“We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake. Therefore at any price, at any cost, the central banks had to quell the gold price, manage it.” 

Sir Eddie George, Bank of England, September 1999

Below is a partial transcript of an interview with Jim Rickards on The Gold Chronicles from July 16, 2015. 

You may listen to the entire interview here. This transcript is for the portion that runs from about minute 31 through 42. It is a very interesting interview and if you have the time you might wish to listen to the whole thing.

The reason I wished to share this transcript is the nice, compact description that Jim gives of the LBMA and how they manage their gold bullion contracts.

What provoked this discussion was an earlier question about the reported very large long positions of two banks, JPM and Citi, on the Comex that were noted back in May-June of this year.

Jim’s supposition is that they must have had a physical gold short exposure elsewhere, and possibly on the LBMA.  As Jim relates it the Banks do not typically take large positions in one direction but tend to work on spreads and make their profits with leverage on those fairly thin trades.

As is clear from Jim’s interview, the LBMA is a ‘fractional reserve’ exchange, with much of the gold being hypothecated some number of times.

IF there is a shortage of physical bullion developing, it will most likely appear in either London or Switzerland.  That is because London is the gold hub for the West, and they tend to operate on some multiple of claims to actual free holdings.  And Switzerland is where the gold is procured and refined for the formats of the Asian markets

As you know, I have been looking carefully for some time at the odd happenings with physical bullion on the Comex. At least they seem very odd to me if not to some others.   You can be the judge.

And as you may recall, there were some pieces in the news about the ‘tightness’ of gold in London and the dearer prices being paid for gold available for immediate delivery. Again, nothing huge, but another point of data.

And of course there is Goldman in there taking delivery of bullion for their house account reportedly.

And this flurry of schemes coming out of India to do more domestic mining, and monetize the gold held by private individuals and their temples, to stem the demand for bullion imports.

IF the Banks were short of physical bullion in London around July when Jim gave this interview, then by his estimates we would tend to see the strains on the free holdings of physical bullion about–  now.

I do not know what has caused Jim to say that “people are taking their gold out of banks and putting it into new vaults because they’re losing confidence in the banking system. These new vaults are private storage vaults owned by private companies, not by banks.” I do not have his level of contacts. But it does seem that there is a slow but steady bleed of bullion out of the Comex warehouses. And ‘deliverable’ gold is at record low levels.

One would hope that the Banks were wise, and would not go increasingly long futures in size and term, hoping that the shortages of physical gold do not become deeper and more stubbornly set. This could turn into a feedback loop of shortage and demand that would have Sir Eddy George back staring into the abyss once again. 

But alas, this time the central banks are net buyers, not sellers. And the gold manipulators must contend with the great engines of physical demand in the East. Surely by now the Banks must have learned their lessons about recklessly gambling with other people’s money and assets.

What have we learned, at long last, about bailing these fellows out?

What makes this a more potentially serious problem is that willful the battering of the miners may make a resilient source of non-central bank supply more difficult to ramp up. A typical gold project takes many years to get into meaningful production.

So here is something to add to your knowledge. Let’s see what comes of it.

Related:  Bullion Bank Apologist and Physical Versus Paper

Here is the excerpt from the Jim Rickards interview.