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Jeff Christian's CPM Group explains how they make paper gold

Section: Daily Dispatches

By Adrian Douglas
Monday, May 10, 2010

A document published by the CPM Group in the year 2000 came to my attention recently. The attribution for the document is not given but the content and style strongly suggest that it was written by CPM Group founder Jeffrey Christian.

You can find the full document here:

The document is titled "Bullion Banking Explained." While explaining what bullion bankers do, this document makes it clear why owners of unallocated metal accounts are being cheated and why the price of gold and silver have been suppressed for so long.

... Dispatch continues below ...


Prophecy Resource Corp. Appoints Rob McEwen to Advisory Board

Prophecy Resource Corp. (TSX.V: PCY, OTC: PCYRF) is pleased to announce the appointment of Rob McEwen to the company's Advisory Board. McEwen is a leading Canadian mining industry entrepreneur. He is the chairman and CEO of U.S. Gold Corp. and Minera Andes Inc. McEwen was the founder and former chairman and CEO of Goldcorp Inc., whose Red Lake Mine in northwestern Ontario, Canada, is considered to be the richest gold mine in the world. During his tenure at Goldcorp, McEwen transformed the company from a collection of small companies into a mining powerhouse, growing its market capitalization from $50 million to approximately $8 billion.

For Prophecy Resource Corp.'s complete statement:

A critical comment from the document is the following:

"The way in which banks monetize their gold and silver positions, using them as collateral for subsequent trades, is integral to understanding what has been driving gold and silver prices over the past several years."

That is absolutely correct, and it drove prices down from 1980 to 2001 and has suppressed their price rise since then, and we will shortly see why.

The CPM document goes on to state:

"With the start of the London Bullion Market Association's release of monthly trading data, the market has become aware that 100 times more gold and silver trade hands each year, just in the major markets, than is produced or used. Some market participants have wondered aloud how 10 billion ounces of gold could trade via the major markets each year, compared to 120 million ounces of total supply and demand, while roughly 100 billion ounces of silver change hands, compared to around 628 million ounces of new supply."

I am one of those market participants who have been "wondering aloud." In fact I "wondered aloud" on March 25 this year, when I made comments at the U.S. Commodity Futures Trading Commission that the London Bullion Market Association's OTC gold market operates on a fractional-reserve basis and that the major bullion banks that operate in that market have sold more gold and silver than they could possibly deliver. I called it a Ponzi scheme. I pointed out to the hearing the significance with respect to position limits on the New York Commodities Exchange that the large shorts were not hedging real metal in London but just paper bullion.

Testifying after I made my comments, Christian agreed with me and added information that it is a misnomer to refer to the London market as a "physical" market because it is largely a paper market where the bullion banks sell 100 times more bullion than they actually have.

You can read more about this here:

As is clear from the CPM Group document written 10 years ago, the bullion banks have been making paper bullion and palming it off as real bullion for a long time. How can they get away with this? The CPM Group document gives us a clue in the following remark:

"The gold and silver markets are unique in that, of all the commodities markets, only in these two markets are there people who believe that forward sales represent an acceleration of physical supply to the market."

What the CPM Group document doesn't explain is that in all commodity markets, except gold and silver, you cannot get away with selling commodities that do not exist or will not be produced in the near future because all other commodities are produced for consumption, so bona-fide consumers must have them delivered at some point. By contrast, much of investment gold and silver is produced and refined only to be stored in a vault. So unlike any other commodity, with gold and silver there is the potential for unscrupulous bullion banks not to have all the metal they sell actually residing in their vaults, provided they have enough to meet the delivery demands of the anticipated small number of investors who will ask for it.

This means that the bullion banks operate a fractional-reserve scam. The CPM Group document describes this as follows:

"This article may help to clarify the complex world of commodity banking, in which gold, silver, and other commodities are treated as assets, collateralized, and traded against. When we explain these processes to clients, we often refer to the same mechanics as they are applied to deposits, loans, and assets by commercial banks in U.S. dollars and other currencies. Banks treat their metal deposits in much the same way as they do deposits denominated in money, as the reserve asset against which they lend additional money to borrowers."

