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Upcoming Gold Default

By Jim Willie CB      Printer Friendly Version
Oct 30 2008 2:18PM

The gold & silver futures markets are each hurtling down a dangerous path toward possible default. The artificial paper price has created enormous physical demand, and hampered supply production, if not delivery. The gap between the corrupted paper price and the legitimate physical price in actual trading markets has grown sharply, enough to force a breakdown like in any distorted market. When December contracts in gold & silver are demanded to be satisfied via delivery of the metal, we could easily see the COMEX fail in delivery. A default is highly likely.

The USFed cut the official interest rate again by 50 basis points, now to 1.0% on the Fed Funds target, in utter desperation. Other central banks did not join in rate cut exercises. The Euro Central Bank is expected to cut next week, reluctantly. So is the beleaguered Bank of England. The pressure is building on gold demand. Now with the official US price inflation at CPI = 5% or so, the real rate of money cost is minus 4%. The actual price inflation runs more like 10% to 12%, making the real cost of money more like minus 9% to minus 11%. GOLD RESPONDS TO NEGATIVE REAL RATES VERY FAVORABLY.


If you think the bank crisis is bad now, wait until the USEconomic recession achieves galloping speed downhill. The stagflation will eclipse that seen in the late 1970 decade. Today the economic growth in the GDP was posted for 3Q2008 at minus 0.25%, even with a hefty 5.4% PCE (personal consumption expenditures). This is another fairy tale told. The US consumer activity cut the GDP back by 2.25%, while the government activity added to the GDP by 1.15% in retrograde style. So the USDollar has rallied amidst economic decay, doing its death dance. Bear in mind that the stated admitted price inflation for Q2 was only 1.5% in that GDP corrupt calculation, which avoided a negative GDP for 2Q2008. They called inflation growth, the usual corrupted modus operandi. The second quarter was when prices skyrocketed for everything under the sun, if memory serves properly. Clearly, the wizards in the USGovt stat-rat offices, employing advanced techniques, moved some price inflation from Q2 into Q3, so that a recession would not be admitted all summer long. With the USFed rate cut to 1.0% again, they are admitting the recession.

The Shadow Govt Statistics folks pitch in a comment to provide light upon corrupted data. “Narrower Than Expected GDP Contraction Is Nonsense. The difference between the reported 0.3% annualized Gross Domestic Product (GDP) and the consensus expectation of a 0.5% contraction is no more than statistical noise, yet the reported result most certainly was manufactured so as to allow the hypesters on Wall Street and in Washington to spin their fairy tales of a ‘less-severe recession’ in order to help draw the gullible back into stocks, at least for a day or two before next week’s election. This follows earlier economic scare tactics aimed at the public to help sell the ‘Bailout’ package… With a 95% confidence interval of +/- 3% around this morning’s estimate of an annualized 0.25% contraction in real (inflation adjusted), annualized quarterly third-quarter GDP growth, the number was not even statistically indistinguishable from growth or contraction in the 3% range. A quarterly contraction in excess of 2% would have been more realistic… U.S. Economy is in a severe recession. With real retail sales, housing, non-farm payrolls, new orders for durable goods, and industrial production all showing quarterly and annual growth patterns never seen outside of a recession still in deterioration, GDP reporting eventually should show a string of quarterly contractions, with the recession dating back to fourth-quarter 2006, long before the exacerbation of the current systemic solvency crisis.”

A simple statement is required to close the preface. The financial market crises, in numerous arenas, have come in large part because the banking authorities have intentionally provided rescues only for New York investment banks and other big financial firms. Up to a month ago, the USFed had sterilized most injections into the Wall Street centers of the banking system by denying the mainstream bank system via liquidity drains. Drain the national system where households work and live, and provide subsidies for the financial crime syndicate. This is a betrayal of government to the people. Elite gain came at mainstream expense. Attention has gained on the misuse, false promises, and other misdirection of USGovt funds even in the bailout packages. The big banks are ordered not to lend, but to acquire smaller banks.

