Monday, March 8, 2010

Is China Getting Long CDS Contracts on Govt Debt Which Require Payment in Physical Gold?

This post is in conjunction with my earlier post today.  It seems as if Janet Tavakoli, a widely acknowledged expert in derivatives and structured finance - both real world and academic - has published a piece today, published by the Huffington Post, in which apparently there are CDS buyers who are calling for contracts that require gold as collateral rather than euros or U.S. dollars.  Although she does not specifically mention who the buyers of these swaps are, I believe it makes sense that China is one of the primary buyers of CDS protection of U.S. Treasuries being that they have close $1 trillion in exposure to Treasuries, and might want to "hedge" their postion a bit with something other than fiat paper and would be asking for something tangible like gold as collateral.

My friend "Jesse" of Jesse's Cafe Americain has written an excellent commentary today which is accompanied by a link to Ms. Tavakoli's article.  Here's the link:  LINK.

As Jesse points out, it would make sense that China would want to receive settlement in something other than dollars if the U.S. Govt credit rating is downgraded.  In fact, gold makes the most sense because a U.S. downgrade would also mean that every other fiat currency is likely in the toilet.  My guess is that it's one of those "where there's smoke, there's fire" type of deals.  Hopefully we can receive further confirmation on this.


  1. This makes too much sense to happen. I would add that there is not enough gold to satisfy CDS trading amounts. Still very interestign and Zero Hedge is runnign a piece saying that GATA has clear evidence of undeliverable metal short contracts.

  2. Great Dave! Glad to see a post about it.

    So how would something like this unfold? The arguments on the Ticker Forum were that the agreements would be between private parties and the US Gold reserves at Fort Knox would not be in jeopardy.

    It was acknowledged that it would probably cause a temporary spike in Gold/Silver but it would be short-lived by the US/IRS putting a larger tax on physical gold/silver sale transactions.

    Jesse at Cafe Americain brought up the excellent point about the US probably can't stop this by taking out credit derivatives, because it is a whole profit center for banks and if brought to falter would put the banking industry on the skids - again.


  3. If there is follow-through in market participants for the demand of gold-based contracts, it will be increasingly likely that oil will one day be traded in only gold.

    And with oil traded in gold only, all other commodities will follow.

  4. This story is horse manure. The sleaze bags rig markets they don't take sucker bets unless they can rig the payment method. Look a the COMEX and the recent oil derivatives in China. All the markets are rigged and when they have an open ended price exposure the contract can default at no or little cost. China can cause a currency event in the US$. Why would anyone bet against it? No reason. More likely JPM and GS have taken US$ CDS event risk bets themselves and "blamed the Chinese". More likely Congress will use these claims to label "China" a curreny manipulator and not pay on foreign T bills.

    This is more likely than JPM and GS making a sucker bet on event risk in the US$.

    WASHINGTON—Last month, the U.S. Treasury Dept. revealed that China sold a record amount of Treasury bonds last December, raising a question over how China—a top hold of U.S. debt—could potentially alter the fortune of the U.S. economy.

  5. @Anonymous: Your points are well-noted and there's for sure a possibility that your thesis is correct. But the story didn't come from typical media sources or plants like Gartman.

    And Jesse told me he has a contact who he checked with who confirmed that Tavakoli's intel was solid.

    China could for sure cause a currency event w/the dollar, but they have too much to lose to allow that to happen because of their exposure. In my view, they have been methodically using dollars to buy natural hedges, some subtle and some not so subtle, against the time when holding up the dollar is beyond their control. The UST CDS gold settlement trade would support that move by the Chinese.

  6. @Ryan - you are dead right. The story Gartman dropped last week about the major Middle Eastern oil producer converting oil sales from dollars into gold as soon as they are booked supports that idea.

  7. @Anonymous #1: The mistake being made on Denninger's site is that they are assuming that the gold being reported by the U.S. Govt is actually still in Ft. Knox. In truth, that gold was supposedly moved to "deep storage" at West Point, however there has not been a physical independent accounting of that gold since Eisenhower was President.

    GATA and GATA-related analysts have ample evidence suggesting that U.S. gold has been largely leased out. The U.S. has never done anything to refute the evidence. The gold actually sitting in Ft. Knox is a very small amount and is for the benefit of tourists.

  8. @gyc: thanks for the heads up on the zerohedge piece. I've probably already seen the material but I'll take a look to see how they present it.

    Anyone interested should go to and explore the site archives.

    The fact of the matter is that just the notional amount of precious metals OTC derivatives issued by banks is far greater than the amount of physical gold/silver that would be available for physical delivery if they were all triggered. We don't know anything about how these contracts are structured or trigger-events because of the secretiveness of the OTC derivatives market. Banks report OTC derivatives to the BIS, which publishes a global bank holdings report quarterly. JPM is by far the largest holder of precious metals OTC derivatives.

