Maloney just came out with this today about the Comex. [youtube]http://www.youtube.com/watch?v=hUtlrZX9aTE[/youtube]
Of course it was JPM given that they are a proxy for the NWO (according to SilverDoctors). Here's a pic from the weekly JPM/Comex/NWO planning meeting. Love the decor.
This misinformation is such a load of permabull shyte that I am surprised it hasn't been moderated. :lol: I am glad to see here it is only posted in order for the piss-taking value. :lol: I am starting to think the writers of ZH have serious mental issues.
COMEX doesn't have to do anything. There are a number of alternate options given to contract holders to settle delivery. COMEX don't need to "pay out", because they are not the contracts holders. That is why COMEX won't default.
Sorry, wrcmad, it looks like you are quite experienced with all this Comex stuff and I'm just new to all these complex rules... But what does this mean? "802.B. Satisfaction of Clearing House Obligations If the Clearing House is unable, using the defaulting clearing member's collateral as set forth in Rule 802.A, to satisfy all of the clearing member's obligations to the Clearing House then such obligations shall be met and made good promptly by the Clearing House pursuant to this Rule 802.B." Doesn't this mean that Comex is the guarantor of the delivery of whatever has been promised by a member and if the selling member cannot for any reason make good of his promise to deliver then Comex will do it on his behalf? (Of course, attaching all possible collaterals of the defaulting seller?) "All of the foregoing shall be deemed Losses to the Clearing House, which shall be apportioned by the Clearing House to Loss categories associated with the Base Guaranty Fund Product Class producing the Loss." Doesn't it look from here that Comex can incur in losses? And that they are indeed the guarantors of transactions? "802.C. Application of Funds to Avoid Clearing House Insolvency Notwithstanding any requirements to reserve funds set forth in Rule 802.A or Rule 802.B, if at any point following a default, the Clearing House will be unable to timely fulfill its obligations following application of the funds described above in the priority described above, such that the Clearing House is in imminent danger of defaulting on its obligations or being declared insolvent, then the Clearing House shall be entitled to apply to such obligation any available funds reserved from the defaulting clearing member's collateral, the CME Contribution or any Tranche (other than the Commingled Tranche, which shall have been exhausted pursuant to paragraph 802.B.4.iii), in the foregoing order of priority, if necessary to avoid a default by the Clearing House or a declaration of its insolvency." Here they are actually talking about what to do when the clearing house is in "imminent danger of defaulting" or "being declared insolvent". Don't they mention actions needed to "avoid a default"? It looks to me that there must be a possibility of default, then. Am I missing or misunderstanding something? (I'm not a lawyer so please forgive me)
Fair and legitimate questions. I'll try to answer as briefly as possible..... feel free to step in if you see any errors in my reply. However, you have to step back a bit, and look at the process from the start. Sure, 802.B (and 802.C) are there to confirm the integrity of the exchange, but jumping to 802.B skips all the safeguards leading up to that rule... and do you really think an exchange acting as counterparty to such leveraged products would really be that stupid to leave itself wide open? The notion is pure fantasy, and a favourite of the metal bloggers. Right from the start, you have to understand that initial liability lies with the Clearing House Members. This is not John Smith Spectulator who stupidly decided to enter a contract on COMEX that he could not cover. The Clearing Members are the broking members... the JP Morgans, ABN Amro's etc. So, knowing these type of investment bankers/bullion banks... do you think they would leave themselves open to losses by a clients default? NO. Each broker has risk management safeguards in place to protect them selves from their clients with their own internal systems. These include initial margins, maintenance margins that are marked to market daily, credit assessments and exposure limits etc. for each individual client. This should ensure (from an internal level) that no client can get themselves into trouble should price move against them. Second to this... and this is a very little understood, but very poignant fact regarding COMEX: It is the short seller who gets to decide on delivery. That's right. Only the short seller can issue a "Notice of Intention to Deliver". The long cannot initiate the delivery process. The short seller gets to decide when and how metal is delivered, not the long. The other