MF Global Lesson – Don’t Buy Futures, Only Physical

If you buy any paper gold, there is a risk of default. You should only accept physical gold, and never paper.

Some people say “Buy a future, pay cash, and hold a COMEX warehouse receipt. There is a specific numbered bar that belongs to you. You pay a small storage fee. Your investment is safe and liquid.”

There’s one problem. Your broker was MF Global.

The MF Global bankruptcy showed that COMEX warehouse receipts are worthless. If you owned a COMEX warehouse receipt through MF Global, you are SOL.

This illustrates a technicality is the US brokerage system. If you own stocks, bonds, or COMEX receipts, they technically are *NOT* owned by you. They are owned by your broker and held in trust for you.

Under normal circumstances, it makes no difference. However, when your broker commits fraud and declares bankruptcy, you get cheated. You thought you had a secure investment, and then you’re just another creditor in bankruptcy court.

When you own a COMEX warehouse receipt, you don’t actually own it directly yourself.  You own it via a broker.  If that broker pulls a Corzine and robs you, then you are SOL.

You also can be exposed via gold ETFs. Suppose that the GLD ETF was using MF Global as their broker. According to the fund prospectus, fund shareholders get hit with any loss, in the event of a default.

This story on zerohedge had an interesting bit. Two MF Global customers claimed the same bar of gold! They thought they had a specific numbered bar that belonged to them. MF Global told two customers that they owned the same bar!

There’s another technicality. Suppose an MF Global customer has a warehouse receipt for a 100 ounce bar of gold, valued at $170,000. The customer paid in full and has $170,000 equity in his account. However, MF Global is only required to keep a 5% margin requirement at the COMEX. MF Global can steal the remaining 95%. Jon Corzine stole $161,500 of the customers’ equity and spent it gambling on European bonds.  After bankruptcy, the customer can’t claim his gold bar, because MF Global’s account only has 5% equity and not the 100% equity that the customer had.  The customer becomes a creditor in bankruptcy court just like every other creditor, even though he had a paid-in-full COMEX warehouse receipt!

This is the classic fractional reserve banking scam. Two MF Global customers were given “demand deposits” or “warehouse receipts” on the same bar of gold. A customer thought he had a full reserve warehouse receipt, but MF Global stole the equity in his account.

This post on zerohedge illustrates the problem. All MF Global customers are now creditors in bankruptcy court. Even if you had a paid-in-full warehouse receipt, you’re only going to get 65% or whatever the other customers get in the bankruptcy. The customers with a warehouse receipt are treated the same as all other creditors, getting paid off a % of the equity in their account.

Amusingly, adding insult to injury, MF Global customers are being charged a store fee from COMEX, from the time of bankruptcy until final liquidation. Jon Corzine stole your gold bar, and he’s still charging you a storage fee, even after he got caught stealing!

This quote tells the point:

The bottom line is that apparently some warehouses and bullion dealers are not a safe place to store your gold and silver, even if you hold a specific warehouse receipt. In an oligarchy, private ownership is merely a concept, subject to interpretation and confiscation.

There is literally *NO* safe investment.  If you invest in a checking account or bonds, you get robbed by inflation.  If you invest in the stock market, you underperform true inflation (gold).  Stocks have earnings and pay a dividend, but you have all the fraud and waste and theft associated with a large corporation.  If you invest in paper gold (ETF or COMEX receipt), you can get robbed by a crooked fund manager or broker.  If you put gold coins in a safe deposit box at a bank, the bank can steal it, and then it’s your word against theirs regarding the contents of your safe deposit box.  Plus, safe deposit box contents must be reported to the IRS/State.  During the 1933 gold confiscation, your bank was legally required to rob you, if you held gold coins in a bank safe deposit box.  If you hide gold in your home, you can be robbed by common criminals.  If you hide gold in your home, you can also be robbed by criminals wearing badges and uniforms.  They will claim “Only a criminal hides gold in his home!”, and via “asset forfeiture”, you have the burden of proof to try and recover your property.

