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It's Admitted To The CFTC: London Gold Market Is A Ponzi Scheme

By Adrian Douglas

Sunday, March 28, 2010

The bombshell GATA dropped at the public hearing held by the U.S. Commodity Futures Trading Commission on futures trading in metals was stunning. Video of GATA Chairman Bill Murphy revealing a whistleblower
source who warned the CFTC's Enforcement Division about market
manipulation by JPMorganChase and witnessed JPM traders bragging of
their exploits can be viewed here:

Murphy explained that even though the Enforcement Division received detailed information about it in December 2009, the manipulation continues unabated, as can be seen by the way gold was taken down last
week to rob holders of April gold call options in the strike range of
$1,100-$1,150 as the hammering made the options expire worthless.

GATA believes that this new evidence will prove to be a "smoking gun," a watershed event in liberating the gold market from price suppression.

As dramatic as this revelation was at the CFTC hearing, there was another bombshell at the hearing. This was the testimony I was able to deliver at the hearing while assisting Harvey Organ with his testimony. I
was able to show that the London Bullion Market Association (LBMA)
over-the-counter gold market is nothing but a massive "paper gold" Ponzi
scheme. What was then astonishing is that the bullion bank apologist,
Jeffrey Christian of CPM Group, who has always been staunchly against
GATA, endorsed my comments as being "exactly right" and went on to
confirm that the LBMA trades more than 100 times the gold it has to back
the trades.

There were lots of almost as equally explosive admissions at the hearing, so I have made a transcript of the relevant section of the webcast. I have posted the two short video clips here and here which are
what have been transcribed.

The transcript is given below with some notes added by me.

* * *

COMMISSIONER SCOTT O'MALIA: Both Mr. Organ and Mr. Epstein in the second panel raised the concerns that short positions exceed the physical supply. The second panel kind of argued that that wasn't a
concern. Are you concerned that the shorts will not be able to deliver
if called upon?

JEFFREY CHRISTIAN: No. I am not at all concerned. For one thing, it has been persistently that way for decades. Another thing is that there are any number of mechanisms allowing for cash settlements and problems,
and a third thing is, as many people who are actually knowledgeable
about the silver market and the gold market have testified today, that
almost all of those short positions are in fact hedges -- the short
futures positions are hedges, offsetting long positions in the OTC
market. So I don't really see a concern there.

[NOTE: It is interesting that Christian is not concerned about the ability of the shorts to deliver because they can cash-settle. He clearly has no understanding that when someone wants to buy precious
metals, giving him cash instead is a failure to deliver, a default. But
Christian is not concerned. He says that the short position is actually
hedged by a long position on the OTC, but we will see later in this
testimony how he describes the "OTC physical market" and we will see
that the long position is not bullion but is in fact an unbacked (or
only partially backed) IOU for bullion.]

COMMISSIONER O'MALIA: Mr. Organ, would you like to respond?

HARVEY ORGAN: I do see a risk on this, and I think it is a risk that we have to be very, very careful of. As countries like China, South Korea, and Russia start demanding and taking physical delivery of their
gold and moving it offshore to their shores and putting pressure on the
Comex, we will probably come to a point in time where we will have a
failure to deliver.

ADRIAN DOUGLAS: Mr. Chairman, could I make a comment?




DOUGLAS: Oh, you said no?

CHAIRMAN GENSLER: I don't know, who is this?

DOUGLAS: I am Adrian Douglas. I am assisting Harvey.

CHAIRMAN GENSLER: All right, Sir. Yes.