option for the short is to offset the short with a long. Now, given it is the short that gets to decide whether or not delivery will occur, and this has to be processed through their broker (Clearing House Member), do you think the broker is going to allow the notice to be lodged without the ability to deliver? That would leave the broker exposed. And if you can imagine a firm like JP Morgan leaving themselves exposed to losses by a reckless client, then we have a hypothetical wild enough to continue to the next series of safeguards: So, now lets imagine that all these hoops have been jumped through by the client, the "Notice of Intention to Deliver" has been lodged by the clearing member on behalf of their client, and the client fails to deliver the metal? In this case, the Clearing Member (the firm that the short's contract went through) is required to deliver the metal (per 7B02). Yes, it is the JP Morgan's who have to cover the losses. These losses can be covered by the firms in a number of ways: 1. All Clearing Members are required to post maintenance performance bond levels to CME Clearing, which represents the minimum amount of protection against potential losses of a positionor portfolio. This is calculated by CME depending on each Member's exposure. 2. All Clearing Members need to lodge sufficient and acceptable collateral to back up their bond. (Rule 802.A) 3. CME maintains a backup fund - contributed by all Clearing Members as safeguard funds (Rule 816) 4. Clearing Members must maintain Capital Requirements which are capable of meeting their obligations. The CME (COMEX) also has safeguards in place against Clearing Members: They have calculated exposure limits on Clearing Members. They have position limits in place for Clearing Members for the current month - the current (or spot-month) being the only contracts deliverable. Currently position limits are 3000 gold futures contracts, and 1,500 silver contracts. So, given the three levels of safeguards against any form of default, there is one other point to consider: It is common rhetoric to quote COMEX leverage in triple-digit figures against physical warehouse holdings. It is also often asked "but what if all open interest called for delivery at the same time?". Lets, just for a moment, ignore the critical fact that this can't happen - as explained before, longs can't call for delivery... only shorts can initiate delivery. Let's also pretend that COMEX acts as a one-stop-metal-buying-shop, instead of it's intended design and use for hedging. Also pretend that 100% of contracts, rather than the historical low single figure % of contracts are delivered. So, remembering that only the current month (spot-month) contract can be delivered, let us pretend for a moment that all open contracts were delivered tomorrow. The current spot-month, September 15 gold contract, has current open interest of 91 contracts. Each contract is for 100oz's. That totals 9,100 oz's. Current COMEX warehouse inventory is 6,877,745 oz's - so, September is currently covered by a factor of 756 times. But September is not a good month to use as an example. Looking forward to Oct 15, OI is currently 20,505 contracts (2,050,500 oz's). Pretending it is now Oct 1st, and all contracts are delivered, current OI is covered by the warehouse at better than 3:1. Coverage is actually better than this, because the bulk of deliveries (or "Settlements") of COMEX metals are by way of "Exchange For Physical" (EFP), which is an entirely legitimate, normal and efficient mode of transferring ownership of physical metal inventory without a Warrant ever being attached. It is more popular because it avoids the costs and fees associated with COMEX warehouse stock settlement. For me, in the world of COMEX gold or silver trading, the question then becomes.... what is a default? And can anyone explain to me how it actually would occur?
Thanks for taking the time for the exhaustive reply. "The long cannot initiate the delivery process." Ok, I had no idea about this, and it's pretty obvious, then, that with this arrangement is impossible for someone to default in his ability to deliver metal (unless he is a moron or he does it on purpose). Given this, a member can default only if for any reason he cannot cover his short position with a long one, right? When can this happen? Only if there is no one willing to take the other side of the contracts? Or if he doesn't have the money for the initial margin payment? Both quite unlikely, it seems to me. And then, even if it happens, there are various protections -yep, I knew about those- and only at the end Comex guarantees the transaction even if it has to take a loss. But, if I recall well, the Comex is not obliged to deliver actual metal and can settle with cash. So, the question at this point is not if Comex can/will default but: why is there metal at all in Comex?
