About Mr. Christian's '100:1' Comment at the CFTC Meeting in March, 2010
In March, 2010 the CFTC held a meeting about metals futures contracts. Mr. Christian, head of the CPM Group, amazed everyone when he revealed that less than 1% of metal in unallocated accounts exists, and if 1% of all owners of unallocated gold or silver accounts withdrew their money, the banks would go bankrupt! Or so it would seem
, if you believe the thousands of silver bugs spreading that rumor.
We're silver bugs too, but we only like the truth. So here's the truth:
The Claims: What Everyone Says
Everyone, so it seems, is blogging and posting that there is 100 times as much paper as real metal in unallocated accounts. Mind-blowing if true! Others say there is 100 times as much paper gold as there is real gold in the world. Even more mind-blowing if true! Let's see what was said at the CFTC meeting in March, 2010:
- paper gold/silver - Paper gold or silver is any type of gold or silver that you can buy where you do not have physical possession of the metal. Common examples are allocated gold/silver accounts, unallocated gold/silver accounts, pools, ETFs, warehouse receipts, and metals futures.
- fully backed paper gold/silver - Paper gold or silver where the metal actually exists. All allocated accounts work this way. Some unallocated accounts and pools work this way, too (for example, Perth Mint certificates and the Kitco pool claim to be 100% backed). Most gold and silver ETFs work this way, as well.
- partially backed paper gold/silver - Paper gold or silver where you have a claim for the full amount of gold or silver, but it may not exist. Many unallocated accounts work this way, where if they have 100 ounces of paper, there may be 90 ounces of metal, or 10, or 5, or even 1. Futures contracts do too, where some short sellers have (or will have) the metal, others do not (naked short sellers).
What Mr. Christian Said
"Precious metals are financial assets like currencies, T-bills, and T-bonds;
they trade in the multiples of a hundred times the underlying physical and so
people buying them are voting and giving an economic view of the world
or a view of the economic world."
What It Means
He is referring to people buying and selling futures contracts on the COMEX (and likely LBMA OTC trading, too). He is saying that there are 100s of ounces of silver and gold traded for every ounce that backs it. For example, COMEX may trade 50 billion ounces of silver in a year, whereas the COMEX bullion dealers only have 50 million ounces, so thousands of ounces of paper are traded each year for every ounce backing it. That is something people were generally aware of before the CFTC meeting (anyone familiar with our home page knew this).
What It Does Not Mean
His statement was not referring to unallocated accounts (it was referring to gold backing futures and similar positions). It was "multiples of hundreds" to 1, not "100:1". And he did not
say anything implying that unallocated accounts were backed by only 1 ounce for every 100 ounces sold. It does not mean that paper silver or gold is bad (some is, some isn't).
What We Knew Before the Meeting and Found Out During the Meeting
Before the meeting, it was generally known (to people who follow silver or gold reasonably closely) that there are 100s of ounces of silver and gold traded for every ounce delivered, or that it is backed by. Everyone knew that there were naked short sellers.
What was learned -- and this is important -- is that unallocated accounts are not fully backed by silver or gold. This is obvious if you think about it, but nobody really discussed it before the CFTC meeting. And while there is no indication that there is only 1 ounce of silver or gold in unallocated accounts for every 100 ounces of paper, it is important to know that nothing prevents unallocated accounts from having little metal behind them.
How Much Silver (or Gold) Backs Unallocated Silver (or Gold)?
It depends on who the silver or gold is purchased from. In some cases, it is 100% backed (the Kitco Pool and the Perth Mint pools both have claimed to be 100% backed by metal). In other cases, there may be no metal backing it (in the case of some scams). According to the CPM Group in 2000 (see Bullion Banking Explained
), many banks have unallocated accounts with just 10%-20% of the metal that should be backing it (5:1 to 10:1). They say that one dealer uses 40:1 (2.5% of the metal backed). The worst case mentioned was a dealer that used 100:1 before it nearly collapsed.
GATA guesses that there may be 45 ounces of paper in unallocated accounts for every ounce of real metal. But there is no data behind that, so it isn't even an estimate -- it's just a guess (perhaps based on real-world data, but they do not provide any to back it).
If 1% of Unallocated Account Holders Withdrawl Their Gold, Will Bullion Banks Run out of Gold?
No. Since the CFTC meeting, it is almost certain that 1% of owners of gold/silver unallocated accounts have withdrawn their gold/silver. And if what the CPM Group said is correct and still applies, it would take at least 10%-20% to cause a problem. That also assumes that there is no new silver or gold available that can be bought quickly to replenish what was taken.
Even If Unallocated Accounts Work on a 100:1 Ratio, There Isn't 100 Ounces of Paper for Every Ounce of Physical!
This is important to understand.
Even if unallocated accounts really do only have 1 ounce of metal for every 100 ounces of paper, that does not mean that there are 100 ounces of paper in the world for every ounce of physical! If 50% of the world's gold and silver is in unallocated accounts, and the 100:1 ratio is true, that means that there is just about 2 ounces of paper for every ounce of physical.
How Much Unallocated To Allocated?
It is important to know or estimate how much of the world's gold and silver is in unallocated accounts, versus allocated accounts. Why? Because allocated accounts are 100% backed, and if 99% of all gold and silver was in allocated accounts, even if unallocated accounts were at 1000:1 backing, there would be less than 1 ounce of paper gold for every ounce of physical.
So how much unallocated gold is out there, and who owns it? Unfortunately, we have no answer for that.
Could There Be 100 Ounces of Paper for Every Ounce of Gold?
It would be nearly impossible. Think about it.
There have been about 4.25 billion ounces of gold mined to date, so if the "100 ounces of paper per ounce of physical" thing were true, that would mean that there was 425 billion ounces of paper gold out there, worth roughly $500 trillion, about 60 ounces per person on the planet. $500 trillion. That's about 10 times the value of all the stocks in the world.
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