For those who missed it, Jason Fine, an MF Global client, demanded delivery for 5 gold contracts (500 ounces) and 3 silver contracts (15,000 ounces) from HSBC, the custodian of the metal. Fine had used the warehouse receipts of his PHYSICAL METAL on deposit at HSBC as collateral for his account at MF Global. MF Global's liquidation trustee James Giddens (i.e. Jamie Dimon) said WHOA THERE PARDNER!, NO CAN DO! MF Global rehypothecated your gold and silver collateral when it purchased CDS contracts from us, so we'll be taking the delivery of said gold and silver thanks to our SENIOR creditor status.
HSBC subsequently filed suit Friday against both Jason Fine and the MFG trustee, in effect to allow a judge decide who gets the phyzz.
This weekend has seen rampant speculation that the markets will open with a collapse in GLD, and a spike in gold and silver, as all the paper holders rush to get out of paper gold and into phyzz.
Personally, The Doc disagrees.
From how I understand it, the lawsuit doesn't mean anything- yet. The real fireworks should come when the judge decides whether the phyzz belongs to the actual holder of the futures contracts, or the counter-party of the CDS contracts purchased with Fine's rehypothecated collateral by MFG.
This could play out in 3 ways:
1. Judge orders Phyzz liquidated for cash, and all parties receive a haircut and a portion of the assets. This is most likely in The Doc's opinion- and at this point, holders of futures contracts may well panic and dump futures positions for phyzz, causing a collapse in COMEX futures prices of phyzz, with a corresponding evaporation of physical inventory as the physical metal becomes unavailable.
2. Judge rules in favor of Jason Fine, and all phyzz is delivered to the rightful owner. JP Morgan instantly panics, crashes paper futures prices, and scoops up all available phyzz. Least likely outcome in my mind.
3. Judge rules in favor of MFG Trusee James Giddens (i.e. Jamie Dimon, Blythe Masters, and The Morgue). Jason Fine told to F*** off, you are an unsecured creditor as JP Morgan holds senior status to your rehypothecated collateral/ assets. For aftermath, see No. 1 only magnified 100 fold. Futures traders instantly lose all confidence in the system, and the COMEX implodes not from a delivery default, but from a loss of confidence among futures traders.
I may be wrong, but I don't see an outcome to this that results in PAPER gold and silver prices rocketing. All three possible outcomes seem to mean major sell-offs in the PAPER futures markets, while at the same time, physical inventory dries up and becomes unavailable. Again, it appears to me that this is more likely to happen when the judge makes a ruling in the case, rather than imminently on the announcement of the lawsuit. I could be wrong, as should a futures trader similarly think through the likely possible outcomes of this HSBC suit, the smart ones will get out now and not wait for a verdict. We'll see whether the speculative futures traders panic now, or wait for the handwriting on the wall before they panic and attempt to get out. My money is they'll wait for the handwriting on the wall, Belshazzar style, when it's too late to get out!
Your Paper is Weighed in the
Balance, and Found Wanting
21 comments:
I am just amazed that rehypothecation was ever allowed and not made illegal! This is the first I have heard of it.
Doctor - if physical sources of silver dry up, will this not cause the spike we all dream of?
JB Canada ( no silver - but lots of great social programs)
Newbie (still drinking Guinness)
Doc,
#3 has already happend. #1: miners are scrambling to bring dividends to the market capturing etf market. (reajustment of sorts) Also Sprott proposal. #2 The LAWs were made in favor of JPM. Judge rules on Law.
So ALL three are in play.
I love this blog. Thanks Doc!
Newbie has to sharpen his iron somewhere.
Thanks Guys
Is that pic Paleo Hebrew?
Newbie likes the pic.
Doc,
If you would send that pic to my email address. You got my IP
anon 6:36- i don't have a copy of the image dowloaded to email you, you can save it by simply right clicking, then save as.
-Doc
suppose this is just the tip of the ice berg and everyone holding a MF acount in silver demands delivery Celente for instance could this create the largest Force Majure in history?
Doc,
what about the 6:20. Any input?
I can assure you that the " unsecured creditor" will get nothing. You can sue..and even win, but still end up with a judgement that will NOT be secured or prioritized. You would have to prove "fraud" in order to raise your claim above the standards of a basic unsecured status. I am not a fan of the whole "class action" resolution, but in this case, it may be the only option. There should be an attorney out ther somewhere that has the balls to take this on.... PONY UP.
Technically, the cartel is trying to paint the tape for wedge formation in silver and gold prices, and they trying to induce a crash in 'spot' paper prices of both metals, in a vain attempt at securing physical metals at lower prices.
Why vain? Because, for the first time ever, paper prices will not respond the way they predict. The beginning of the end is at hand.
