Is COMEX a giant Bitcoin’s Mt. Gox?

On November 29, 2015 by Phil Champagne

The general public including many television announcers have made some comments about Bitcoin that clearly indicates a giant lack of understanding. It is understandable as the technology is somewhat still recent of only a few years. Just as email addresses were seen as a strange thing with the “@” sign in the early 1990s on major new shows such as NBC’s Today Show:

So I had a good laugh when I heard references to the CEO of Bitcoin arrested when in reality they meant to say the CEO of the Bitcoin trading exchange website Mt. Gox. Mt Gox went bankrupt for its lack of bitcoin after allegedly been hacked and the bitcoin stolen. This would be similar to saying the CEO of Internet emails when referencing back then the CEO of say, AOL.

Regardless if the problem originated by fraud or by a hack of the website, the result was the same: the sum of all bitcoins in the user’s accounts was much higher than the actual number of bitcoins stored and held by Mt Gox.  As long as people did not request to withdraw their bitcoins from their account, the trading could go on unaffected. However, at some point, there was a “run on the bank” where more people were asking to withdraw than to deposit bitcoins. Since this was essentially a musical chair game with very few chairs (bitcoins) for the amount of traders, it became obvious once the music stopped.

The amount of registered silver and gold at COMEX are a tiny amount. What’s different is that for convenience, the majority of traders do not take delivery since that will imply having to store securely their gold and silver when it is already “safely” stored at the COMEX. And this is a big distinction. For Bitcoin, it is easy for users to keep and store their bitcoins themselves while for COMEX, the convenience is perceived as just too great. In other words, a disbalance between the of amount registered real asset compared to the sum of all user accounts is more difficult to keep for long with an asset that is easy to get delivery of and store ourselves (bitcoins) compared to an asset with a more challenging process for secure delivery and storage (gold and silver bricks).

While Mt. Gox got into this situation by a hacker stealing its client’s bitcoins, it is somewhat unlikely COMEX would have its gold and silver stolen. However, nothing prevents the creation of more paper gold or silver then there is available for delivery. Since it is understood that most will never take delivery, this is a known fact and actually has become acknowledged in the trading community as just fine. The believe is that if more traders were to request it, the actual metals would come from different sources to satisfy this demand. But would it? What happens if this gets so out of whack that if any major “iceberg hits the Titanic” kind of event happened there would be a run on the COMEX. We currently have this strange situation developing right now, and you can read more about it with an article from Bill Holter.

What is important to recognize is that Gold and Silver price influence interest rates. While it is recognized by everybody that the Federal Reserve are setting and influencing the interest rate, it is often dismissed that they also manipulate the price of Gold and Silver – the “barbaric metals”. That’s actually funny considering that even Alan Greenspan, the father of the ambiguous “Fed Speak”, has said so in relatively obvious terms:

Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise. –Alan Greenspan, July 24, 1998.

Let’s not kid ourselves, all should agree that gold and silver are indeed safe assets with their value lasting over the long term through wars, paper devaluations, empire extinctions and natural cataclysms. When the trend on the price is flat or down, it is easier to make a population only consider investing in government bonds. But if the price was constantly and steadily rising just as the price of food does, this asset class would become — to the average mom and pop — an obvious alternatives to bonds. Regardless, any price manipulations always end and the agents of the government know this, but they also know that a great alternative is to make it volatile so as to classify this asset as such and consequently scare the general public.

I’ve discussed before how real estate market with rent control creates distortions and unintended and bad consequences. Why would anyone who agrees with this would not agree the same about interest rate always amaze me. It’s somewhat analog to a “rent on currency”.  The Federal Reserve and its agents have been at this price manipulation for quite a while with some disruptions every few years punted down the road with more manipulations, only to make the problem worse. I’m confident those traders who believe they can still get gold and silver from these “Mt Gox”-type future exchanges whenever they decide will face a dramatic surprise just as we saw those trading bitcoins on this early Bitcoin exchange.

The question is, when will the music stop?

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