Until the global interest rate cut was announced, the USFed had not created much new money, despite the numerous rate cuts on the US side. The policy was unconventional and deliberate, with a two-fold purpose to aid Wall Street and to keep a lid on the gold price. Their bad policy, emphasis upon rescue and redemption for criminal fraud, neglect of the private sector, have left the USEconomy vulnerable to an extreme breakdown. A GRAND REFLATION WILL SOON BE ATTEMPTED, TIMED OBVIOUSLY AFTER THE ELECTION. The effect will be much like blowing up a dam holding back a lake, where downstream the price inflation will be broad, deep, and powerful. That day comes soon, and if not, then the entire US financial system will go dark. That cannot be permitted.


As a preface, much response came from last week’s article about the “USDollar Death Dance” from both the public and analyst community. No hint of investment in the USEconomy is coincident with the paradoxical US$ rise. In “Plumbing the Depths of Depravity” posted of October 29 (the intrepid expert forensic financial analyst Rob Kirby, and erstwhile bond trader, confirmed my view of a twisted engineered perverse USDollar rally. He echoes one of my major points delineated, that settlement of credit derivatives, like with the credit default swaps from failed insured asset backed bonds, has produced a demand for USDollars in contract settlement payouts. His website contains a treasure trove of information that reads like criminal indictments, but without the hundreds of obscurely written pages and weird words.

In the cited article, Kirby wrote: “What folks need to understand is that the global OTC derivatives market, measured in tens or hundreds of Trillions, is virtually all US Dollar denominated. Its SYSTEMIC failure, which is now occurring, requires US Dollar balances to clear (settle) the trades (bets). This has created the paradoxical global demand for US Dollars, the currency of a country that is fundamentally bankrupt. By rationing credit to hedge funds that were naturally levered and ‘long commodities’ (institutions like JP Morgan routinely took the other sides of their customers commodities bets, ruining institutions like natural gas player Amaranth), and propping up the balance sheets of those who were short commodities [such as] the Banks. The Federal Reserve led cabal of Central Bankers have ENGINEERED the collapse in commodities prices while creating the illusion (of a perverse USDollar rally). The engineered collapse of the commodities complex became necessary in the eyes of monetary elites because the rush for tangibles and corresponding repudiation of fiat money was becoming manic, as so CLEARLY evidenced by the emerging shortages of precious metals, gold and silver bullion.” My rejoinder is that the crude oil price, and many commodity prices, have come down right before the election, just like in autumn 2006, a perception we share.

Kirby went on to conclude that “We are CLEARLY going to HYPERINFLATE!!!!” He steadfastly contradicts shallow assertions that deflation will dominate the scene. Anyone observing the money supply acceleration in recent weeks can easily see this, yet deflationists seem unable to observe the human response in desperation. We two have frequent debates between ourselves, whether USTreasury Bond default will occur or else a big Reflation Episode. It is possible both will occur. These exchanges will contribute toward a key section in the upcoming November Hat Trick Letter on the weekend of November 9. A topic raging lately between us has been the failures to deliver USTreasurys. This extraordinary phenomenon highlights the extreme mountain of toxic bond (in)securities spewed worldwide by the corrupted US financial sector, but it also highlights the questionable legitimacy of USTreasury Bonds. The traded volume of USTBonds had been recorded a few years ago to be over $2 trillion above official issuance in USTBonds. So maybe we are seeing a redux of counterfeit issuance of USTBonds in order to satisfy unprecedented demand. By the way, USTreasury management is done, and accounting is done, handled by only one giant bank.

