Today one of the top names in the gold world covered the all-important question, is the U.S. and London based gold and silver Ponzi scheme finally beginning to come unraveled?  This is another trip down the rabbit hole of negative gold lease rates, backwardation, and corruption at the highest levels of the banking industry.

Eric King:  “John Hathaway was talking with KWN about the bullion banks scrambling to find metal to cover their shorts.  I then noticed that a gold robbery took place in Baghdad where gunmen wearing military uniforms stole 250 pounds of gold, and I laughed because I thought to myself, ‘My God, has it really come to this for the bullion banks?’  Of course I’m being facetious, but the scramble for bullion that Hathaway was talking about by the banks to cover these shorts is a very real situation.”

William Kaye:  “That’s exactly right.  You may remember the last time we spoke that I addressed the backwardation in gold as well as the inverted GOFO rates.  Since that time the backwardation has become even more acute. During early trading in Asia on Monday we saw backwardation of more than $1 in the gold market.  That is an incredibly high number.  Spot gold was trading at a $1.10 to $1.20 premium to the next benchmark paper contract, which is February….

Continue reading the William Kaye interview below…  


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“That backwardation has narrowed a bit because of gold’s significant advance off the lows.  Right now the backwardation is still about 60 cents.  So it’s about half of what it was on Monday when it was really extreme and the paper price of gold traded in the $1,140s.

So what Hathaway is saying makes a lot of sense.  I certainty agree with his conclusion which is that physical gold in the system is extremely tight.  This is also reflected in what are very highly inverted leasing rates.  Meaning people are willing to pay a high premium today for spot allocation of gold.  That should not occur in precious metals because they are largely hoarded and stored as opposed to being used in industry.  This kind of backwardation is highly unusual, and frankly should just not occur.”

Eric King:  “Hathaway also brought up the bullion bank exposure to metals in the derivatives market.  He highlighted the fact that Deutsche Bank’s derivates positions are a staggering 20-times the entire GDP of Germany.  That is astounding.  Hathaway believes that if there is a major upside reversal in gold and silver that it will literally threaten the solvency of some of these bullion banks who would then be significantly upside down in those derivatives bets against gold and silver.”

Kaye:  “There is so little transparency.  It’s so opaque that unless we get a credible whistleblower who comes forward and exposes the massive derivatives bets against gold and silver prices, who isn’t forced to commit suicide by jumping off a building, it’s very difficult to say.

But what Hathaway is saying makes a lot of sense.  We’ve discussed this issue of unallocated gold accounts in the system as well as the fractional reserve nature of gold.  We know the entire Ponzi system of gold and silver is already highly-leveraged (100-1).  So it is entirely possible that the banks themselves have a similar, highly-leveraged exposure.

So Hathaway is correct in what he is saying, even without the layer that is presented by the additional leverage introduced through derivatives and other synthetic contracts.  And he’s absolutely right that when gold and silver start turning in the other direction we could see a very, very rapid upside advance, and I think the speed of the move when it does occur will be shocking to people.

My own sense is that these banks will not go bankrupt because they can and will declare force majeure.  As we’ve discussed, ABN AMRO and Rabobank have already done this.  Meaning, they will simply leave the gold trading business.  In other words, at levels that doesn’t bankrupt the banks, Deutsche Bank and other banks who are in this unfortunate situation of being short, whether through derivatives or unallocated gold accounts, they will declare force majeure and pay off in some fiat currency at levels that don’t bankrupt the banks.

Those entities and customers who have put themselves in that position with these banks will then have to take the fiat money and chase the gold price higher.  They will have to do this in order to put themselves in the investment position they thought they were in in the first place.  So when things go in the other direction, and that will likely be in 2015, things will move very, very quickly to the upside and this is why gold could go bid-only.”

IMPORTANT – KWN has many more interviews being released today.

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The audio interviews with Rick Rule, Bill Fleckenstein, Ben Davies, Greyerz-Turk-Stamm, Gerald Celente, David Stockman, William Kaye, Dr. Paul Craig Roberts, Andrew Maguire, Eric Sprott, Rick Santelli, Michael Pento, John Mauldin and Marc Faber are available now. Other recent KWN interviews include Jim Grant and Felix Zulauf — to listen CLICK HERE.

Eric King