesis, or the trickle down, supply side, recovery boogie woogie.

But one might ask, how is it that occasionally things in bullion banking seem to go awry, so that even the great monetary power and experience of the Governor of the Bank of England might find himself 'staring into the abyss.' 

Where are the risks in this, and in any other type of fractional assets arrangement?

And that brings us to our word for the day:
Rehypothecation: The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients. Clients who permit rehypothecation of their collateral may be compensated either through a lower cost of borrowing ora rebate on fees.
An example of rehypothecation might be used in any fractional asset system. One example might be a bullion bank, or mint, that offers the sale and storage of unallocated gold and silver.  You may buy the bullion from them, but you agree to leave it there in an unallocated pool of assets.

The advantage for the customer is that they are given a significant break on storage fees for not demanding the delivery of specific bullion. 

It does not even have to be a bank or mint, but a larger dealer in metal.  Any entity that offers unallocated bullion storage can use that unallocated bullion to smooth the delivery process to retail and wholesale customers that prefer to take delivery of their bullion.  For the sake of clarity I will refer to the bank, mint or dealer offering unallocated storage as Dealer.

As in the case of the more familiar commercial banking, the 'deposit' of the customer, with cash left 'on deposit,' makes them a creditor of the bank.  The return which the customer receives for this loan of their asset is interest, or some other value such as a reduction in fees.  In the old days they used to even kick in toasters and TVs, but those were other times when deposits seems to matter more.

In the case of metals, typically the unallocated bullion is rehypothecated by the dealer to some degree.  It is often used as a classic 'float' in support of their own operations.

It is a way for the dealer to obtain short term bullion to supply their day to day transactions with people to whom they take and deliver bullion in various forms, such as delivering title of a certain amount of refined gold in return for the delivery of intermediate stage material, in the form of dorĂ© bars from a mine for example.  And generally the dealer would receive some fees in return for this service to the miner. 

The reason that the dealer might not charge the unallocated owner a storage fee is because the customer has agreed, even if in the fine print, to allow that entity to use their bullion as collateral in unspecified third party transactions.

 The customer has hypothecated or deposited their asset to the dealer, in return for some form of reimbursement.  And in turn the dealer may rehypothecate, or use, that asset for their own purposes.

The same asset can be rehypothecated many times, so that a single ounce of gold and silver, or any piece of property, may be encumbered by a chain of ownership claims, some of them downstream from the original dealer.   Practices may vary, but rehypothecation has become commonplace in our modern financial system.  Leverage pays off well when it works.

This is all very well and good, as long as the different parties in the chain do not overdo the leverage, or number of claims, applied towards that particular asset.  And of course if there are no untoward counterparty risks or failures in the chain, or disruptions in expected supplies either in terms of availability or price.  If that happens we can see a domino like effect.

So when you are given a nice textbook example of how fractional ownership of anything works, keep in mind that there is never a free lunch. If you are receiving some sort of benefit for keeping your assets at a particular place, chances are quite decent that they are being utilized for the advantage of someone else.

And if there is a disruption somewhere in the markets, and  the chain of rehypothecation is broken, difficulties may most certainly arise.  Often a dealer will be in a position to offer some sort of guarantee, as in the case of FDIC insurance for monetary bank deposits.  Results may vary.

Although I have not discussed it, it is also possible that an asset held specifically without any prior agreement for reuse, such as the case of allocated bullion being held through a broker, might be subject to cross claims of ownership, as in the sad case of MF Global.  In that case the customers had to lawyer up against other counterparties and wait for some sort of settlement.  This does not happen very often, but it can and does as we have seen.

Sometimes the leverage in a vehicle is not always easily seen.  Is GLD fractional?  Does all their gold hold clear title to some specified percentage of an investment unit?  I don't know.  How much 'leverage' is there in a particular bullion bank at any given time?  We have seen them occasionally seen them get 'over their skis' as in the case of Scotia Mocatta some time ago, but it is hard to tell because audited results are not frequently available.   We know they are running floats, unless they are otherworldly saints, or just fools.  The question is, how much?

I wonder under what auspices central banks lend out the gold of their people to bullion banks?  Do they realize that their gold is being rehypothecated, often by third parties?  Have they ever agreed to it?  Do the central banks even have to disclose such arrangements?  What oversight is there from the civil authorities?

And what happens if the central bank asks for the return of their bullion, and it was not there?  One can only wonder. Perhaps Germany offers a contemporary example of how to manage such a situation.

Speaking of the movement of bullion, there was a whopping warrant issued by JPM on 109,856 ounces of gold bullion in its storage yesterday, adjusting it over to the registered (deliverable) category.  And there was a lesser amount of 11,056 adjusted over to registered at Scotia Mocatta.

So now the total deliverable category is back up to 616,519 ounces, which is a good thing, since one might have wondered how they were going to fulfill those contracts that have already stood for delivery.  I expect that they will be posting the drawdowns in the foreseeable future.

Also at Scotia there was a withdrawal of 40,395 ounces of gold from the warehouse altogether.  All the transactions and totals are included in the report below.

As a reminder, tomorrow is a Non-Farm Payrolls day, and shenanigans are often in fashion.

Have a pleasant evening.