Wednesday, June 4, 2014

Copper and Aluminum " ponzi scheme " coming apart ? June 4 - 5 , 2014 China Scrambling After "Discovering" Thousands Of Tons Of Rehypothecated Copper, Aluminum Missing ..... How bad might this get ? Consider the following ........“We have heard that some banks in China are offering financing against photocopied warehouse receipts,” one metals trader told MetalBulletin (login required), which first broke the news of the investigation and export freeze. There is currently a hold on all commodities that have been used as collateral for financing, which includes iron ore, aluminum, alumina and bauxite, and aluminum ore,MetalBulletin said. + One big question is who will be left holding the loan losses on the “missing” materials, which could be as high as $300 million, Metal Bulletin editor Alex Harrison told Quartz. Another uncertainty is whether these investigations will spread to other locations where metals are stored, which could ultimately affect the price and availability of credit though China......... the rumored size of the problem is rising fast—the value of the metals reportedly involved in the investigation started at “$250 million last week [and has] already risen to in excess of $1 billion,” a second Metal Bulletin report said today.










http://blog.milesfranklin.com/now-we-have-an-answer


Now We Have an Answer

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While proof reading this piece I realized that I should preface it with an explanation.  This very well may be the most important piece that I’ve ever written and one that could explain why and how the price of gold has dropped for 2 years in the face of all time record demand.  We have wondered and scratched our heads as to how demand could dwarf supply yet the price drops.  What is happening in China right now may very well explain it mechanically.  The “mechanics” however now seem to be moving into the reverse because of fraud.  What was previously “sold” that did not exist, now must be bought…yet still does not exist and is even a smaller relative pool.  We are potentially facing a margin call in reverse in the gold (and silver) markets.  The day that “none available” becomes the reality could happen very rapidly and without notice.  I think we now have an answer!
Another day, another scandal.  No I’m not talking about The White House where it seems that another scandal promptly comes along to distract your attention from the current scandal.  No, I am talking about an investigation into China’s port of Qingdao base metal’s warehouse.  I have written about this topic before, one avenue of credit creation is the “shadow banking system” that uses warehouse receipts as collateral for credit.  It appears that some metal is missing or unaccounted for, and this after rumors has alleged that much of the metal has been re hypothecated as many as 10 times over.
OK, so here is the story as told by Zero Hedge a couple of months ago and now the story of missing metals today.  Copper is reacting to this story by dropping in price rather than rising, this scenario was forecast by Goldman Sachs and agreed upon by Tyler Durden(s).  Please understand that no matter what happens to the prices of copper, lead, beans, zinc or even gold, the bottom line is that this is a very fast growing seed that will grow into a credit contraction/implosion that will leap from China’s shores and engulf the entire credit based world.
I must confess that I am a little bit confused with this but let’s think this through and see what we come up with.  At first glance, my thought was that if the metals are not there for whatever reason (never there, hypothecated many times over or even sold while other letters of credit exist with multiple owners), once this fact was understood the prices would rise.  Common sense says that if there is less supply than previously thought then the clearing price should be higher.  Goldman and Zero Hedge argue that once the scam is uncovered, a rush to sell the contracts will overwhelm the demand to secure the physical product.  This very well may be true as owners of “receipts” will sell to receive whatever they can …while they can.  The selling should only be over the short term in my opinion and a rise later in price as tight physical supply adjusts the clearing price later.  I think the best way to explain their theory is that commodities (paper contracts) face a gigantic margin call that only can be satisfied by selling to cover.  In essence, the asset has already been borrowed against several times over and the money does not exist to actually purchase the metal because it’s already been “bought” and the money spent elsewhere.  Again, this is a little bit counterintuitive but I will come back to “counterintuitive” shortly.
Gold is where Goldman and Zero Hedge disagree.  Goldman believes that gold will also go down just as other commodities while Durden disagrees.  Zero Hedge believes that gold may actually rise and erase the losses of the last two years, in their words…
And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures “hedges”, i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.
In other words, from a purely mechanistical standpoint, the unwind of China’s shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for. 
-Zero Hedge, June 4, 2014
This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.”
OK, let me break this down a little, first I do not think that “China” under ANY circumstances will be selling ANY physical gold.  I believe that the “transfer” from West to East of gold bullion over the last few years was a national decision that China made at the very top levels, it is a national program that will not be altered or reversed.  That said we know that gold has dropped over the last two years while physical demand has dwarfed known physical supply.  This was and is “counterintuitive” as I mentioned above.  In a purely “cash market” this could never have happened but it did.  “It did” and we have speculated as to why or how all along, now I think we have a better idea.  The “hedging” that has been done was multiple in size of the overall market so in fact there was more selling than buying which pushed the price down (with paper).  This allowed “China” to purchase and secure the real deal and as I’ve said regarding their infrastructure, it is built and if the paper markets implode or evaporate …then…”oh well, at least we have the real deal.”  I might add they in retrospect will have secured “the real deal” for what will be looked back upon as for FREE!
Zero Hedge speculates that purchases of “hedges” to close in the paper market will overwhelm sales in the cash market (I do not agree that physical sales of any big size will ensue).  These “hedges” include forward sales and leases from the mining industry, “leases” both official and “unofficial” (as in stolen) and multiple sales of the same physical ounce in the paper markets.  As you know, there has been some very good work done and evidence put together that there are 100 paper ounces sold for every 1 real and deliverable ounce on the planet.  It is this situation that I believe Zero Hedge speaks of as “unwinding.”
So the question now is how much, how big and how quickly does this scandal in China become uncovered.  Make no mistake, there will be executions in China over this unlike the “the Corzinization of America” because they actually still do have a rule of law.  Even though “we” (Americans) have become almost completely numb with scandal after scandal, this one has the potential to shake the entire globe so that we cannot ignore it.  This is all about the credit structure coming down.  “Collateral” has been lent against many times over and in some cases never existed or has been stolen.  This is about “trust” and will quickly become about liquidity and the lack of.  This is initially a highly deflationary event and as most everything is run on credit…everything will feel the shockwaves.
Even without the paper contracts that must be unwound on the buy side for gold, the fact that confidence will have been totally broken will in my opinion push gold to much higher levels on its own.  I also want to mention that as “history rhymes” we may be seeing this again soon.  The deflationary events of the 1930′s gave way to a revaluation higher of gold; this will be done again in my opinion only this time by China as they are now the biggest owner.  They will have the ability to do this and also the need to.  We will find out truly “who has the gold and who doesn’t.”  Those who do not will need to spend much much more of their fiat currency to secure gold and or live in hyperinflation.  This is the “perfect storm” for America and the greatest setup of all time for a revaluation of gold.  The dollar will be sold like a hot potato at the same time revelations of leased, lost and otherwise stolen gold come out in public.  Picking a higher number for gold correctly will be a crapshoot and could even become an infinite number under the worst circumstances.







