Hey There Income Hunters,
Here’s your first big thought for the week …
We need to use the Archegos failure — remember that? — as a warning of what’s to come.
Because today I’ll reveal a developing crisis in the gold derivatives markets that may only be months, or even weeks, away from triggering seismic disruptions worldwide.
The coming crisis may well result in a revaluation of gold prices to MUCH higher levels as we continue the transition to a new global monetary system …
And it will also be a signpost that bank counterparty risk is rising — which may be the catalyst for bursting the financial asset bubble.
(Check out my video Archegos Failure and the Role of Derivatives to gain an understanding of the part derivatives play in the overall risk embedded in bank operations.)
The chart below illustrates a total of almost $600 trillion nominal size or face value of over-the-counter (OTC) derivative transactions outstanding.
OTC global derivatives present tremendous systemic counterparty default risk due to its lack of transparency, oversight and regulation. It will continue to be a critical signpost to monitor for counterparty failures and potential contagion that could trigger a daisy chain of misfirings leading to a global banking crisis.
Today, I will take you through the gold derivatives market crisis that began in 2019 and accelerated during COVID-19. It led to a change in bank rules that may cause banks to shut down their gold derivatives operations and allow physical gold to trade at it’s true price — and much higher — price
The Bank’s Role Under Question
Systemic risk has always been the major concern in capital markets. Today, it’s concentrated among a handful of global banks that are deemed too big to fail, so this risk goes ignored.
COVID-19 has proven to the Fed that the Banks' role as intermediary may be interfering with their goal of transferring wealth from the wealthy to the lower and middle class. Meanwhile, COVID has become a scapegoat for many market players who share an attitude that once the pandemic is over everything will return to normal.
I have never been in the “return-to-normal” camp because of what I have been talking about for months and that is this …
The US is at the end of its long-term debt cycle and in all of history the end of a long-term debt cycle was anything but normal.
The Gold Derivatives Markets
BLBelow is an overview of the London Bullion Market Association (LBMA) forward contract market and Commodity Exchange (COMEX) gold futures market.
- Gold derivatives markets are controlled by bank bullion derivatives desks. These desks are basically trading desks required to trade for profit.
- The LBMA members consist of 12 market makers, all from the top banks, and 31 other banks, which may or may not take positions. All bank desks are funded by the expansion of bank credit.
- According to the Commodities Futures Trading Commission (CFTC) there are 28 swap dealers who are active in gold futures on COMEX.
Systemic Risk in Gold Derivatives
Similar to the way bank prime brokerage operations facilitated Archegos’s financing of equity trades, LBMA member banks extend forward swap agreements, which are simply unregulated futures contracts on the price of gold, to customers desiring exposure to physical gold…
The banks open “unallocated gold” accounts for the customers, allowing the bank to maximize profits by never actually putting physical gold in the account.
The banks instead let customers believe they have access to physical bullion … when the accounts are actually backed by forward swap contracts to maximize the bank's leverage while helping them to avoid using capital to finance the gold bullion.
This process is identical to the prime brokers' use of equity swaps with Archegos.
At the top-end, gold dealer banks executed gold swaps with clients in an amount equal to $114 billion a day at today’s gold price…
The LBMA market makers would state that their short positions in the gold derivatives was backed by sufficient bullion held in the vaults so as not to alarm the markets. However, as you’ll see below, that was not the case
Meanwhile, running long positions for forward settlement at the banks in London led to larger and larger dangerously leveraged operations with as much as 50% still on today…
Corruption among traders peaked in August 2019 when a JP Morgan trader pleaded guilty to manipulating the precious metals market for nine years. In the past 12 years, cases against traders for rigging settlement prices of gold futures and swaps have been brought against 16 defendants with most pleading guilty.
All along, banks continued the process of pumping up COMEX gold futures then dumping long contracts on their clients, prior to selling futures to push prices down and force the closeout of customers’ positions, allowing banks to profit on their trades …
However, toward the end of 2019 as gold broke out, customers had the upper hand on the banks. Interest rates were softening after the repo spike to 10%, driving gold futures higher:
The customers — considered suckers by the banks — were finally breaking the banks, who held most of the shorts.
Gold Trading Desks Crushed
Once COVID hit, businesses turned to banks for massive liquidity. That shifted the banks’ focus from making profits to fearing losses.
The scenario is common for banks when a negative shock hits the economy. They are forced to take every opportunity to reduce their balance sheet and free up space to make emergency loans to customers.
So, the gold trading desks were told to unwind their positions at the worst possible time. These massive short positions were a result of never buying physical gold bullion against the constant customer buying of gold….
The forced closing out of positions caused the collapse of the all-time-high in open interest (see below) …
This has all caused a panic for LBMA and COMEX since throughout the industry there are still many short positions held by bank trading desks.
Bank of International Settlements (BIS) Forced to Pull the Plug
After years of talk about how corrupt the paper precious metals market is, the BIS has been forced to shut it down.
The BIS is the “central bank of central banks,” responsible for working on behalf of all central banks to ensure the stability of the global monetary system.
So, with the U.S. dollar as the reserve currency, maintaining a strong dollar via suppression of gold was a main priority for BIS …
BIS’s main role now shifts to facilitating the smooth transition to a new monetary system — based on a basket of currencies backed by gold.
In meeting its current goals, leaders want to eliminate the gold derivatives market so gold can be used by all central banks in a way that strengthens the new global monetary system.
This ensures further volatility in the currency and financial markets as posturing from China, the U.S., Canada, the U.K., Japan and Europe all have a say in the overall makeup of this new monetary system.
Much more to come on this …
Bring It Home
Today I wanted to give you the background that led to the BIS rule changes that will impact the precious metals market in a HUGE way.
There is much more inside intel for me to reveal on what is happening behind the scenes and its impact on precious metals and all related markets.
Please join me this Thursday at noon EST when I share information that is critical to trading in the weeks ahead. I’ll also reveal three new trades that capitalize on the major changes coming …
Don’t miss it!
Live and Trade With Passion My Friends,