I'm getting confused about what MF, a Futures Clearing Merchant (FCM), is allowed to use my brokerage account for. Lets assume a simple example:
1.Cash I put in my account 100
2.Portion allocated to initial margin -17
on a silver contract
3.So called cash "surplus" 83
A. MF could legally take my collateral and invest it in certain prescribed assets (eg Treasuries, AAA rated corporate/sovereign debt etc). The income/capital gain from such investments was for MF's benefit, which allowed it to offer cut rate trading commissions, which benefitted customers, which was the rationale behind this CFTC rule. But what amount was allowed to be thus invested - was it 100 or was it 83? If it was 100, then my silver contract counterparty's security of 17 was at risk - surely that can't be right? And if the same was being done with my counterparty's 17, then my security was at risk?
B. Now I read about hypothecation, and rehypothacation, and I don't technically understand it. Using the simple example above, can anyone explain how my $100 is further utilized by MF, over and above the investment allowed under A. above? I read that in the US, 140% of my account can be further used by MF as collateral for hypothecating......what exactly that means I can't work out!!
C. In the UK, there is no 140% limit, in fact no limit at all. Was MF allowed by the CFTC to transfer my $100, originated and based in my US account, to it's UK subsidiary, via an intercompany loan account, where it could escape the 140% rule? Does that mean the USA 140% rule could be so easily loopholed - surely the CFTC would not allow it?
D. There is so much talk now, but nowhere can I find a simple arithmetic example of how my $100 is used, and to what risk of loss it is exposed. When I signed my MF account forms, it seems I gave permission to MF to do these theings with my $100. My introducing broker assured me my $100 was "segregated" and at no risk. In light of these new facts coming to light, it seems the word "segregated" had absolutely no meaning when it came to the risks of loss my $100 was truly exposed to. Is it possible that the professionals in the Futures Industry knew all these things, but chose to not fully inform customers, and that the hypothecation merry go round was always known about, and is actually "surprise information" only to the customers? This thing stinks, and the entire Futures Industry is on shakey ground now. I have my 60% returned from MF with a new FCM, but am fearful of continuing with Futures, because I have no way to fully understand my risk of loss. This is bad, really bad. The outcome of the HSBC/Fine lawsuit may have profound implications on gold/silver prices - so I'm stuck and paralyzed into inaction and indecision, exept the realization that physical ownership and pocession is the only true safety.
I guess they will finally stumble upon the gold "vein".....
anon 6:26, those are modern hebrew characters, but knowing hebrew, those are not real words (though they can be pronounced phonetically) for reasons i won't go into here. even if the letters indicated they were real words they look like they would be foreign to modern or biblical hebrew. highly doubtful it's any kind of aramaic (0.0001% chance) or yiddish. just strange. looks like someone doing some occult art or something. just my take.
satya
Here is the bottom line. Any funds you put into ANY investment arena are not secured in any fashion. You do not obtain a signed contract, UCC filings, personal guarantees, or any sort of "secured" position in the transaction. You basically give them your entire life savings without ANY secure position at all. If they fail... It has already been shown and proven time and again that you basically have no choice but to stane in line behind the big guys who were smart enough to secure the debt. That is a mighty long line my friend. Caveat Emptor.
Ok Doc. So, early indicators show you are on to something here. gold down $20 and silver down 2% as of now...
I know. Dont panic, btfd too... but... now what? If/when we get this major sell off in 'paper' and collapse of comex... then when/how do we get price discovery in the phyzz?
Yes. The paper market is manipulated, and has always been a bad representation of price. Yes. It will be a swell day when comex implodes. But what sets world price next? ebay?! Or does BiNack just come out and state the price is now X$?
Help a patient understand how to understand.
I thought all those kind of antique dudes were yiddish? Anyway as for hypothecation, it just means if we go broke, not only do you lose all your money, in fact we just stole all your money. It's called capitalism.
"How do you get price discovery after the crash of paper PM markets?"
Easy, as delineated in Bernanke's 2002 speech, the Bernak will revalue it for you, and that price is going to be very high because central banks have a lot of gold on the asset side of their balance sheet that needs to offset a mountain of liabilities.
Hold on through the pain of the decoupling process.
Pricing of gold after the collapse:
We know the Pan Asian Gold Exchange wasn't created to destroy the COMEX, well not yet, because the Chinese are one of the chief beneficiaries of the kick the can game. Their numbers are not transparent, but it's likely they have a long way to go to populate the asset side of their balance sheet with gold, and to make this work, the Fed, Europe, Japan, and China have to have enough gold to support a system of trade.
So, in answer to your question, perhaps the PAGE was created to take over gold price discovery when the inevitable blow out occurs in the US and London.
a. Markets decouple
b. Paper prices either skyrocket or fall, but either way, it's all over because you can't get physical.
c. Period of disorder during which you can't use gold or silver coins because nobody can tell you their price. In light of the risk in cashing a gold coin without adequate price discovery, they gather dust and you must barter.
d. The Fed steps in and revalues gold to some impossible level.
e. Trading resumes on the Page.
f. You tell your wife and friends "I told you so, clean out your stash, and disappear to Vegas with your secretary to be married by Elis and start the whole process over again.
I love the pic and caption at the end, very creative, just loved it :)
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