http://www.zerohedge.com/news/2014-06-05/chinas-missing-commodity-scandal-spreads-banks-fear-fallout-rehypothecated-funding-d




More On China's "Missing Commodity" Scandal: Fallout Spreads As Banks Get Involved

Tyler Durden's picture





While we have warned about the problem with near-infinitely rehypothecated physical/funding commodities/metals, be they gold or coppermany times in the past, and most recently here, it was only yesterday that China finally admitted it has a major problem involving not just the commodities participating in funding deals - in this case copper and aluminum - but specifically their infinite rehypothecation, which usually results in the actual underlying metal mysteriously "disappearing", as in it never was there to begin with.
And disappearing commodities is exactly what we reported yesterday the third largest Chinese port of Qingdao is being investigated for after a source at a local warehouse said that "it appears there is a discrepancy in metal that should be there and metal that is actually there... We hear the discrepancy is 80,000 tonnes of aluminium and 20,000 tonnes of copper, but we hear that the volumes will actually be higher. It's either missing or it was never there - there have been triple issuing of documentation."
This has resulted in a prompt and acute selloff of copper and other commodities as we further documents, but the problems may only now be starting and the banks, those which stand to lose the most if their "collateral" is uncovered to have never existed, are finally getting involved. As Reuters reports, worries over a probe into commodity stockpile financing at China's Qingdao port appeared to deepen on Wednesday as Standard Bank Group and a part-owned unit of Louis Dreyfus Corp warned of potential losses and copper prices fell further."
Responding to queries about the probe at Qingdao, which has not been officially confirmed, South Africa-based Standard Bank said it was "working with local authorities" to investigate potential irregularities at China's third-largest port, a major source for metal and iron ore imports.