DOUGLAS: I would just like to make a comment. We are talking about the futures market hedging the physical market. But if we look at the physical market, the LBMA, it trades 20 million ounces of gold per day
on a net basis, which is $22 billion. That's $5.4 trillion per year.
That is half the size of the U.S. economy. If you take the gross amount,
it is about 1 1/2 times the U.S. economy. That is not trading
100-percent-backed metal; it's trading on a fractional-reserve basis.
And you can tell that from the LBMA's Website, because they trade in
"unallocated" accounts. And if you look at their definition of an
"unallocated account," they say that you are an "unsecured creditor."
Well, if it's "unallocated" and you buy 100 tonnes of gold even if you
don't have the serial numbers, you should still have 100 tonnes of gold,
so how can you be an unsecured creditor? Well, that's because it's
fractional-reserve accounting, and you can't trade that much gold -- it
doesn't exist in the world. So the people who are hedging these
positions on the LBMA, it's essentially paper hedging paper. Bart
Chilton uses the expression "stop the Ponzimonium" and this is a Ponzi
scheme. Because gold is a unique commodity and people have mentioned
this, it is left in the vaults and it is not consumed. So this means
that most people trust the bullion banks to hold their gold and they
trade it on a ledger entry. So one of the issues we have got to address
here is the size of the LBMA and the OTC markets because of the
positions which are supposedly backing these positions which are hedges,
but it is essentially paper backing paper.

[8 seconds of silence]

CHAIRMAN GENSLER: Oh. I guess I get time. Errr. ... Umm. I don't have any other questions. Commissioner Dunn.

COMMISSIONER MICHAEL DUNN: I appreciate the difficulty of trying to do this by remote, but at the end of your testimony you start talking about bonafide hedge exemptions for commercial traders and must be part
of position limits and not to grant hedge exemptions to swap dealers
would be devastating for liquidity of exchanges and the price discovery
capacity, and we got into who determines what is legitimate. But could
you amplify on that a bit and what you see as a danger there?

CHRISTIAN: Yes, I can amplify on it. But amplifying on it a bit is more difficult because it is a very big subject. The first thing is that precious metals, copper, other metals, energy -- these are all traded
internationally and are fungible commodities, by and large. There are a
lot of strange things that have been misspoken about the difference
between the wholesale and the retail market and we don't really have the
time to go over those, I think. But the fact of the matter is. ...

[The lights go off.]

CHRISTIAN: Oh, excuse me. I am in a building with motion-sensitive lighting and it doesn't recognize what I do as human activity.

CHAIRMAN GENSLER: Those were your words, not anybody's here.

CHRISTIAN: No, they were my wife's! If you start putting position limits on bonafide hedgers, for example, the bullion banks -- and the previous fellow was talking about hedges of paper on paper and that is
exactly right. Precious metals are financial assets like currencies,
T-bills, and T-bonds; they trade in the multiples of a hundred times the
underlying physical and so people buying them are voting and giving an
economic view of the world or a view of the economic world, and so when
you start saying to a bank I have a number of people. ...

[NOTE: This is mind-blowing. Christian openly admits that the LBMA OTC market is not trading in physical gold or silver but in paper promises. But gold is not intended to be a "financial asset" like
T-bills and currencies. That is the whole point of owning it. Actual
physical bullion is a tangible asset with intrinsic value that doesn't
have counterparty risk. Christian believes that the purpose of trading
paper promises in gold is for investors to "vote" on their view of the
economic world. He confirms that the LBMA trades hundreds of times the
real underlying physical gold. This is even a higher estimate than I
have made. The LBMA is, as I asserted before the commission, a giant
Ponzi scheme.]

CHRISTIAN: Well, actually let's go back to a concrete example of Mr. Organ when he was talking about August of 2008 when there was an explosion in the short positions in gold and silver held by the bullion
banks on the futures market and he seemed to imply that that was somehow
driving the price down. If you understand how those bullion banks run
their books, the reason they had an explosion in their short positions
was because they were selling bullion hand over fist in the forward
market, in the physical market, and in the OTC options market. Everyone
was buying gold everywhere in the world, so the bullion banks who stand
as market makers were selling or making commitments to sell them
material and so they had to hedge themselves and they were using the
futures market to do that. So if you place position limits on the
futures market, they will have to find some other mechanism to hedge
themselves -- and they will. And someone else will provide that market.

COMMISSIONER DUNN: Jeffrey, I am going to cut you off because I want to ask another question of Mr. Organ.

