Punchinello's Chronicles

April 26, 2011

Imagine a Run on the COMEX

Okay, so what’s the COMEX you ask? It’s short for the Commodities Exchange. And what’s that? Ah…that’s an interesting question, and brings in the concepts of “real” (physical metal or PM) gold and silver, versus “paper” contracts for gold and silver. These paper contracts are traded back and forth through various companies (funds), and can be called Exchange Traded Funds (ETFs). But what’s all this commodities exchange stuff?

Most of us know Craig’s List, right? Well, in many ways, Craig’s List is a sort of commodities exchange. A commodity is a material thing like food, metal, oil, wheat, corn, pork bellies and so forth. A material thing is different from a virtual representation of something. Stocks and bonds are pieces of paper that represent your share in a company or organization of some sort. Basically, you can drop a commodity on your foot and it’ll make you swear.

Let’s say you have a set of audio speakers. They’re commodities because anyone can buy stereo speakers just about anywhere for varying prices. You could use them or you could throw them in the garbage. On the other hand, you might want to sell them and make some money. One way is to sell them directly to a buyer, but how do you find that buyer? If he or she is a friend or part of your family, it’s not a problem.

Craig’s List is an “exchange.” It’s a central location that brings together buyers and sellers. In most cases, what people are buying or selling are real things: lawn mowers, fur hats, necklaces, audio equipment, sofas, and all sorts of things. In some instances, people are selling their services or skills, like an actress or handyman. Either way, the “exchange” is that place where people come together to exchange “stuff” they have (commodities) for money, or in barter trading.

We don’t actually call Craig’s List an exchange because the financial world tends to reserve that word for a special kind of buying and selling. That being said, a key point with Craig’s List is that if you “list” an item you want to sell, then you actually have possession of that item. You own it, you store it, you control it, and it’s yours to sell. If it’s a car, you have a piece of paper giving you the title of ownership to that car. Remember: you actually possess and own the item, and you have the legal right to dispose of it in some way, particularly in exchange for money.

Now let’s consider gold and silver. They’re commodities, just like oil, wheat and corn. But there are millions of people around the world who want to trade gold and silver back and forth. Not everyone wants to go to a coin shop and by a single collectible coin. Some people want to buy and sell hundreds of thousands of dollars worth of commodities.

To buy or sell on a typical commodities exchange you generally have to have a license. Companies with a license then can act as your broker — someone who actually places an order for you under their license, and assists you in buying or selling something.

With me so far?

When you’re playing around on the COMEX (again, commodities exchange, and there are many exchanges), you generally work with contracts. These contracts start with some sort of minimum item or dollar amount, 5,000 ounces of silver being a typical basic contract. You can imagine that you need a pretty hefty amount of money to play around in the commodities market. True, you can gain a lot of profits, but you also can lose a tremendous amount of money as the prices go up and down.

One last thing to know is about futures and options. Suppose you know that your uncle is going to be cleaning out his basement next month. In that basement, he happens to have two nice audio speakers. If Craig’s List worked like a financial exchange, then you could list a “speaker option” based on the future price of those two speakers.

The problems are several. First, you don’t actually possess those speakers, you just “think” you will next month, if and when your uncle gives them to you or sells them to you. Secondly, you’re not totally sure what price you’ll have to pay for the speakers if or when your uncle sells them to you. Additionally, you’re not necessarily sure what people might pay for those speakers in the future. A month isn’t so hard to figure, but a year? What if there’s a speaker shortage? What if the government passes new laws regulating speakers?

Alright, so we have a market — the exchange. We have gold and silver. It costs a boatload of money to get involved with these exchanges. You have to use a broker, someone who’s licensed to trade on the exchange. The product you’re dealing with exists, but you’re mostly dealing with “title” to that stuff in the form of contracts. You say that on such-and-such a day, you’ll actually take possession of what you contract to buy.

Conversely, you might sell the item you have on contract to someone else. They can take possession or sell it again. Hundreds of millions of dollars worth of contracts move around, bought and sold, every day around the world in many exchanges.

All and all, the key thing here is that the person actually owns the commodity! In the case of gold and silver, the exchange itself will store the commodity in its own vaults! They claim.

Now let’s go back to the Great Depression. Banks were speculating with money deposited by all sorts of people; regular citizens and farmers who put their paychecks into the banks. Many people had savings accounts with their entire life’s savings in the banks. And the banks were investing that money on Wall street and in various other kinds of financial speculation.

One day, people got worried about their money and went to get it out of the banks. Lots of people got worried, all at once, and they ALL went to the local banks to get their money. That’s called a “run on the bank.” Since banks only had to keep a percentage of the actual money on hand, when all their customers demanded their money at the same time, there wasn’t enough. The banks closed.