"Standard Bank Group is not yet in a position to quantify any potential loss arising from these circumstances," the bank, whose Standard Bank Plc subsidiary conducts commodities trading, said in a statement.
Standard Bank is not the only one that may suffer major losses should the disappearance of rehypothecated collateral be confirmed:
Singapore-based logistics provider GKE Corporation Ltd warned shareholders that it was "assessing the potential impact" of the investigation on its GKE Metal Logistics Pte Ltd unit, a joint-venture 51 percent owned by global commodities merchant Louis Dreyfus.
While we expect many other banks to step up, for now these two are the first companies to publicly discuss the issue since the inquiry came to light on Monday, when Reuters reported the port in northeastern China had halted shipments of copper and aluminum as it launched an investigation into metal stockpiles used for collateral on loans.
To be sure Chinese authorities are in a bind: while they can't ignore the problem, a very aggressive investigation into the disappearance of collateral may result in a collapse of the entire rehypothecated house of cards, and they know it: according to Reuters, authorities at the port in northeast China have not officially confirmed an investigation, and have said exports and operations are running normally.
But earlier on Wednesday, Xinhua news agency reported that the port had said it was investigating whether iron ore warehouse receipts were fraudulently used multiple times to raise finance by different banks.
And while we have been warning about this problem for years, only now - when there is a documented case of allegedfraud - are the players finally starting to panic:
According to traders and warehousing sources, port authorities at Qingdao's Dagang wharfs have been examining whether there had been multiple issuing of receipts for single cargoes of metal tied to a trading company and linked companies.

The tumult has revived concerns that first surfaced in March, when China's first domestic bond default fuelled fears of further financing woes and triggered one of copper's steepest drops in years, with prices tumbling 8 percent in three days.
The immediate impact on pricing is clear, and just as we warned in March: lower.
"I think it's (copper) got more downside to go," said analyst Vivienne Lloyd at Macquarie. "That (the probe) will have the effect of making the banks extremely cautious about to whom they will issue letters of credit."
So while we are gratified that yet another event we have warned about has come to pass, what happens next is unclear.
Recall what we said in March, when we looked at the possible aftermath of a wholesale unwind of commodity funding deals:
From a commodity market perspective, financing deals create excess physical demand and tighten the physical markets, using part of the profits from the CNY/USD interest rate differential to pay to hold the physical commodity. While commodity financing deals are usually neutral in terms of their commodity position owing to an offsetting commodity futures hedge, the impact of the purchasing of the physical commodity on the physical market is likely to be larger than the impact of the selling of the commodity futures on the futures market. This reflects the fact that physical inventory is much smaller than the open interest in the futures market. As well as placing upward pressure on the physical price, Chinese commodity financing deals ‘tighten’ the spread between the physical commodity price and the futures price.

... an unwind of Chinese commodity financing deals would likely result in an increase in availability of physical inventory (physical selling), and an increase in futures buying (buying back the hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve (or full carry)." In other words, it would send the price of the underlying commodity lower.
Indeed as an unknown number of deals have begun unwinding, lower commodity prices is precisely what we have seen, just as predicted. But like in March, there is a footnote, one which pertains to a specific subject of Chinese funding deals: namely those which use gold, which as we showed before...
... is the metal most widely used in terms of notional to provide "metallic" funding.
We agree that this may indeed be the case for "simple" commodities like copper and iron ore, however when it comes to gold, we disagree, for the simple reason that it was in 2013, the year when Chinese physical buying hit an all time record, be it for CCFD purposes as suggested here, or otherwise, the price of gold tumbled by some 30%! In other words, it is beyond a doubt that the year in which gold-backed funding deals rose to an all time high, gold tumbled. To be sure this was not due to the surge in demand for Chinese (and global) physical. If anything, it was due to the "hedged" gold selling by China in the "paper", futures market.

And here we see precisely the power of the paper market, where it is not only China which was selling specifically to keep the price of the physical gold it was buying with reckless abandon flat or declining, but also central and commercial bank manipulation, which from a "conspiracy theory" is now an admitted fact by the highest echelons of the statist regime. and not to mention market regulators themselves.

Which answers question two: we now know that of all speculated entities who may have been selling paper gold (since one can and does create naked short positions out of thin air), it was likely none other than China which was most responsible for the tumble in price in gold in 2013 - a year in which it, and its billionaire citizens, also bought a record amount of physical gold (much of its for personal use of course - just check out thoseoverflowing private gold vaults in Shanghai.

* * *

This brings us to the speculative conclusion of this article: when we previously contemplated what the end of funding deals (which the PBOC and the China Politburo seems rather set on) may mean for the price of other commodities, we agreed with Goldman that it would be certainly negative.And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures "hedges", i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.

