Infinite Gold

by Adam English, Outsider Club What if I told you that your gold could be multiplied over and over… that a single bar of gold can be turned into a nearly endless hoard of the yellow metal? I certainly couldn’t blame you if you think I was either full of it or living in a fantasy land. But it’s true. And all you need to get started is a central bank, a bullion bank, and a bunch of greedy brokers. Pass around that gold bar, and it’ll turn into a nearly infinite supply of gold… Welcome to the bizarre reality we know as gold rehypothecation. It may be perverse, fraudulent, and just about the worst idea ever, but don’t doubt for a second that banks and brokers are minting an endless supply of gold — at least on paper. How It Works Few people understand exactly how far this goes, how it affects the market, and how it creates tremendous risk for everyone out of what we’re assured are safe “reserves.” The Fed has this musty, subterranean vault in New York filled with gold that isn’t doing anything. How terribly boring, right? Luckily, a bullion bank executive wanders along and has a proposal… He wants to borrow the gold, pay some interest on it, and then return it at a later date. And the Fed loves it. After all, it gets to profit off of some metal that’s otherwise gathering dust in its basement — and pump some more wealth into the market in the interim. Other central banks love the idea, too, and the bullion banker has an easy time getting similar deals from them. So the bullion banker now has possession of a bunch of borrowed gold, but can’t really do much with it, because virtually no one accepts gold payments. So he needs to monetize it while turning a profit greater than the interest due to the central banks. Thankfully, everyone loves gold as collateral… So our bullion banker hypothecates the gold, meaning he gives the gold — or, more commonly, pledges access to it — as collateral for cash. Now is when the real fun begins, as that gold gets multiplied time and time again… The creditor is now making money through the loan and has gold as collateral if anything goes wrong. And no need to stop there… Remember, the creditor has a guarantee that it’ll at least get the gold if the loan defaults. So the creditor goes and pledges the gold that was pledged to it as collateral for another deal. The gold has now been hypothecated again, or rehypothecated. In the United States, this presents a problem. You see, rehypothecation is capped at 140% of the value of the original collateral. But bankers and brokers are crafty, and they easily found a way around the rules. They just need to get the money out of the country… So they bury legally binding clauses into their lengthy contracts to get U.S. clients to let them move a client’s assets and funds over to subsidiary accounts in the United Kingdom. Now there are virtually no limits. 100% of any pledged assets (such as collateral) can be rehypothecated in the UK. So the gold that came from the Fed was used as collateral for a loan. Then that collateral was used as collateral. Then again. And again. From bank to broker to investment firm, the original bullion has become the basis for an endless chain of guaranteed gold. Since each and every agreement, loan, and contract depends on it, it is mitigating the risk of all of these deals if they go sour. On paper, there is a whole lot of gold being used as collateral, but the actual amount of the precious metal hasn’t changed. What could possibly go wrong? Continue Reading>>>

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