Wednesday, August 17, 2011

The Scramble For Physical Gold May Be About To Begin. Got Physical?

It looks like it might be “game on” in the physical bullion markets, the long anticipated parabolic move upward coming your way courtesy of one Hugo Chavez, the erstwhile dictator of Venezuela. He started Wednesday by announcing that his government will be nationalizing all the gold and silver mining industries. This story alone may well have led to JP Morgan holding off on their usual Thursday raid on precious metals on the COMEX.

Chavez quickly followed up on the move by announcing that he was going to seek repatriation of all of he country’s gold assets, beginning with some 99 tons held by the Bank of England. Venezuela also has requested return of gold deposits held at the BIS in Switzerland and the Federal Reserve Bank of New York. He has also indicated that he going to move Venezuela’s cash reserves out of western banks and into banks in China, Russia and Brazil. The problem for the B of E is that most of it gold holdings have either been leased out or are otherwise encumbered by cash swaps particularly to the aforementioned JP Morgan’s GLD ETF. I can only imagine the panic at the “Morgue” this evening. Blythe Masters and her flying monkeys who control the COMEX have a big problem. Namely the eligible vaults at the COMEX only have some 10.5 tons inventory!

Somehow I don’t think Chaves is going to accept either shares in the GLD or a rubber check from Blythe’s commodity desk.  Neither do I think el Presidente has a snowball’s chance in hell of actually getting his hands on that gold. He is clearly concerned that his wave of nationalizations has spawned a raft of civil actions seeking compensation for the properties seized by his government and that it could lead to the freezing of his overseas accounts. The race will be on to see if sanctions can be put in place and accounts frozen before the logistics of currency transfers and moving physical bullion can be executed.

No matter how this plays out the shorts on the COMEX may be doomed. If Chavez presses his claim neither the B of E nor the Morgue have the physical to deliver. The B of E will be forced to reclaim their swaps putting the short squeeze on the Morgue placing Blythe in the position in having to buy gold on the open market and the price goes ballistic, and both the London Bullion Exchange and the COMEX are faced with default, just the rumor of which will push the price even higher.

If the courts beat Chavez to the punch and freeze Venezuela’s assets before the transfers can take place they risk a third world political backlash, making the justifiable claim of the western banks waging economic warfare to prevent the collapse of their un-backed short positions. This could then in turn unleash another storm of sovereign states demanding the return of their own bullion deposits. Absent any similar legitimate claims for compensation as are held against Venezuela, the end result for B of E, JP Morgan, HSBC and the rest of the shorts on the COMEX will be the same.

My bet is that Blythe Masters and Ruprecht have the plane warmed up on the runway. Only now they might not be as welcomed in Venezuela as they had hoped.

1 comment:

Comments are of course welcome. Please stay on topic. Comments with links to commercial sites unrelated to the post or the general theme of this blog will be deleted as spam.