In other words, from a purely mechanistical standpoint, the unwind of China's shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for.  This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.
So far it is unknown just what happens next: when it comes to copper and certainly gold, there has been a substantial downswing in prices. How much of that is attributed to CFDs unwinding is unclear. But the bigger question, and not just for gold prices, but for the Chinese economy is if indeed the funding deal house of cards is imploding, what happens to China's shadow banking system, which is extremely reliant on the billions in "rehypothecated" dollars emanating from non-existent metal collateral.
Because should the Qingdao port fiasco spread and be confirmed at all other venues that use commodities for funding purposes, then that may just be the straw that breaks the already weakened back of China's credit system. How the PBOC will respond to that may be just the variable that answers what happens to China's inflation, and thus to the price of the simple, unencumbered underlying physical metals in the coming weeks and days.
Stay tuned.

China Scrambling After "Discovering" Thousands Of Tons Of Rehypothecated Copper, Aluminum Missing

Tyler Durden's picture




"Banks are worried about their exposure," warns one warehousing source, "there is a scramble for people to head down there at the minute and make sure that their metal that they think is covered by a warehouse receipt actually exists."
The rehypothecated catastrophe that we discussed in great detail here (copper financing)here (all commodities), andhere (global contagion) appears to be gathering speed as the China's northeastern port of Qingdao has halted shipments of aluminum and copper due to an investigation by authorities after they found "there is a discrepancy in metal that should be there and metal that is actually there."

Copper prices are tumbling already (despite Gartman's most recent prognostication on Dr. Copper's China recovery meme) as the world's 7th largest port disallows any shipments until the probe is complete.
"It's such a massive port I would think virtually everybody has exposure," warned one analyst, adding that this will be bearish for metals as "a lot of Western banks will try to offload material and try not to deal with Chinese merchants."
China's northeastern port of Qingdao has halted shipments of aluminium and copper due to an investigation by authorities, causing concern among bankers and trade houses financing the metals, trading and warehousing sources said on Monday. Port authorities could not immediately be reached for comment. China has a public holiday on Monday.

"We were told we can't ship any material out while they do this investigation," a source at a trading house said. The port of Qingdao is China's third-largest foreign trade port and the world's seventh-largest port, trading with 700 ports in more than 180 countries, according to its website (www.qdport.com/).

"Banks are worried about their exposure," one warehousing source in Singapore said.

"There is a scramble for people to head down there at the minute and make sure that their metal that they think is covered by a warehouse receipt actually exists," he said.
Metal imports have been partly driven in China as a means to raise finance, where traders can pledge metal as collateral to obtain better terms. In some cases the same shipment can be pledged to more than one bank, fuelling hot money inflows and spurring a clampdown by Chinese authorities.
"It appears there is a discrepancy in metal that should be there and metal that is actually there," said another source at a warehouse company with operations at the port.

"We hear the discrepancy is 80,000 tonnes of aluminium and 20,000 tonnes of copper, but we hear that the volumes will actually be higher. It's either missing or it was never there - there have been triple issuing of documentation," he said.

Beijing last year set new rules to curb currency speculation amid signs that hot money inflows helped push the yuan to a series of record highs. The rules required banks to tighten the management of their foreign exchange lending and types of clients that are able to access those loans.

"It's such a massive port I would think virtually everybody has exposure," the trading source said.

"Once the investigation is over, it could be bearish for metals. I think that a lot of Western banks will try to offload material and try not to deal with Chinese merchants," the trading source added.
Critically - this is a major problem for any shadow-banking credit creation process as if the rehypothecated commodity-backed CCFDs are ultimately unwound, 1) someone will not get their collateral (payment problems - bailouts?), 2) less real collateral means less real credit expansion (which banks can;t fill because the firms that use this method of financing are anything but creditworthy), and 3) liquidation of any assets will proceed rapidly...
Goldman concludes that "an unwind of Chinese commodity financing deals would likely result in an increase in availability of physical inventory (physical selling), and an increase in futures buying (buying back the hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve (or full carry)."In other words, it would send the price of the underlying commodity lower.



Finally, as we showed before when it comes to commodity financing deals, in terms of total notional value, both copper and aluminum pale by comparison to the one metal most used (by value) in China as a funding substitute: gold
As we commented previously:
When we previously contemplated what the end of funding deals (which the PBOC and the China Politburo seems rather set on) may mean for the price of other commodities, we agreed with Goldman that it would be certainly negative. And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures "hedges", i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.

In other words, from a purely mechanistical standpoint, the unwind of China's shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for.  This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.
So if tens of thousands of tons of copper and aluminum are suddenly "missing", one can assuredly say: "at least the gold is still there." Right?


Quartz.....