[NOTE: It is hard to imagine more inane drivel than this. Christian conjures up the image of bullion bankers selling bullion like crazy to the public, which is in a feeding frenzy, and the bullion
bankers are "hedging themselves" by selling gold short on the Comex!?
Did he get that idea from a blonde? A little while later Chairman
Gensler also realized that this was the biggest baloney ever concocted
as a cover for massive gold market manipulation by JPMorgan Chase and
HSBC in 2008 and so he poses a follow-up question.]

CHAIRMAN GENSLER: I would like to follow up on Commissioner Dunn's question for Mr. Christian, if I might, because I didn't quite follow your answer on the bullion banks. You said that the bullion banks had
large shorts to hedge themselves selling elsewhere, and I didn't
understand. I might just not have followed it and you're closer to the
metals markets than me on this, but how do you short something to cover a
sale? I didn't quite follow that?

CHRISTIAN: Well, actually I misspoke. Basically what you were seeing in August of 2008 was the liquidation of leveraged precious metals positions from a number of places and the bullion banks were coming back
to buy it, and they were hedging those positions by going short on the
Comex and that is really what it was.

[NOTE: Even on a second attempt Christian invents the most ridiculous poppycock to explain away the blatant manipulation of the precious metals in 2008. If, in his own words, investors were buying
gold hand over fist everywhere in the world, why would leveraged long
holders dump all their long holdings? They ordinarily would have been
making a fortune. The bank participation report of August 2008 shows
that two or three bullion banks sold short the equivalent of 25 percent
of world annual silver production in four weeks and the equivalent of 10
percent of annual world gold production. There was simultaneously a
decrease in their long positions, which were almost non-existent anyway,
which is incoherent with a notion that the bullion banks were mopping
up dumped leveraged investments. For an intelligent and coherent
explanation of what happened in August 2008 read my CFTC written
testimony here:]

CHAIRMAN GENSLER: So I am glad I asked because I really didn't follow that. But if I think of the earlier charts of the positions of the bullion banks that Mr. Sherrod had, these concentrated shorts have been,
well, you know, reasonably consistent. They are not exactly the same on
every day, but his charts showed a similarity across a couple of years.
So what are bullion banks -- I mean, I am just trying to understand --
what are bullion banks hedging on the other side? We heard from other
panels, but you seem to be familiar. Is it warehouse receipts? What is

CHRISTIAN: Well, it's a tremendous number of things. You were at Goldman shortly after me and we had an MIS system that kicked out a daily gold book.

CHAIRMAN GENSLER: That's really remarkable because we don't seem to have a lot of similar views, but, you know, a lot of people were at Goldman Sachs.

CHRISTIAN: Well, I didn't like the trends at Goldman, so I left in 1986. But honestly, and bad jokes aside, if you look at a bullion bank's book -- its gold book, for example -- you will see an enormous number
of things. There will be gold forward purchases from mining companies.
There will be forward purchases from refineries. There will be gold that
has been leased out to electronics manufacturers, component
manufacturers, and countless manufacturers and jewelers. As gold flows
through the beneficiation process -- and again, these are all long,
complex issues that are hard to reduce -- but, you know, a lot of
producers will sell their gold the moment it leaves their possession at
the mine. It might be in concentrate form or it might be in dore form.
It then goes to a smelter or a refinery. The bullion bank buys that and
it agrees a price at the time it is buying it but it won't be allowed to
sell that metal until the refinery outturn, which is maybe two weeks
but it could be six months. So they will go into the market and short
the market in order to cover the commitment they have made to buy at
that price and then when they get the metal in the physical market, then
they can either sell that metal in the physical market and unwind the
hedge in the futures market or the forward market or do something else.
There are all sorts of other derivative contracts that investment banks
and bullion banks will sell to investors, to other banks, pension funds,
to insurance companies, and each of those will often have a long
exposure in gold, which will be hedged with an offsetting short
position. [NOTE: There he goes again with that blonde idea that when
you sell gold to someone, you hedge that with a short position.]
if you look at a bullion bank's gold book or silver book, you would find
a large range of topics. One of the things that the people who
criticize the bullion banks and talk about this undue large position
don't understand what is the nature of the long positions of the
physical market and we don't help it. The CFTC, when it did its most
recent report on silver, used the term that we use, "the physical
market." We use that term as did the CFTC in that report to talk about
the OTC market -- in other words, forwards, OTC options, physical metal,
and everything else. People say, and you heard it today, there is not
that much physical metal out there, and there isn't. But in the
"physical market," as the market uses that term, there is much more
metal than that. There is a hundred times what there is. If I look at
the large short positions on the Comex, my question is: Where are the
other shorts being hedged? Because the short position that I believe the
bullion banks use to hedge their physicals is larger than their short
position on the Comex, and the answer is that they hedge it in the OTC
market in London.