I think it will come as a surprise to many investors who hold unallocated accounts in bullion that their investments are no safer than the fiat currency system against which they are seeking to protect themselves.

The CPM Group document explains on a rudimentary basis how bullion banks use investors' bullion to conduct business for their own account and revealing the scam in more detail:

"Imagine, if you will, that the bank can line up three or more producers and others who want to borrow this gold. All of a sudden, that 1 ounce of gold is now involved in half a dozen transactions. The physical volume involved has not changed, but the turnover has multiplied. This is the basic building block of bullion banking. This admittedly rudimentary outline of bullion banking holds the key to understanding how bullion banking allows for a multiple of trades to be based on one lot of metal. Many banks use factor loadings of five to 10 for their gold and silver, meaning that they will loan or sell five to 10 times as much metal as they have either purchased or committed to buy. One dealer we know uses a leverage factor of 40. (Long-Term Capital Management had a leverage factor of 100 when it nearly collapsed in 1998.)"

It is interesting that the CPM Group document cites Long-Term Capital Management. This was something that helped prompt the foundation of the Gold Anti-Trust Action Committee, because it was speculated that LTCM was short around 400 tonnes of gold and that this short position was the main reason the Federal Reserve orchestrated the LTCM bailout. Soon after that the Bank of England announced that it was selling approximately 400 tonnes of gold. This was a surreptitious bullion bank bailout and demonstrates clearly what a dangerous game the bullion banks are playing.

"A bank does not even have to be buying gold at a particular time to be able to use it as collateral against which it can trade, sell forward, and lend gold. If a bank has gold held in an unallocated account, or a forward purchase on its books committing a producer to sell it gold later, it can use these gold assets as collateral for additional gold trades."

As an investor in an unallocated account, that is all you need to know to understand that your investment is not safe. CPM Group has warned you that your investment is put at risk for the gain of the bullion bank. If an investor takes a risk he at least should be eligible for the gains won by that risk. Instead the bullion banks give the impression that the investor in unallocated gold is "holding metal" while the banks are selling it or loaning it many times over.

The CPM Group document then climaxes with a real peach:

"In the second quarter of 1998, one of our mining clients had a forward sale on its books which was coming due at an unattractive price. This was a silver trade, with a forward sale locked in at $5 coming due when silver was trading at $6 per ounce. In fairness to the producer, its bank had forced it to sell forward, forcing it to use forwards instead of more efficient options positions, as part of the terms of a revolving credit facility the bank had extended the producer. On our advice the producer rolled the position forward and sold that month's silver output at the higher $6 spot price. The chief financial officer of the mining company asked us why the bank, which had a $1-per-ounce profit on the position, would allow them to roll the position forward. The explanation is that having a silver position on its books at $6 per ounce provides the bank silver assets that it can collateralize many times over, which is worth a lot more to a bank than $1 per ounce in one-time profits."

I don't think it could be much clearer. Creation and selling metal that does not exist is a phony supply, but when the market treats it as indistinguishable from metal in the vault, the effect is to suppress prices.

The CPM Group document concludes:

"A major bullion dealer at one of the most active bullion banks in the world made a comment to me in early 1998 that succinctly put in context what one's approach should be toward those comments about how bullion banks and monetary authorities were colluding to drive the price down. The banker said, 'Do these people have any idea whatsoever how gold is traded?' The answer is no."

Of course I would disagree. At GATA we understand very well how gold is traded and how paper gold is sold to those who will accept it and physical bullion is sold only to those who will not.

In a recent essay Christian defended "fractional reserve" operations in the bullion market by saying of GATA:

"They then went on to rail against fractional-reserve banking, implying that it was the root of all evil. They seemed to ignore that fractional reserve banking has made modern life possible, and has been around since at least the time of Christ."

Fractional reserve banking has made modern life possible?

Mr. Christian, you have to be kidding me. What fractional-reserve banking has made possible is all modern financial crises, including the current one.

