Is The Metals Market A Ponzi Scheme?


Is The Metals Market A Ponzi Scheme?

Posted by Karl Denninger

The stories are certainly gaining credibility – and volume.

There have long been claims that the “paper gold” market is wildly manipulated.  Certainly it does trade 100x or more the physical market, but this, standing alone does not prove manipulation.  Have a look at the number of contracts that trade against physical oil, wheat, soybeans or corn.  You’ll find that in each of these cases there are a lot more contracts than bushels or barrels.

But the recent allegations go further.  Now there is a document out on Zerohedge that makes the claim that the US Government has been involved in a massive and outrageous fraud – that is, the “creation” of fake gold bars that are in fact tungsten with a gold veneer on top.  We’re not talking about a “few” bars either.  The allegation is that ten thousand metric tons of fake bars are in fact in circulation – right now – and that our government was the one that caused it to happen.

Huffington Post has picked this up too, but unfortunately the author is a hard-core “gold is money and you need to buy a lot of it right now” guy.  Not exactly the most unbiased source…. and, if he (or his fund) is long a massive amount of the yellow stuff and smells deflation, well, “price support” suddenly becomes rather important.

A big part of the problem here is the insane amount of secrecy that surrounds what should be a completely-transparent market and reserves.  The US, for example, allegedly has a lot of gold at Fort Knox.  Is it really there – and is what’s actually there really of the quality claimed?  How do you know?

I’m a contrarian on the impact that would flow from proof being delivered that the US Gold stock was all tungsten bars with gold plating on top.  Many claim this would cause an instant explosion in price and collapse of the dollar. 

I disagree.

Discovery that the metals market has been “polluted” to the point of irrelevance would mean that those around the world who had bought and were holding alleged gold bars that in fact aren’t gold had tendered good money for nothing.  This would be a monstrous deflationary event – after all, the definition of deflation is the destruction of money, and that’s exactly what would have happened, just as if you took a stack of $100 bills and burned them in your back yard.  To the extent that sovereigns were unknowingly duped this could have enormous consequences, especially if, as is alleged, the fraud is traceable to direct and intentional action taken by the US Federal Government.

I’m in the camp that extraordinary claims require extraordinary proof, and a fuzzy video on Youtube claiming to be a sectioned gold bar – with no visible mint marks or serial numbers – doesn’t cut it for me.

If there is such a fraud on the scale claimed and it has in fact been discovered there are literally thousands of people who know about it.  While many of them have every reason to keep their mouth shut (it’s their money that was vaporized by the fraud!) there are a lot of others who have every reason to stand up and shout.  So far, other than a handful of very self-interested parties, nobody is.

As they say, “show me the money” – or as is more appropriate in this case, “show me the tungsten.”