18 June 2011

PMs and the LME Warehouse Scam

Gata and ZeroHedge have picked up on this Wall Street Journal article on bankster owned warehouses restricting deliveries out to the minimum amount allowed by the LME. The scam is summarised by the Financial Times: buyers "must keep on paying rent on the metal even after you have asked for it to be delivered, giving warehouse companies a guaranteed income stream".

But with no restrictions on how quickly metal can come in (and the bankster warehouses have been bidding for metal to be delivered into their warehouses from producers) it "has had the effect of driving the cost of metal in the physical market in the US to the highest level in more than a decade relative to LME prices". The FT notes however that this creates the risk that "the LME contract risks becoming entirely detached from the physical market."

Apart from the storage fee scam, an increasing price is good for the banksters because it makes it easier to sell commodities as an alternative investment class to institutional investors (see FT on Goldman Sachs).

Problem is, with lots of metal coming in but restrictions on it going out and you end up with increasing stockpiles. That doesn't help the story that commodity prices will rise. Solution: take the metal "off warrant" which, as FT Alphaville points out, just transfers it into a "non-LME storage facilities or simply being classified private non-LME registered stock in the very same warehouses. Kept out of sight, so to speak."

The scam here is that (FT Alphaville again) "the industry still reads cancelled warrants as an indicator of physical demand" which is positive for prices, however "many of the 'cancelled' warrants are ... not transforming into real deliveries, they’re just being stacked elsewhere in the same warehouse. In which case the demand they insinuate is potentially not real at all."

Precious metals are not subject to the warehouse outward restrictions scam and the spot market is much bigger than futures anyway, from a physical point of view. However, the "off warrant" scam can be played, particularly on fools like ZeroHedge who get all excited about COMEX eligible and registered trends while ignoring (ignorant of?) the "stock" sitting in ETFs and, more importantly, the dark pool that is bullion bank vaults. And don't fall for the "its fractional" false flag. Yeah unallocated is fractional, but what is missed is that if the amount of fractional is giga-enormous, then even at 10:1 or even AIGish 40:1, the amount of physical metal being held in the system is still enormous.

Which is why I am very interested in this ETF bar list project and am doing what I can to help, as this I believe holds the potential to reveal just how big that dark pool of stock really is.

11 comments:

Robert LeRoy Parker said...

And what do you make of dodd frank putting a stop to forex metals trading in the US?

SG said...

@Robert LeRoy:

Do you have a link to that?

Thanks

Robert LeRoy Parker said...

zerohedge link

Looks legit.

Bron said...

Typical ZeroHedge sensationalist headline. See

http://jessescrossroadscafe.blogspot.com/2011/06/cftc-to-curtail-off-exchange-highly.html

and also from ZH's own article http://www.zerohedge.com/article/dodd-frank-precious-metal-trading-prohibition-could-make-hedge-fund-fx-trading-illegal

"Covered forex transactions include forwards and options conducted in the over-the-counter market as well as off-exchange futures and leveraged transactions that do not result in actual delivery of currency."

and

"Spot transactions are excluded from the scope of the regulation, as are physically settled transactions that are not offered, or entered into, on a leveraged or margined basis, or financed by the offeror."

Robert LeRoy Parker said...

Sensationalism draws advertising revenue.

But do you have an opinion about this being PM positive, negative, neutral?

When all the people in the U.S. close there 100:1 positions at the same time on july 15th that might be sort of bad, no?

Robert LeRoy Parker said...

All the little people I should have said.

Justin said...

Hey Bron

Off topic but there's lots of talk about this 'mining boom' being bandied around, yet looking at many of the mining shares on the ASX you could hardly say boom!

I bought a handful of, mostly gold, miner shares at pretty much the bottom in '08 & some are now trading below their '08 lows!

Was wondering about your opinion on this 'boom' as someone living in WA & working in a mining related area.

Bron said...

Robert,

Effect all depends on 1. whether those small investors move their positions to COMEX brokers and 2. of those who close out, are they net long or short (who knows)?

Justin,

Well mining is going well, but I think the share price issue is more to do with general investor attitude to shares in general plus the effect of ETFs making it easier to just invest in gold direct and not take on business risk with a miner.

It has to correct at some stage, however.

Justin said...

The issue I have though is that ultimately if many of these miners cannot raise 'capital' they can't mine. OK, some are probably just holes in the ground with liars at the top but how can there be a 'mining boom' with the share prices of these companies so low, literally pennies?

It doesn't gel with me. ETF's may be taking some of the money which would have otherwise been going to the miners but a real mining boom wold surely be seeing a lot of speculative interest in mining shares? The word 'boom' does suggest speculative interest. An index of my shares is now under-performing the ASX, as if that were possible in a mining boom.

Paul said...

Hey Bron,

What do you make of the opening of the Pan Asian Gold Exchange?

Cheers

Paul

Bron said...

See http://www.ft.com/cms/s/0/6ffc3174-af02-11e0-bb89-00144feabdc0.html?

"A decision to double the rate at which the largest warehouses must deliver metal disappoints many consumers and traders, who wanted a bigger change to eliminate queues."

Hopeless.