Fractional-reserve operations, and particularly ones where the customer is not fully aware that he is invested in one, are accidents waiting to happen. The following account of the collapse of Johnson Matthey bullion bank in 1984, written by Randy Strauss of Centennial Precious Metals in Denver, helps to bring this into focus:

"On Friday, September 29, 1984, the financial implosion of Johnson Matthey Bankers precipitated a hasty weekend meeting called by Rothschild's bullion director Robert Guy between representatives of bullion peers Sharps Pixley, Samuel Montagu, Mocatta, and Goldsmid. Kleinwort Benson Chairman Michael Hawkes (on behalf of Kleinwort's bullion subordinate Sharps Pixley) and Evelyn Rothschild feverously pitched their terrible plight to the Bank of England in the person of Kit McMahon, Governor Leigh-Pemberton's right hand. If JMB were not bailed out in time for Monday's business, the thusly enwisened market would surely commence an unsatisfiable bullion run that would topple the bullion banks like dominoes, spreading onward to owners like Kleinworts, Standard Chartered, and Midland Bank to threaten the whole commercial banking system. In this instance the Bank was moved into agreement that the interests were too vital to let JMB fail, and to save the wider institution it bought from Johnson Matthey PLC (for a price of 1 pound) the isolated arm of JMB that was insolvent, effectively nationalizing the under-water bank to preserve market confidence, thus preventing that first domino from falling."

Johnson Matthey Bankers held a lot of central bank accounts in gold, and so the Bank of England had to step in. JMB was sold by the Bank of England to Mase Westpac. Westpac was sold to Republic National Bank then at the end of 1999 HSBC bought Republic National Bank.

The Bank of England bailed out JMB and saved the bullion bank (and perhaps several other central banks?) from almost certain bankruptcy. At that time many central banks still had sizeable reserves of gold, as this was before the Bank of England sold half its reserves. This was before the central banks sold, leased, or swapped more than half of their hoard of 30,000 tonnes of gold.

Today very little bullion is available to rescue the bullion banks when they face the next run on their less than adequate stocks. In silver there are no large above-ground stocks. There are no central bank hoards of silver. The bullion banks are even more vulnerable than they are in gold to a run on their stocks of silver.

Throughout history fractional-reserve operations have led to the failure of banks. Just because there may be no failures for many years is no guarantee that the system will not fail.

It is up to investors to perform due diligence. Unallocated accounts where the account holder is an unsecured creditor and where 100-percent backing, third-party audits, and unencumbered title are not plainly stated mean that the investor owns only a paper promise. He does not own bullion.

If you make sure that you own real bullion, you will then help bring an end to the unscrupulous practice of the bullion banks in making paper bullion out of thin air, which serves only to suppress the value of any investment in real metal.


Adrian Douglas is editor of the Market Force Analysis letter ( and a member of GATA's Board of Directors.

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Preliminary Feasibility Study Completed for Seabridge Gold's KSM Project

Study Reports Reserves of 30.2 Million Oz. Gold, 7 Billion Lbs. Copper,
133 Million Oz Silver, 210 Million Lbs. Molybdenum

Base Case Life of Mine Cash Operating Costs Estimated at $144/oz. Gold Produced
(Net of Base Metal Credits)

Toronto -- Seabridge Gold Inc. has announced results from a National Instrument 43-101 compliant preliminary feasibility study of its 100-percent owned KSM project in northern British Columbia, Canada. The study was prepared by Wardrop, a Tetra Tech company, a major international engineering and consulting firm.

Seabridge President and CEO Rudi Fronk says, "The study confirms that the KSM project now hosts the largest gold reserve in Canada and one of the largest in the world. KSM is projected to provide an extraordinary mine life of more than 35 years with estimated cash operating costs well below the current average of the major gold producers. Estimated capital costs are in line with those of comparable, large-scale, undeveloped gold-copper projects and KSM has the advantage of being located in a low-risk jurisdiction."

For the complete Seabridge Gold statement: