The Comex And LBMA: Paper Gold On Steroids

March 31, 2020
MBA, Market Analyst & Author @ The Mining Stock Journal

I truly thought I had seen all that was possible in the creation of paper gold when the Comex rolled out its “pledged gold” category which enabled technically insolvent banks like HSBC and JP Morgan – the only two Comex banks to have taken advantage of this new gold derivative product – to use paper gold to satisfy the performance bond requirement of CME clearing members.

But now the LBMA and CME operators have rolled yet another paper gold derivative productive in the hopes that the two entities can stave off defaulting on futures and forward contractual delivery requirements.  The Accumulated Certificates of Exchange (“ACE”) facilitates the “fractional” delivery of a 400 oz gold bar.

There’s just one minor problem with this set-up.  According to the Cambridge Dictionary, the word “delivery” is defined as:  “the act of taking goods, letters, packages, etc. to people’s houses or places of work.” To me this means if I want delivery of the 100 oz bar of gold for which I contracted, I would like to have the 100 ozs deposited in the location of my choice so that I can possess the gold bar for which I paid upfront.  In effect, the Comex has technically defaulted on the contractual terms of the 100 oz Comex futures contract.

Ronan Manly of Bullionstar.com has written an excellent analysis of this new paper gold derivative scheme:

And just like that, when you thought bullion bankers and their front men, the CME and LBMA, could not create even more paper gold, they just went ahead and did. And it gets better, since according to the CME:

“Once issued, ACEs can be held as long as necessary. A client can use ACEs to comply with short delivery requirements (1 ACEs reflecting one futures contract of 100 oz) or it can be swapped back against a 400 oz bar by exchanging 4 ACEs. A customer can comply with delivery requirements with ACEs or regular bars, or a combination of both.”

Here’s his entire article:   Comex delivery problems.

It’s only a matter of time before the markets wake to this reality. At that moment we will see the $100-$200 or more daily moves in gold that many have discussed as an eventuality.

Dave Kranzler

https://investmentresearchdynamics.com/

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Dave Kranzler spent many years working in various analytic jobs and trading on Wall Street. For nine of those years, he traded junk bonds for a large bank. He has an MBA from the University of Chicago, with a concentration in accounting and finance. He currently co-manages a precious metals and mining stock investment fund in Denver. My goal is to help people understand and analyze what is really going on in our financial system and economy. Dave publishes the The Mining Stock Journal a bi-weekly subscription newsletter that features junior mining ideas as well as relative value ideas in large cap mining stocks.

 

The melting point of gold is 1337.33 K (1064.18 °C, 1947.52 °F).

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