When the Unsustainable No Longer Sustains

Guest Post by Jesse

“Benign remedies are for the innocent.  Misdeeds, once exposed, have no refuge but in audacity.  And they had accomplices in all those who feared the same fate.”

Tacitus, Annals

Gold and silver were hit early on today, and knocked lower on high volume in relatively quiet trade, while the stock market was being pumped higher.

The Fed would like to set the stage for their FOMC meeting next week, and rather badly so.   They are afraid to do it with these unstable equity and bond markets, because if they raise and the market breaks, they will be blamed for it.  You can see that the IMF and the World Bank have already covered their posteriors by warning.  And Larry Summers has also chimed in.

It is not a 25 basis point increase that will break these markets. They are already broken, an accident waiting to happen.  The trail of policy errors goes back to the Greenspan chairmanship of the FOMC.

The Comex continues to bleed out, with additional gold and silver leaving their warehouses yesterday.

Registered (deliverable) gold has fallen to 185,314 troy ounces, a low we have not seen since before the year 2000.   On a quick calculation pending the final numbers early tomorrow, I would think that the ratio of paper claim to actual deliverable gold at price is now at an unprecedented level of 226:1.

Say what you will, this is not ‘normal.’

Unless something changes, you can stick a fork in the NY version of ‘price discovery’, it is done.

Who is going to keep honoring a price set by a bunch of jokers playing liar’s poker with a stack of paper claims?

The largest gold bullion exchange in the world outside of Asia, the LBMA in London, is scraping the bottom of the barrel trying to find enough bullion to keep satisfying delivery requests for Asia at these prices.

The indications are that the costs to borrow physical for immediate delivery, which means refining into kilobars and shipment to Asia never to return, are soaring. That is worth watching closely, although the clubby London exchange has always been light on disclosure.

There are increasing signs of desperation.   Once again they look to India to cut imports and start ‘utilizing’ the gold held privately in that country.  That means to hypothecate those long term gold holdings as collateral for other peoples’ obligations, and into the bullion float, never to return.

From what I have been reading, it seems as though JPM introduced quite the scheme to do just that with unallocated gold, ETFs, and a number of private sources around 2011 in London.  And that kettle seems to have reached a full boil.

I suppose that the mining companies, having been obliterated by forward hedging in the first leg of this bull market, the best example being Barrick, have failed to rise to the occasion.  So they must keep looking elsewhere for bullion.   And the CEOs of the big firms always seem to want to go along to get along, even to the disadvantage of their shareholders.

The gold pool in London and NY shows every indication of a late stage Ponzi scheme.  If it was not operating under the ‘thin cover’ of some unwitting, bureaucratic boobs, it would probably have toppled over already.  The regulators have failed in their sworn duties, and wantonly so.

Wall Street and the City have skated through so many lawsuits and criminal cases that they have fallen into a recidivistic spiral of white collar crime.  They think that they are teflon dons.

Listen to what Peter Hambro has to say in the first half of this recent interview, here.   He is making his Bloomberg interviewers very uneasy it appears.

What I don’t quite understand, and I admit it, is why the gold pool keeps pressing prices lower in what is clearly an unsustainable and highly corrosive gambit?   Where do they think they are going with this, or have they extinguished all impulse to conscience and caution?

Ok, Jesse, but the price just went lower, and I’m confused, angry, and depressed (head hits table, clunk).

When the going gets tough, these jokers keep doubling down, almost every time, with a false bravura. But they are breaking the cardinal rule of never adding new money, even when you are winning, to a proposition that is steadily becoming mathematically unsustainable.   That is how almost every major secular financial failure, from LTCM to MFGlobal to the London Whale, went wrong.

This gold manipulation pool, durable as it might seem, is no different from any of the others, such as the infamous London Gold Pool.   And the countdown to its end is underway.

Money, except during the relatively short life of a totalitarian state, is a function of market acceptance and global valuation.

Private individuals and governments have always intervened in the valuation of many markets including money.

I watched the ruble burn in the 1990’s.  I watched the currencies of the former Soviet bloc pass from an Orwellian fixed value system to free exchange.   No currency has ever been held its value against the market forces outside their own borders, and inside, never for longer than the power of the State to control nearly everything, every facet and thought of peoples’ lives.

Given time, the markets have always won. Always.

I am concerned that if these folks do not wise up soon, we will not see an orderly rise in the price of the underlying commodity, but a series of dislocations and breaks sharply high as Jim Rickards appears to now think.  That will not be constructive.   They forget that it is never the act, but always the extended coverup, that brings even the most powerful down to disrepute and failure.

Storm warnings are out.  Time to get our own houses in order.