China’s investigation into missing metal could spark a much bigger crisis


Qingdao, China’s third-largest port, has long been a crucial  manufacturing link and one of the key hotspots in the global commodities trade, due to the vast amounts of raw materials like iron ore, copper and aluminum that flow through its warehouses.
+

But as of last week, the port’s shipments of crucial metals have been completely frozen, as officials investigate whether or not companies have been fraudulently inflating their stockpiles. Some 20,000 metric tonnes of copper and 80,000 metric tonnes of aluminum are reportedly missing.
+

If the investigation finds widespread evidence of wrong-doing, it could create a ripple effect of credit squeezes and defaults. That’s because Chinese companies that struggle to get bank loans are fond of using inventories of metals like copper, which sit in bonded warehouses in port cities like Qingdao, as collateral to secure short-term loans. These loans, in turn, sometimes are used to invest into high-yielding shadow banking products.
+

Commodity-backed financing accounts for nearly one-third of all short-term foreign-exchange loans, or roughly $160 billion. And “hot money” inflows into the Chinese economy, made up mostly of commodity financing and black market activity, accounted for about one-third of the growth in China’s money supply last year, Goldman Sachs analyst Max Layton told a mining conference in Chile last month.
+

While the hot-money influx worries Chinese officials and China bears, things really go haywire when companies illegally use one stockpile of metal as collateral for more than one loan, which appears to have been happening in Qingdao.
+

We have heard that some banks in China are offering financing against photocopied warehouse receipts,” one metals trader told MetalBulletin (login required), which first broke the news of the investigation and export freeze. There is currently a hold on all commodities that have been used as collateral for financing, which includes iron ore, aluminum, alumina and bauxite, and aluminum ore,MetalBulletin said.
+

One big question is who will be left holding the loan losses on the “missing” materials, which could be as high as $300 million, Metal Bulletin editor Alex Harrison told Quartz. Another uncertainty is whether these investigations will spread to other locations where metals are stored, which could ultimately affect the price and availability of credit though China.
+

“Banks are worried about their exposure” in Qingdao, one source familiar with the warehouse told Reuters. “There is a scramble for people to head down there at the minute and make sure that their metal that they think is covered by a warehouse receipt actually exists.”
+

If it does spread, the probe could drive any western banks that have not already selling businesses in the commodities sector to abandon it entirely.
+

Information is limited—there has been no official statement yet from any port officials, and news reports in Chinese state-run media are solely quoting foreign outletsIn the information vacuum, the rumored size of the problem is rising fast—the value of the metals reportedly involved in the investigation  started at “$250 million last week [and has] already risen to in excess of $1 billion,” a second Metal Bulletin report said today.






Any coincidence with Wall Street Banks being " concerned " about gold hoarding by China ? 




Wall Street concerned over China's gold hoarding

  • Huang Shu-rong and Staff Reporter
  •  
  • 2014-06-02
  •  
  • 09:21 (GMT+8)
A customs officer holds a gold ingot seized at Shahjalal International Airport in Bangladesh. (Photo/Xinhua)
A customs officer holds a gold ingot seized at Shahjalal International Airport in Bangladesh. (Photo/Xinhua)
The People's Bank of China, China's central bank, is the world's biggest gold hoarder and the bane of Wall Street traders, reports the Chinese-language financial news website BwChinese, citing a Hong Kong financial analyst.
Leung Hai-ming told the portal that China's central bank took advantage of the US Federal Reserve's quantitative easing program in 2013, when the price of gold fell by 27%. The bank bought in over 1,000 tonnes of gold, representing almost one third of the world's 3,756 tonnes last year.
There is reportedly less than 180,000 tonnes of gold reserves left, and only 20% of that remaining gold is tradable. This means that the People's Bank of China will likely keep hold of the gold, limiting the gold trading volume — a concern for both the US government and Wall Street traders.
Leung said that the US Federal Reserve loans gold to investment banks such as Goldman Sachs, Citibank, JPMorgan Chase, Morgan Stanley and others every year to trade in the market. The amount of gold ranges between 400-500 tonnes and the move acts to artificially suppress gold prices. When the prices are in their favor, these investment banks buy back the gold and return it to the Fed.
But this measure is absolutely useless because China's is hoarding the gold and does not follow the rules, Leung said. When it sees that gold prices are going down, the first thing it does is buy them, and does not sell when prices continue to fall. It seems that Wall Street cannot do anything to counter China on this, according to Leung.
The analyst said that the People's Bank of China is putting pressure on Washington and Wall Street as the US dollar has been linked with gold prices since its rise as the leading global currency. The Fed hopes to manipulate gold prices in its favor, Leung said, but the Chinese central bank is standing in its way.
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