Nearly correct. If a short cannot make good on delivery, they have a number of options available to avoid default: 1. They can buy a long to offset. - as you mentioned, what if they cannot cover their short? When would this ever happen? All the short holder has to do is bid up a little for a long to entice another short seller, and they will be covered. Anyone would take the other side because the bid up in price would guarantee them a profit, whether that be another long holder who was planning on delivery but decided to take the easy pickings this month, or an arbitrage trader who took the other side and offset it in a forward spread..... there are many different possibilities. If you offer a guaranteed profit (free money), you will be covered. This type of trading is why you often see price volatility at the time of futures expiry. 2. They can roll the contract over to the next calendar month by entering a calendar spread themselves - this defers the need to consider delivery for at least another month, and gives them time to sort out their position. 3. If they have to, they could lease physical gold held in a COMEX-approved warehouse by another owner, and thereby complete delivery on his short position, allowing them further time until the expiry of the lease to provide physical delivery (or cash, or off-Exchange settlement if the terms of the Lease allow such). Yep, but realistically it has never has to get to that - as the COMEX protections ensure the brokers are liable first. Legitimacy. The exchange guarantees that if a futures buyer wants to take delivery, the amount of gold or silver indicated on the contract will be delivered - this ensures the spot price reflects the true price of physical, and is not just 'paper trading'.
Ok, then last questions - and thanks for taking the time to reply, hopefully this thread will be useful to many others as it has been for me - - why do people purchasing physical even care about checking what happens in Comex? Is it relevant at all? As far as I understand now, all their members want to do is leveraged trades on "spot" movements without the intention (or possibility, for that matter) to actually take delivery of the metal (even the Hunt brothers couldn't do it during their almost successful attempt at cornering the market, right?). - can the info about what happens there be used by us small fries for our physical purchases? Like, for instance, has the total number of contracts open at any point in time any correlation/proportionality with subsequent swings in spot price? Or would we be just better off ignoring completely what they are doing in their own parallel world?
There is gold in the Comex because investors/traders choose to store their gold in the Comex warehouse, which can then be easily sold. The Comex can't guarantee the delivery of physical gold, the only thing they can guarantee is you will be cash settled, which is what their guarantee is as stated. The open interest to total eligible/registered gold is 5:1, so if everyone wanted delivery and every oz is available for sale/delivery, they will get 1 in 5oz they ask for. I know you keep saying Comex is a true reflection of the physical price of gold, but when only 0.08% of open interest take delivery, and when there are 140,000 contracts traded each day (that's 14 million oz of paper gold, traded every single day, vs 8 million oz of total gold in Comex warehouse, so each oz of gold is traded almost twice EVERY DAY), it is clear to me that it is just another vehicle for big banks and hedge funds to trade in pieces of paper. Add in that the price smashes. If you were a true physical seller, would you dump hundreds of millions worth of gold in 20 seconds, just so that you can get 3% lower for your gold? Source: http://research.perthmint.com.au/20...ex-stocks-open-interest-and-delivery-figures/ http://www.marketwatch.com/investing/future/gold
One word... arbitrage. It is the leveller, and ensures price is connected with physical. The futures market is designed to hedge physical, and it serves that purpose well. It is not designed as, nor meant to serve as, a bullion dealer or supplier. So it is expected that most participants don't intend to take delivery. There are much easier and cheaper methods of procuring physical. Hedgers comprise the largest group of participants in the futures markets, and are usually commercial or institutional commodities producers or consumers. Speculators are the second major group of futures players. These participants are very important in providing liquidity, and keeping a market efficient. Speculators assume price variability risk, which the hedgers are trying to offload. I use the info all the time, so my answer would be yes.
Fair call... sort of. Their regulations guarantee delivery of physical in accordance with contract specs. They guarantee in the unlikely event of a default you will be cash settled. That is a favourite hypothetical of the dooms-dayers, and is a very misleading fallacy. As already discussed above, this can't happen because: 1. Only the spot month is deliverable. 2. Only the shorts can initiate delivery. 3. Delivery does not have to (and usually doesn't) occur through a COMEX warehouse (EFP's) To imply everyone would want delivery is misleading - the sellers determine the terms of delivery, not the buyers. To imply "they will get 1 in 5oz they ask for" is also misleading based on this fact. So, it follows logically that net open interest is irrelevant. Given this, net cover is also irrelevant. I don't see the significance of this at all. Futures contracts have no claim on physical, so to refer to them as "paper gold" is false and misleading - then to compare to trading volumes to warehouse physical stocks is also irrelevant. Yes, futures are a vehicle to trade contracts... that is what it is designed for. The volumes are a sign of a healthy market. No. Why do you ask?
