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Janet Tavakoli

Janet Tavakoli

Posted: March 30, 2010 02:10 PM

How to Corner the Gold Market

What's Your Reaction:

First, let your greed overcome all regard for the stability of the global market, and overcome your aversion to illegal activities. Stay away from people like me, and fly under the radar, because I'd like to see you thrown in jail. Most Washington officials, regulators, and Wall Street managers are probably safe to hang around, especially if you cut them in for a piece of the action or give them vague promises of a future lucrative job.

Pump up the gold story. Get your friends to tell retail investors to buy some gold every month. Get your buddies in the financial business to offer exchange traded gold funds (ETFs) that claim to buy physical gold. This will sound safe to retail investors, but in fact, the ETFs are very risky. This will serve your purpose when you are ready to start a panic. These particular ETFs will allow the "gold" to be commingled with the custodian's gold, and the custodian can lease out the gold. Moreover, the "gold" custodian can give it to a sub custodian that the manager doesn't know. The sub custodian can give it to yet another sub custodian unknown to the original custodian. The manager will never audit the gold, and the gold is not "allocated" to a particular investor. Since this is an "exchange traded" gold fund, investors will probably assume the gold is regulated by the Commodities Futures Trading Commission (CFTC), but it isn't. By the time investors wake up to the probability that there is very little actual gold backing their investment, your plan will be ready to execute.

Now you are ready to execute your plan.*

Step 1: Let everyone in the futures markets know you are buying gold, speculating in gold, and want to take physical delivery. It helps that China openly announced it wants to increase its gold reserves; the market isn't looking too hard at you. At first, act like you're naïve. Buy on margin and pyramid up by reinvesting your profits when you have them.

Step 2: Get the banks to let you finance your gold.

Step 3: Book up all of the space at gold refiners, so that no one else can do it. Buy as many gold mines as possible.

Step 4: Create credit derivatives contracts that give you the option to ask for your pay-off in gold.

Step 5: Pick the future month to make your big move. You will go long gold futures and demand physical delivery.

Step 6: Secretly and habitually start making some large early purchases in non-U.S. markets. That way, when the U.S. markets open, gold should follow the upward trend.

Step 7: The bullion banks and dealers that have over-hedged their physical gold with short positions will now be squeezed and have to make margin calls. Offer to cancel some of your forward contracts in exchange for early delivery of gold. This will temporarily relieve the bullion dealers' pain on their short positions, and give you control over even more of the gold supply.

Step 8: You and you friends have pinched off the gold supply and control most of the free gold supply having locked it up in your own vaults and warehouses. You are all long a lot of futures contracts, and you will all demand physical delivery. You now have the naked shorts exactly where you want them.

Step 9: Rely on bankruptcy and bailouts to get what you want. Normally, you would be afraid that you would never get paid, because your demands would bankrupt the naked shorts. But the naked shorts are likely to be unwary hedge funds or other sophisticated investors, and no one cares if you bankrupt them. Other naked shorts are likely to be the bullion banks, and they are all being bailed out by the Central Banks who will lend them what little gold they have left and then beg the IMF for whatever they have.

China is a wild card. If it is not part of your scheme and decides to lend its gold, it could dampen your profits or even upset your short squeeze. But China may not want to help out your victims. Why should they? If China buys enough gold mines and increases its reserves enough, it may be in its interest to befriend you. Your combined ownership will have made the futures markets irrelevant. Together you will not only have cornered the gold market, you will have cornered gold.


Note: This post was shortened and adopted from a longer article distributed by Tavakoli Structured Finance, "How to Corner the Gold Market," March 30, 2010.

* The Hunt brothers used a similar earlier strategy in an attempt to corner the silver market in 1979-80 as recounted by Stephen Fay in The Great Silver Bubble (Coronet, 1982).

Janet Tavakoli's book on the causes of the global financial meltdown and how to fix it is Dear Mr. Buffett: What an Investor Learns 1,269 Miles from Wall Street.

Update: This commentary was released in long form, "How to Corner the Gold Market (Extra Edition)," Huffington Post, April 13, 2010.