Following the relative quiet of the season’s holiday, a word of warning and an urge to start buying gold is very prescient.
Posted by Adam King on December 27, 2011
Rehypothecation Means You Should Be Buying Gold Now
December 27, 2011 – Following the relative quiet of the season’s holiday, a word of warning and an urge to start buying gold is very prescient. Traders and investors are already familiar with the newest financial buzzword, rehypothecation. But you may, as yet, be unaware of its meaning and what the activity means to the greater markets and to gold holders.
It emerged after the collapse of MF Global. Depositors got phone calls one Monday morning from an unknown representative who simply said the bank had gone bankrupt and their money was with a “trustee.” We’re not talking about chump change here, either. It was first reported in the main stream media that $600 million worth of customer funds had been used to finance the $6.3 billion bad bet on European debt that brought the bank down. Later, Forbes reported the number is actually over a billion dollars, $1.5 billion, to be precise. That’s a lot of customer money.
While I’m sure Jon Corzine’s testimony before Congress and printed statements that customers “may” see their money is very comforting to those loyal depositors who gave the bank their money, it is rather disturbing to learn that the commingling of accounts undertaken by MF Global is completely legal per the CFTC rules and a lawsuit currently pending in the southern district of New York reveals that the same activity is being perpetrated with gold and silver accounts.
Rehypothecation means, as the lawsuit between MF Global and JP Morgan reveals, that banks are effectively using clandestine gold and silver accounts, owned by depositors, as collateral on increasingly risky investment bets. As in, different banks are using the same accounts on separate bets. The lawsuit is over who actually owns about 800,000 contracts, which is relatively small, but separate banks using the same accounts, belonging to customers, in order to make bets is a sign that the paper gold and silver market is now hazardous to physical markets.
The only answer in this market is buying physical gold and silver. Just as the $707 trillion dollars worth of derivatives in existence brought the financial to a precipice in 2008 and effectively decoupled markets from reality, the rehypothecation scheme will produce a schism of the same order in the gold and silver markets, given time. It is your duty to yourself and your family to remove your fiat money from the paper people by buying gold and silver; but you must now also take some form of delivery when you buy gold and silver to stop rehypothecation and its coming disastrous consequences.
Senior Staff Writer – Certified Gold Exchange
US Gold Market