• On June 1, 2015, JPMorgan added almost exactly enough ounces of physical gold to patch the deficiency between supply and delivery demand at COMEX, avoiding widespread dealer default.
  • Declassified documents, along with strong circumstantial evidence indicate that it was not JPMorgan, but its most important customer, the US Federal Reserve, that just bailed out COMEX.
  • The deficit in world physical gold supply will be at least 606.1 tons in 2015, but may be much larger, and similar incidents are likely in the future.
  • The deficit in world gold supply versus demand will grow much larger in 2016 and beyond.
  • Even if the entire remaining US gold reserves were mobilized, prices could not be permanently held down to current levels, making gold and gold mining stocks a good deal now.

In an article dated June 1, 2015, I pointed out that COMEX clearing members had gotten themselves to the edge of a widespread default on physical gold delivery obligations. They faced net claims of 550,000 troy ounces against only 370,000 registered ounces left at the COMEX warehouses. That left a deficiency of 170,000 ounces, or 5.29 tons of gold.

That same day, JPMorgan Chase (NYSE:JPM) transferred 177,402 troy ounces of gold into COMEX registered gold stockpiles - just enough to cover the shortfall at maturity, plus some extra to cover the additional buying that always happens during an average delivery month. All this raises a question: Did JPMorgan Chase just engage in a bailout similar to John Pierpont Morgan's 1907 bailout of the New York City banks?

At first glance, it may appear as if JPM bailed out other COMEX clearing members. If you look closer, however, you see something else. The June 2, 2015 delivery report shows that the gold that saved COMEX came from JPMorgan's house account. Then, after replenishing COMEX registered gold supplies, it delivered 246,800 troy ounces of bank-owned gold, representing 2,468 matured short contracts, as JPMorgan customers purchased and took delivery of 42,200 troy ounces.

The Commodities Futures Trading Commission (CFTC) regulates COMEX. It publishes a monthly report called the "Bank Participation Report," which tells us how much of the open interest, each month, is held by banks and how long or short the banks happen to be. As of May 5, 2015, taken together, all US-based banks, including JPMorgan, Citigroup (NYSE:C), Goldman Sachs (NYSE:GS), and Morgan Stanley (NYSE:MS), held a net short position (after subtraction of offsetting long positions) of only 5.8% of the total. A report the next month, dated June 2, 2015, disclosed that all US-based banks had upped their shorts to a net total of 9.2%.

COMEX rules require that deliveries be assigned in proportion to the number of shorts a particular clearing member has open, for itself and its customers, as of the day the futures contracts mature. If the clearing member is delivering on behalf of a client, the gold is listed on the delivery report as having come from the member's "customer account." Even if JPM is engaged in proprietary trading and market-making at COMEX, it is virtually impossible for it to have ended up assigned to almost half of all deliveries. It is even more unlikely that every gold bar in those deliveries was sourced from the bank itself, rather than its customers.

In a previous article, I wrote:

"If conspiracy theorists, like those at GATA, are correct (and I think they are), the worst case scenario would be a stealth government bailout. It is relatively easy to set up "location swaps", where gold bars owned by the government are promised in exchange for gold bars in the eligible bar category at COMEX warehouses. People could be persuaded to put their physical gold into play, in the registered category, if a government guaranty on return of the actual gold, along with a thick "envelope" of Benjamin Franklins, is thrown in as a sweetener."

For many years, conspiracy theorists claimed - without much actual proof - that JPMorgan Chase was the primary agent of the Federal Reserve in capital markets. Assuming that gold price management is a state secret, of course, no one is going to find a copy of JPM's contract with the government. However, we do have evidence that the bank administers other markets for the Fed. For example, there is a detailed contract appointing JPM custodian over $1.7 trillion worth of the Fed-owned QE bonds. You can read that contract for yourself to get some perspective on this issue.

I believe that the key is in the Federal Reserve policy to engage in what are known as gold swaps. In footnote 3 of a Bank of England document, we are instructed that:

"Under a gold location swap gold stored in a particular physical location is swapped with a market counterparty for specified period with gold stored in another physical location. Under a gold quality swap, gold of a particular quality is swapped with a market counterparty for a specified period with gold of different fineness. In each case a fee is built into the transaction.

Technically speaking, the US Treasury is "in charge" of US gold reserves, even though all the gold has been legally transferred to the Federal Reserve. But we know that the Federal Reserve makes use of gold swaps against that gold. As far back as January 1995, Mr. J. Virgil Mattingly, the Fed's highest ranking lawyer, admitted it. The comments were recorded in the minutes of an FOMC meeting. But by 2001, Mattingly claimed he had been misquoted. Thankfully, in 2009, a Fed governor, Kevin Warsh, was honest enough to come clean. He admitted that the Federal Reserve engages in gold swaps. These swaps are critical to understanding what happened on June 1, 2015.

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