  9. Only makes sense going forward that real payment for real stuff (read as metals for essentials, oil, gas, etc) be demanded while cheapo Walmart crap can be settled in fiat.

  10. Anyone know if there are other PM exchanges besides COMEX and the London bullion market?

    It appears that the gold miners are still very much correlated with the paper price of gold... they have not disconnected in the same way that the physical gold price has disconnected (from the paper price).

  11. Actually, until the SPX faded in the last 20 mins of trading today, the HUI index was for sure disconnected from the smash in paper gold.

    Dubai has a physical bullion exchange but it is small, China has five small regional exchanges, TOCOM is a paper exchange in Japan - not sure if it's backed with physical gold the way the Comex is supposed to be. The Comex and LME, of course are "fractionally" backed LOL.

    When the real price discovery and physical delivery demand kicks in, that's when the real shit is hitting the fan.

  12. "China could for sure cause a currency event w/the dollar, but they have too much to lose to allow that to happen because of their exposure"

    It all depends on how much gold the Chinese are really holding and how much they have to extract out of their ground. When the $ goes the global economy can enter an even playing field. China will still be the super producer but they won't need to target the U.S consumer to receive U.S $'s. The standard of living for the Chinese should increase as we enter the "freegold" economy as described by FOFOA. The world has much to gain when the $ system burns and freegold puts the counter-balance in place that is needed at this time.

  13. Agree with everything you say there.

  14. Greek police stormed a government printing

  15. I just read what Jesse had to say and this one thing got me.

    "If swaps and contracts and leases are being made on the US gold reserves, the people then are the subjects of a monumental theft and fraud."

    Well, we have been subjects of a monumental theft and fraud since the FED was formed in 1913. The love of money is the root of all evil and they not only love it but control it to enslave all of humanity.

    The devil does indeed rule the world and he is personified via central banks from the west.

    Joe M.

  16. My view would be that (if this is true) the gambit involves the expectation that the gold can not be delivered, but that the failure to do so will cause the price of gold to go to the stratosphere. If China has enough of the yellow metal-and I expect they will be positioned with a few boats full of physical, if they aren't already- they will do fantastically well whether the contracts are honored or not.


  17. Edwardo, I have it from a source who verified Tavakoli's information as at least being the "word" out there about the gold collateral demands from China that the Chinese will deploy the scenario you outline. Only it will be when they've already accumulated enough gold to be the world's largest bona fide, verfied holder of gold. Forcing default will be a strategy to force a massive upward revaluation of the price of gold. There's a little more to this that my source will not share with me unless I can throw enough educated "shit" against the wall that such something will elicit a "wink."

  18. Dave,

    If the given scenario with China is correct, what do you think the timeline would be? The US extend and pretend almost up? They sure seem to have been keeping it going for much longer than many people believed possible.

  19. China can never become the largest bona fide verified holder of gold because the largest bona fide verified holder of gold are the Indian house wives. This group of individuals hve been hoarding gold since Seneca complained about the export of Roman gold for spices, silks and peacocks all manufactured in India. The sisterce were welded together by links to form traditional Indian jewellry and rich Indian familes have this stuff in their possession today and only bring it out at weddings which is really something to behold. The really rich families throw rolled gold instead of rice at the bride and the temple sweep it up at the end to pay for the marriage.

  20. @Anonymous-re: China-timeline: Good question. Depends on how long it takes them to accumulate enough gold. On paper the U.S. has 8000 tonnes. It ain't there but it's what's reported and it's what's been reported, roughly,since the last audit over 55 years ago.

    Figure China claims a bit over 1000 tonnes. Let's say the real number is 2500-3000 tonnes. I'm betting they want to amass 10,000 tonnes, but who knows for sure. If the U.S. has zero, then maybe China only needs 5,000 tonnes plus all the gold they have in the ground...I dunno.

    As for putting a timeline on the U.S. currency implosion, Ron Paul says within 2-3 years; someone I know who has brilliant information and insight believes within a year. Because the shit that is happening now I had expected to be happening by 2005 back in 2002, my timeline always sucks. It could happen w/in a year but I'm erring toward RP's timeline. So say, w/in 3 years.

    Your thoughts?

  21. @Anonymous re: Indian housewives: excellent point and I agree that, as a whole, the Indian population collectively is the largest holders of gold. BUT, I think for purposes of "having the most and making the rules," the relevant entities would be organized Govt/Central Banks and their relative cache of 400 oz. bars.