The fractional reserve gold scam continues falling apart.

GATA continues to monitor the collapse of the great fractional reserve gold scam. You can read about the latest news here, but in short, Austria is now talking about repatriating its gold too.

There are a couple of important things to note here:

·         People still don’t realize it yet but they will someday soon: gold is money and everything else is not. Or more to the point, as quoted from Mr. J.P. Morgan himself, “gold is money and everything else is credit”.

·         The basis of fractionally reserving something is the offering of credit and the assumption of debt.  The entire economic world is a fractionally reserved leveraged mess. That includes the gold and silver markets. By this I mean to say that promises for gold and silver delivery have been extended to people based on them having paid some small up front “lay away” fee (also known as the premium on a futures contract). The quantity of metals promised for future delivery far exceeds the amount of physical metal on hand. In other words, there is an un-payable debt promised to gold futures contract holders, many of which are hedge funds and even retirement systems.  This is clearly a fractionally reserved system.

·         This fraudulent system can operate for long periods of time because most people do not collect their metal. They simply sell their contract to someone else. At the end of the day the contract often ends up being settled in dollars, not metal. It effectively becomes a mechanism for gambling on the price movement of metals.

o   Moneymen love this business because they get to collect premiums on something they never had. It is in effect a shadow fiat currency system. Again, they do not have the physical metal to back all the promises and they are simply hoping (or going by historical norms) that a certain % of the participants will not claim their gold. Thus, the contract can be settled eventually without anyone having seen the gold. If this is the case, the gold need not even exist for the fraudster to make money. It is a clear version of modern alchemy: The goal of getting something from nothing.

§  Eventually all these schemes collapse either because the patsies get fleeced and have no more to gamble or they get wise. Either way, the major sign of impending collapse is the withdrawal from the system of the reserve element. In this case, of the gold. London is the center of western gold trading. Thus, London has been the historical holder of the gold reserves.

§  But now everyone is asking for their gold back from London as well as from the USA. This means the leverage in the western gold trade is climbing rapidly each time someone repatriates their gold. Why? Because less reserves in the hands of the traders have not reduced the size of the trades! Western gold trading is acting like it still has the same amount of reserves as it did before the Saudis pulled their gold out and Venezuela repatriated its gold and Hong Kong began storing its own gold and China started hoarding gold.

·         The effect of all this fraudulent, fractionally reserved trading has effectively been the naked shorting of gold (and silver).  As people begin to lay physical claim to the assets, the shorts must cover.  It is no different than in the late 1960s when other countries began trading in their dollars for gold.  At some point the US did not have the gold to give under the contract and so it defaulted.  The price of gold skyrocketed as a result.  That was effectively a short squeeze and the makings of the next one are happening again right now.  At some point one of the patsies is going to ask for its gold back and it will be told that the gold does not exist.  The futures market for gold will collapse in a massive wave of naked short covering and the price of gold will spike up far beyond what it should really be as the global shorts get squeezed.  It’s coming folks, sure as the sunrise.  Maybe not this week or this year, but soon enough I reckon.

The key to understanding all of this is to realize that there is a good reason that other countries were and are storing their gold in the UK and the US.  It's not that Austria and Germany and others did not know how to build their own gold vaults.  There must have been some good reason to allow someone else to hold onto their gold.  That reason is so that the countries could earn income on their gold.  How was that income earned?  By depositing it in the metals markets in foreign countries and allowing them to loan the gold out for interest or to create derivatives and other leveraged paper scams on top of the gold.  In other words, they loaned it out for the express purpose of putting it into a fractionally reserved investment scam. 

Now they are starting to realize that there are too many promises made on too little gold and so they are demanding repatriation.  In other words, they are wising up to the fact that the fractionally reserved gold market scam is long in the tooth.  They are becoming more concerned with return of their capital then return on their capital.  As Buffett likes to say, when the tide goes out we will see who is skinny dipping.  Given the intelligence of Buffett I suspect this is simply a clever reference to naked shorting.  When the tide (the reserves of a fractionally reserved system) goes out (get repatriated) we will see who is skinny dipping (highly leveraged naked short).