CHAIRMAN GENSLER: I thank you for that detailed discussion

* * *

This is a stunning revelation. Christian confirms that the "physical market" is not in fact a physical market at all. It is a loose description of all the paper trading and ledger entries and some
physical metal movements that occur each day on behalf of people who
believe they own bullion in LBMA vaults but in fact don't. They are told
they have "unallocated gold" or "unallocated silver," but that does not
mean the LBMA has physical metal set aside for those customers and has
just not given specific bar numbers to the customers.

No, it is the most cynical and corrupt definition of "unallocated" -- the customer has NO bullion allocated to him. NONE!

The LBMA defines the owners of "unallocated accounts" quite clearly as "unsecured creditors." That means they have NO collateral. NONE.

Can it be any clearer? It is a giant Ponzi scheme.

Christian confirms what many analysts and GATA have been alleging -- that there is not much REAL physical metal -- but testifies that there is actually 100 times the REAL physical metal being sold based on the
much more "loose" definition of what "physical" means to the bullion

The last sentence of his statement is mind-blowing. He says the "physical" positions of the bullion banks are so huge that they are much bigger than the Comex short position. He says the "physicals" are
hedged on the OTC market in London! Did you get that? Let me walk you
through it.

The bullion banks are selling what is supposed to be vault gold, but it is just a ledger entry if the customer never asks for delivery. The bullion banks must balance their exposure with a ledger deposit entry.
This has to be some paper promise of gold from a third party, or some
derivative, or even some real gold bullion. If all the ledger entries
balance out, then the bullion bank has no net exposure in exactly the
same way the futures market works with a short offsetting a long.

A futures market can never default if no one asks for delivery, as only paper contracts are traded. The loosely defined "physical" London market is an identical scheme. As long as everyone is prepared to buy
and sell "ledger entries" for imaginary gold in the vault, no one will
ever discover the fraud.

The LBMA does buy and sell some real physical metal as well. But we now know from Christian's testimony that this is one one-hundredth the size of the paper gold trading. The LBMA says on its Internet site that
it trades 20 million ounces of gold each day on a net basis. We can
calculate that the net trade of REAL physical gold should be about
200,000 ounces each day. That is 6.25 tonnes per day or 1,625 tonnes per
year. This is very much in line with the size of total global mining
output of approximately 2,200 tonnes per year.

So the giant Ponzi trading of gold ledger entries can be sustained only if there is never a liquidity crisis in the REAL physical market. If someone asks for gold and there isn't any, the default would trigger
the biggest bank run and default in history. This is, of course, why the
central banks lease their gold or sell it outright to the bullion banks
when the bullion banks are squeezed by high demand for REAL physical
gold that cannot be met from their own stocks.

Almost every day we hear of a new financial fraud. The gold and silver market fraud is likely to be bigger than all of them. Investors in droves who have purchased gold in good faith in "unallocated
accounts" are going to demand delivery of their metal. Then they will
discover that there is only one ounce for every 100 ounces claimed. They
will find out they are "unsecured creditors."

GATA has long advocated the ownership of real physical bullion. The bombshells dropped at the CFTC's public hearing have served only to reinforce that view. We believe that we have made significant new
inroads into exposing the fraud and the suppression of precious metals
prices and it is documented in the CFTC's own hearing.


Adrian Douglas is publisher of the Market Force Analysis letter ( and a member of GATA's Board of Directors.

* * *

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