That is one of the brilliant aspects of the State financial scam.  There is literally *NO* safe investment!

I used to fall for the “exponential growth” model of investing.  That’s a lie.  If your returns don’t outperform inflation, then your investments follow asymptotic growth and not exponential growth.  If my investments underperform inflation by 10% per year, then the maximum value of my savings is 10x the amount I save per year!  (Don’t pro-State troll with “The CPI is an accurate measure of inflation!”  Hopefully, none of my regular readers are dumb enough to fall for that one.)

This post on zerohedge had another interesting bit.  MF Global lost money speculating on European bonds.  The market value of those bonds decreased, but if those bonds are held to maturity without default, then MF Global might have profited.  According to that article, those bonds were sold to JP Morgan Chase at a 5% discount to fair market value.  Even after MF Global’s bankruptcy, MF Global customers were still getting fleeced!  That 5% was taken from MF Global’s customers/creditors, and transfered to JP Morgan Chase’s executive bonus fund.

There was another loophole.  The CME has a rule that the clearing fund reimburses customers in the event of a clearing default.  HOWEVER, this was not a clearing default!  MF Global never defaulted on its obligations to the CME.  Instead, Corzine stole segregated customer funds!  That isn’t covered by the CME clearing fund rules!  You have to read the fine print!  However, there may be some liability for the CME and COMEX, because they had an obligation to regulate MF Global.  There is an argument that the clearing fund shouldn’t be used to reimburse MF Global’s customers, because then other banks would be responsible for MF Global’s fraud.  They would get bailed out by the State anyway, if they were forced to reimburse MF Global’s customers.

This post on zerohedge was also interesting.  It agreed with some of the points I made.  Jon Corzine isn’t some fool who misplaced $1.2B of customer money.  He knew exactly what he was doing.  He raided segregated customer accounts to cover a shortfall elsewhere.  Jon Corzine was probably smart enough to leave no trail of E-Mail messages or paper.  He paid off his subordinates to not testify against him.  Most of MF Global’s other executives are well-connected scum; they will find high-paying jobs elsewhere, in exchange for keeping quiet and playing stupid when they’re asked to testify.

This illustrates the problem with the State banking system.  If you invest in banks, stocks, gold ETFs, or COMEX warehouse receipts, there’s nothing that prevents someone dishonest from robbing you.  The only safe investment in physical gold and silver hidden someplace safe.  Even then, you’re at risk for being robbed.  With physical gold and silver, you can be robbed by common criminals or criminals wearing badges and uniforms.  There is literally no safe investment.

3 Responses to MF Global Lesson – Don’t Buy Futures, Only Physical

  1. Yep. I’ve been telling people for years that warehouse gold is sold on a fractional reserve basis and doesn’t really exist. No one believed me. Now they are all screwed. Oh well. I’m sure next time I warn them about anything they will say I am crazy again. Sucker born every minute and they never learn.

  2. Also, two more points.

    First, there is vastly more “gold” that is held in gold deposit receipts than has been mined of gold throughout all of history. So where did the phantom gold come from if not from earth? Mars? No! The answer is it doesn’t exist.

    Second, when you buy gold now, the government demands that the sale be registered with them for “tax purposes”. What that means is that they have your address and amount you should have so they know where to come and get you when gold is declared illegal a few years from now.

    • “Start an gold/silver/FRN barter network” is one of my favorite agorist business ideas.

      If I’m ever prosecuted, I’ll tell the jury “WTF? The prosecutor is going after me but not Dick Fuld and Jon Corzine?”

      Here’s another interesting bit. The “real” (cash) price of gold may start to diverge from the “official” COMEX/CRIMEX price. For example, the “official” price of gold might be $2000/oz, but if you want an actual physical gold coin, you may have to pay $3000+/oz.

      After the MF Global blowup, many investors are saying “WTF? Why would anyone every buy a future or hold a warehouse receipt?”

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