Could the failures to deliver USTreasurys, as shown in the alarming graphic below, be a precursor to actual default? We will see. Kirby maintains a period of tremendous hyper-inflation is coming. My forecast is for a possible USTreasury default, as conditions grow out of control, and economic disintegration catches the nation by surprise. The collapse of General Motors could trigger a profound change in perception concerning the effective implementation of USGovt and Wall Street bailouts and rescues. Either way, disruptions like never seen before are on the horizon. The settlement failures bring into question the integrity of the USTreasurys as a legitimate market. Their counterfeit from more supply than issuance is well documented, and rings like a loud echo to the naked stock shorting chapter of US financial markets.


What conditions would precede a default in gold & silver COMEX futures contracts? Tough question. These are unprecedented times. Surely, a widening between physical price and paper price reads like bold billboard graffiti. That invites a queer arbitrage, to buy in one location and sell in another, of course practiced only by the privileged insider. One other characteristic of imminent default could be a vanishing act in the open interest (OI) seen in the Commitment of Traders for futures contracts. The gold OI has reduced sharply since late spring when it ranged between 400 and 460 thousand, now to 319.5k on 21 October 2008. The silver OI has reduced sharply since late spring when it ranged between 125 and 140 thousand, now to 95.8k on 21 October 2008. The severe drop in open interest is highly unusual, not at all normal!

If these unfair paper markets, intended as devices for price discovery, when just devices for price suppression, are heading into default, then the movement among many players might be to exit the stage before chaos erupts, and embarrassment is heaped upon trading firms. Leading US bankers might be isolated. Also, and more importantly, if a default occurs, the settlement of existing contracts comes seriously into question. The players might wish to exit the crime scene before major doubt distorts contract settlement. Who would want to have hundreds of $thousands tied up in a market with yellow police ‘Crime Scene’ tape cordoning off the zone? By the way, the shrinkage in large commercial net short position usually means a big powerful upsurge in the gold price is coming, as in very soon. They have little more to liquidate, and never liquidate all, since they delivery from production facilities.


The gold lease rates have jumped significantly. Lease rates have more than tripled in the last month alone! They have not subsided. The last time rates on the one-month lease were in this neighborhood was over a decade ago in another crisis. It means that vault owners who control large quantities of gold are much less willing to permit other parties to borrow it, plain and simple. The COMEX, where paper gold is traded, might not be able to acquire much needed gold from central bank vaults and other bullion bank vaults in order to satisfy delivery requirements. Vault owners must expect higher gold prices to come. Clearly, the gold market is experiencing shortage. The lease market is an excellent forward indicator on physical price movement. Silver lease rates have also tripled, just like gold, and not subsided either. The lease game is thoroughly perverse. One effect rarely noted is that short sellers within the futures contracts might be squeezed due to leasing challenges. If they have a harder time to roll over contracts, by means of higher required posted margin or higher cost of leased gold, then they must cover. A price rally ensues.

Steven Isenberg, chief executive officer of M Partners in Toronto pointed out that the cost of borrowing gold rose dramatically in March 2001, when central banks were making less bullion available to speculators, mining companies, and jewelers. Gold promptly rallied more than 12% in the following two months. He said, “This [the lease rate for gold] usually precedes a sharp move in the gold price.”

Ross Norman, director of, said the latest lease rate spike “is indicative of perhaps an even tighter market still yet to come.” While gold miners and jewelry groups are the most frequent borrowers, central banks are the traditional lenders. Fat Prophets offers an excellent interpretation on lease rates, given on October 12. “Today’s commentary concerns the last carry trade left in the markets, i.e. gold. Gold peaked at $1032 in March this year. However, since then it has fallen steadily, trading as low as $734. While this fall has been in line with a rising USD dollar, it has also been orchestrated. The current spike in gold lease rates indicates that demand for physical gold is extremely high and growing quickly. We may well be witnessing the first seeds of the gold price breaking free from the short sellers and the end (death) of the gold carry trade, which so many bullion banks made such large profits on in the 1990s. The lease rates (available on will be the key indicator to watch.”

