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Old 12-12-2011, 11:20 PM   #1
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FOFOA article: MF Global, paper hedging, buy-sell spread

Has anyone notice the buy-sell spread for physical gold increasing lately, as mentioned below?

Quote :
Unambiguous Wealth 2 – The MF Global Chronicles

.........This MF Global bankruptcy is like a shockwave spreading out over the whole marketplace. It's like an EMP that could fry the matrix in a flash, once people begin to understand its implications. It's already had far-reaching consequences.

One group that has so far been disproportionately affected is the non-bank physical gold dealer network. Many large and small, retail and wholesale gold dealers used the COMEX paper market to hedge their physical business. Say someone walked in and sold a dealer a thousand ounces of krugerrands. That dealer would immediately go to his MF Global online account and short ten COMEX futures contracts worth 100 ounces each.

So these dealers often have large cash balances sitting at the ready so that they can earn the spread from any customer without taking the price risk. It was not their contracts or COMEX positions that disappeared when MF Global went bankrupt, it was their large cash balances. Active positions were rolled over to other clearing houses, but the cash disappeared.

I have heard about one large gold dealer that had $5M in cash at MF Global. Many smaller dealers had hundreds of thousands sitting there. And they were all with MF Global for one reason and one reason only, Lind-Waldock. "Lind-Waldock was the Charles Schwab of commodity brokers" according to one of my readers who trades commodities. It was the longest-standing discount commodity broker in the world. It had been around for more than 40 years and many big names used Lind-Waldock. It was bought by MF Global's parent company back in 2005, but up until a few months ago, the commodity trading website still said Lind-Waldock at the top.

So for whatever reasons, word of mouth, residual credibility or whatever, the physical bullion dealer network was disproportionately with MF Global when it filed for bankruptcy. And ever since this went down on October 31, it has had an impact on the physical market in the United States. The liquidity these dealers used to hedge their business is not available right now.

So imagine that you walked into a dealer to buy or sell 50 gold eagles today. When he makes that deal with you, he is now taking on position risk. So he's going to have to pay you less for your eagles—or charge you more if you're buying—in order to lower his risk. Previously he would have hedged that risk on his MF Global account. So if you've noticed that the buy-sell spread on physical has gotten wider over the past month, that's why.

(Turd Ferguson reports today that: "Sources tell me this is already happening as bulk physical gold is currently being sold and delivered at $1950/ounce." h/t burningfiat)

And now that you've got that picture in your mind, imagine the dealers' conundrum with intraday $200-$300 price swings, or if the market mechanism for paper gold price discovery breaks down entirely. Some of these dealers have already said they will never go back to paper hedging, period, even if they get their money back! Paper gold is nearly finished.

I'd like to mention now that Jim Sinclair has been absolutely ON FIRE talking about the implications and the shockwave of consequences emanating from the MF Global bankruptcy. In his latest great interview he says that by putting the OTC derivative positions of a bankrupt clearing house ahead of its client's deposits, this case will ultimately break the very market mechanism for price discovery. He says the system ($IMFS) is already broken, but whereas Lehman Bros. was the "Lehman event" for Main Street, MF Global is the "Lehman event" for the insiders. When your clearing house becomes a questionable counterparty, it's over............
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Old 12-12-2011, 11:43 PM   #2
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buy premiums look the same on tulving. i havnt called them but on the site they are the same.
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Old 12-13-2011, 07:23 AM   #3
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Buy premiums on apmex also seem to be unchanged, but I appreciate the comments in the OP just the same. Definitely something to keep an eye on.
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Old 12-13-2011, 12:44 PM   #4
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The VERY IMPERFECT widget at (JV with eBay) has:

-- AGE premium of 10.9% over spot (partly explainable because of recent sharp drop in gold)

-- SGE of > 80% over silver spot (likely a glitch, often seen there, but worth keeping an eye on)


And when I am back, I will report after hitting my bank and the coin shop. For me, the best to track physical shortages is the coin shop premia for PMs.
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