To prevent the closure of banks, which in turn wiped out hundreds of thousands of people and eliminated their entire life savings, The Government created the Federal Deposit Insurance Corporation (FDIC). Banks would pay ongoing insurance premiums to the FDIC, and if there was a catastrophic failure, the customers for that bank would get their money. The bank management would be fired, the bank would be closed or taken over, but the moms and pops who had their money in the bank would get their money.

During the Great Depression, the very wealthy people lost a lot of money, but they still had a lot of money left. It was mostly the middle- and lower-class people who were wiped out.

Today, we’re facing what I would call a historical mirror reflection of the Great Depression. All the same events are taking place. All the same circumstances are in place. All the same mentalities, ideas, principles and rules are taking place. Corruption is rampant, justice doesn’t exist in the financial world, and the gap between the very wealthy and the average working person is wider than at any time since the Depression.

These very wealthy people have seen their net worth increase by nearly 23% in the last few years, here in America. At the same time, the typical middle-class net worth has decreased by about 25%. Oddly enough, the two numbers are very close. Ergo, “wealth” has been transferred from the lower segments of the economy to the highest portion, and in particular to the financial sector — bankers and investment corporations.

What do you do with your money if you earn $2-million per year? What if you get $500,000 annual bonuses? Money comes pouring in, year after year, and you have to put it somewhere, right? More importantly, you want that money to make you more money, growing as an investment year after year. How do you do that?

You could put it into real estate, but that’s not going so well nowadays. You could put it into the stock market, but that’s not going so well these days. You could put it into a savings account, or even under you mattress, but we’re talking millions of dollars. You could buy gold and silver, diamonds and jewels, but you’d have to put them into a vault somewhere.

The answer is the COMEX and other exchange funds. You can buy a million dollars of silver as “contracts.” Remember that: You’re buying a contract that says on paper that you’ll (eventually) own some silver or gold.

Oddly enough, there’s been some strange news coming out of the financial world lately, having to do with the commodities exchanges. Remember, they’re supposed to be keeping actual, physical bars of gold and silver in their vaults. In fact, if you buy a 5,000-ounce contract for silver, then by all rules and rights you should be able to go down to the COMEX warehouse and take physical delivery of that silver!

You should be able to take physical delivery of any of the commodities listed in contracts.

Lately, it seems people aren’t able to get that silver!

Now imagine this: Suppose a few people get worried that there actually might not be any real silver or gold in the exchange warehouses. What if they “run” downtown to the warehouse to take possession and find out they can’t? What if they’re told, “Delivery is not possible at this time.”

Wouldn’t that be EXACTLY what “the little people” were told, back in 1929 when they went to get their physical money out of their local bank?

We have the FDIC now, to insure “the little people” and their bank accounts, up to maybe $250,000 (or more for non-interest-bearing accounts). There isn’t any FDIC-like company to insure investors and speculators on the commodities markets!

This time, instead of “the little people” who can’t afford to play around in the COMEX, it’s “the big people” — the elite of our society who are in jeopardy. Couldn’t happen to a nicer bunch of people, I’m thinking!

What if all these Very Wealthy Individuals who’ve been playing with commodities, speculating on mortgages, and generally ripping off billions (not just millions) of dollars from We, The Taxpayers get worried about the actual existence of their physical commodities? What if there’s a run, and all those people run to the COMEX to take physical possession of their silver and gold?

What if there isn’t any silver or gold!?

Apmex Starts Reverse Inquiry: Seeks To Buy “Any Quantity” Of Silver From Clients At $3 Over Spot

posted at – ZeroHedge

Over the past hour Zero Hedge has been inundated with reader comments notifying us that Ampex has, validating the earlier post speculating about a possible silver shortage at the metals distributor, launched a “reverse ïnquiry” in which it will pay “you $3.00 over the current spot price of Silver for your Silver American Eagles. ANY year, ANY quantity!” and “We will pay you $38.00 over the current spot price of Gold for your Gold American Eagles. ANY year, ANY quantity!”

Note that APMEX is the American Precious Metals Exchange. Why do you suppose they’re trying to buy silver from us folks? Don’t they HAVE all that silver and gold to cover their outstanding contracts? That’s not possible. Is it?

If they DON’T have all that actual silver and gold, then what will The Rich People do if they try to take possession of their millions of dollars worth of paper contracts?

Riddle me this: What will you and I — The Little People” — do when we try to redeem OUR paper dollars for sugar and gasoline? With the Federal Reserve cutting the value of our paper dollars every day, what can we do?

Wouldn’t it be just the best poetic justice if all those billions of dollars worth of “personal and private investments” made by the Wall Street financiers and bankers turned out to be just…paper? And wouldn’t it be absolutely the most delicious irony if The Government (bought and paid for by the Very Wealthy) bailed out all those failed accounts…with paper dollars?


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