The margin requirements at COMEX have been increased. Could this move be intended to hinder gold investors? Yep! Is the move consistent with rising gold lease rates? Yep! Will the devious maneuver halt a gold price response? Nope! Margin collateral demands in a general sense have risen by 500% in many hedge fund accounts. The pressure extends to India, where withholding credit from major buyers has inhibited gold buying. The trend is clear, as pressure by authorities has been to reduce leverage by force. When liquidation is late, price reversal comes swiftly.


Two interviews have been cited in recent past articles. They are so important, a repeat must be provided in case readers missed them. In a rare event shedding light on the positive side of the gold market, CNBC interviewed Jurg Kiener, CEO of Swiss Asia Capital. He points out the stark contrast of the two markets, paper gold versus physical gold. Kiener expects soon the US ‘gambling price’ gold market in major US-based and London-based exchanges to eventually default after a titanic battle that began years ago has reached fever pitch. By that he means a return suddenly to physical price determination will come for gold. He concluded that when such an inevitable event occurs, THE GOLD PRICE WILL DOUBLE VERY QUICKLY, LIKE IN DAYS.

John Embry of Sprott Asset Mgmt focuses on the extreme amount of nationalization and other bailout funding by the USGovt, as a prelude to a potential gold futures default. He said to watch the December COMEX futures contract. The old saying is that gold responds to the medicine applied, but not the prescription written. Sadly, not much of any medicine has been administered to the public or the mainstream USEconomy yet. Almost nothing has occurred yet for applied medicine on mortgage workouts, rewritten home loans, loan balance forgiveness and ample new funds for new home loans that would truly assist the pain in the mainstream. Instead, a sham of a voluntary bank program has resulted in little more than a ‘Revolving Door’ that returns distressed homeowners to the foreclosure center. Embry makes great points in his article “Rescue Will Send Gold to Surreal Price Level” But notice the title has the future tense. He implicitly agrees that the rescue for the system outside the banking sector has not begun, that the USDollar debasement is a process only just begun, although Pandora’s Box has been opened. He says in the interview, “… the US authorities will not hesitate to debase their currency in an attempt to salvage the financial system. In the fullness of time, this will be wildly inflationary and should propel gold and silver prices that would be viewed by many in today’s context as surreal.

Gerald Celente of Trends Research Institute is a superstar. He commented on how the USGovt bailouts will result in enormous upcoming supply of new money creation. It is all funny phony money in my view, requiring protection from the imminent guaranteed runup in price inflation. NEVER DOES A DEBT RELATED SOLUTION FIX A DEBT RELATED PROBLEM. He regards the USGovt bailouts, rescues, and mergers to be a colossal failure of policy, which will not prevent a USEconomic depression. The absence of realistic assistance to the American people who struggle with mortgages is what is missing in glaring manner. He points to most bailouts giving subsidy aid to CEOs and preferred stock holders. Gold will surpass the $1000 mark in the near term, but probably not until the liquidation engineered by the corrupt bank authorities has subsided. His comments came immediately after an important global interest rate cut that involved numerous central banks, which joined the embattled US Federal Reserve.

Celente wrote: “Beyond the $1 trillion subprime problem that has been erroneously targeted as the prime culprit behind the credit crisis are more serious financial catastrophes that are barely reported, mostly overlooked and cannot be remedied. The Fed cannot print enough money to paper over the $531.2 trillion in derivatives and credit swaps, the trillions in the overbuilt commercial real estate market ready to collapse, the multi-trillions in leveraged buyouts going bust, and other exotic financial instruments that have turned toxic. Yesterday’s lowering of interest rates and the continual Fed action to flood the markets with money will lead to an era of hyper-inflation, the likes of which no living American has ever seen. Gold prices shot up some $24 after being down over $20 earlier in the day. We continue to forecast gold $2000. And once again, we urge you to take precautionary measures in view of a worsening global market meltdown.”


Jim Willie CB
Editor of the "HAT TRICK LETTER"
Hat Trick Letter



Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at . For personal questions about subscriptions, contact him at