Chris Martenson: Fractional Gold Lending At Work

Chris Martenson who has been following gold for a long time and has a background as a gold futures trader shares his take on the ongoing developments in gold and silver. No matter how you want to call it  the underlying mechanics are nothing but official activities between central banks and their dealers (the bullion banks, which include JP Morgan, Goldman Sachs, HSBC, etc).

If you understand how gold leasing works, you’ll see it’s a sweet game [for the bullion banks]. A central bank wants to have some income for their gold holdings so they lease it to their bullion banks who will typically get it for one percent for a whole year. If a bullion bank would take one billion dollar from the central bank’s gold, they would typically pay only one percent for that. Next they will take the gold, sell it in the market, take the proceeds, invest it in Treasury bills as those are being paid five percent (or three percent on a thirty year Treasury note). The spread is the risk-free interest. If you are such a bank and you get an infinite lending facility from the central bank, how much would you borrow? Correct, “as much as you could lease me, give me as much as you can.” This is fractional reserve gold lending. Probably for this reason Germany got nervous and asked their gold back.

The well known sequence of events that led to the gigantic price decline on April 12th and 15th.

When I see at midnight that 3,000 big gold contracts were dumped within a single one minute tick, that has only one possible explanation: it was someone who wanted to drive the price down. It is a thin market, it is early in the morning, it is a concentrated position.

Up until this point, Chris Martenson only talked about (verifiable) facts. As from here readers should understand that the facts are interpreted. Only time will tell if this interpretation proves to be correct.

Guess what is going to happen as a consequence? GLD is going to see small investors getting nervous. As a consequence of this, GLD is probably going to disgorge several hundreds of tons. A misconception that people hold is that people think that that gold is sold and that it is floating around in the market as if there is excess gold. But every single ounce of gold is owned by someone; so GLD will be holding less of it and someone else will be holding more of it. If the “more of it” side of this transfer is not going to be bullion banks or other parties that are part of the gold leasing chain, I will be deeply surprised.

A final personal conclusion which probably reflects how a lot of gold owners are ‘experiencing’ this price decline.

It feels to me that this move was designed to scare off weak hands and pull it into the official part of the system to cover the leasing. And the best way to get something from someone is to convince them that they should not want it.

Source: video interview

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