A little gold goes a long way

An article today over at King World News contained an interesting chart showing a couple of important aspects about how business is being done at the COMEX.  The COMEX is the metals gambling arm of the NY Mercantile Exchange (NYMEX).  In other words, a little metal is held in some warehouses and it becomes the basis for highly leveraged bets.  The typical bet placed is called a futures contract.  Here is a nice description of how the COMEX gold system works from first addition of gold into the warehouse.

It is important to note just how difficult they make it to remove gold from the warehouse and then to put it back into the system!  If you choose to remove the gold that you purchase from the system, it has to go through a complete re-refining step as if it was scrap gold.  They will not just examine the bar and say, "oh, it's obviously one of our previously known good bars" and put it back in stock.  If they were interested in protecting the integrity of gold in their system, they could weigh the block with a high precision scale and then exactly measure its fluid displacement before handing the serialized block to its new owner.

Due to the laws of physics, gold that is 99.999% pure will have a precise weight and, at a given temperature, a precise volume.  By measuring weight and volume to a fine degree (i.e. 3 or 4 decimal places), it is very easy to tell if a gold bar has been drilled and capped or "drilled and salted" (plugs of a cheaper heavy metal like Tungsten inserted).  You can also x-ray the bar to see if it has been tampered with.

While they claim that the expensive reintroduction process is "for everyone's safety", it is really a control mechanism which pushes market participants to settle their trades in cash instead of metals.  It financially dissuades market players from taking possession of their gold and then coming back in a couple years and selling it through COMEX without expensive reprocessing fees.  In this way, metals build up in the COMEX and participants just settle trades in fake paper money.  Having tons and tons of metals under its control - even if it belongs to others - gives COMEX legitimacy.  Also, COMEX is allow to declare Force Majeure if it wants to which is essentially a rule that says something happened beyond its reasonable control and so all gold trades are settled in cash and COMEX gets to retain the metal.  It is COMEX's version of "In a crisis, possession is 9/10ths of the law".  This is how the scam is supposed to work at least.

So now look at the following chart which shows that as the gold price broke down below the cost of mining it (which is the light blue horizontal line in the top graph), the number of speculators (AKA "open interest") in the markets remained constant (of course it will remain constant, these guys do this to make a living) but instead of settling in dollars, many of them have been taking physical delivery of the gold out of COMEX warehouses.  Just look at how they have cleaned out the COMEX warehouses in that 3rd chart down!  Amazing.

As a result of all the gold being pulled out of the system, all of the open interest is now "backed" by a tiny little amount of gold.  In other words, this is not really much of a gold market anymore.  It is really just a paper market where people who don't own any physical gold come together to haggle about the price of gold that other people actually own.

Smart people will look at this and wonder the following:

• Why are people suddenly taking gold out of the system even though it carries a heavy bureaucratic price penalty to put it back into the system should they ever want to sell it?
• Are they worried about collapse of the system and that possession will be 9/10 of the law?
• Are they worried about collapse of the dollar?
• Are financial institutions simply hoarding gold so that it can be listed as an asset on their balance sheets as was common practice in decades past?  In other words, perhaps they never intend to sell it.

The COMEX is used to determine the spot price of the physical metal.  But anyone selling gold in the COMEX is doing so without the metal actually being there given the low physical stocks.  When you sell something that you don't have it is known as naked shorting.  As long as those who you sell it to do not demand physical delivery of what you sold them (i.e. they keep the gold in the COMEX "on account" so that they can make trades based on it), the fraud can continue.  But when everyone demands physical delivery - something known as "a run on the system" - that is when the naked shorts crash and burn and that is when market participants figure out that the market mechanism in question (i.e. the COMEX) is a sham.   Warren Buffet made a very sly comment about this that was designed to be understood only by "enlightened" market participants.  He wrote that when the tide (AKA liquidity AKA credit) goes out we will see who is skinny dipping (naked shorting the system). When this happens, legitimate commodity holders will look for some other market mechanism that does not allow all of the naked shorting leverage.  Without all the creation of fake, nonexistent "paper gold", the price of physical is going to be much, much higher.

Until the COMEX collapses under its own corrupt weight you can actually go buy physical metal for a price which has little to do with the price that would be charged to you in a free market where a highly leveraged and bureaucratic system was not in charge of setting gold prices.  Without this sham of a gold market, prices would be much higher.  No con ever ran forever and it won't be different this time.  The winners in this race will understand that COMEX artificially lowers the market price of gold and that at some point the COMEX will default and gold will skyrocket in a matter of weeks as people figure out that paper gold is not the same thing as physical gold in your hands.

Keep dollar cost averaging into PHYSICAL gold and silver held in YOUR OWN HANDS.  Do it slow by slow.  Do it with your retirement savings instead of putting money into a government controlled 401k which will eventually be stolen from you.  Don't try to time the market too much.  I like to play with charts but models can let you down.  The biggest economic fear people should have is that in perpetually waiting for lower prices they are really just procrastinating about saving.  Saving into a 401k is a ridiculous joke.

After seeing how Obama used the IRS to target political opponents and after seeing how nobody really got in any trouble for it, how can anyone trust the government to control their retirement savings?  Likewise the NSA lied to congress about spying on Americans, and we are talking bold faced lie here under oath, and nobody got in any trouble.  There should be mass firings and lots of people going to jail in both of these cases.  The fact that these things did not happen AT ALL means government is totally corrupt.  You think they will hesitate for a second to steal all of your savings just as soon as they have some political crisis to use as cover for doing so?  Really?

Buy gold while it is cheap.  Cheap is a relative term for sure, but since gold is now selling for less than the total average cost of production, it is cheap.  Dollar cost average into it, save it in your own hands, and forget about the dollar price fluctuations.