Pyramid Scheme

The Precious Metals Variety

In the 1970s, Bag’s grandfather was a bartender at an Irish pub on the south side of Chicago, right by Midway Airport. The beautifully crafted wooden bar ran the length of the place, with about 25 stools, a couple of pool tables, a few vending machines, and, of course, its share of regulars. One of those regulars was Jimmy, the local bookie. Fun guy. He taught Bag how to read the “Racing Form” for the local horse tracks. He was also responsible for introducing parlay cards to Bag - who was at the time, maybe 14 years old. Jimmy was always telling him to pass the cards out to his friends - or the people down at the local country club, where Bag worked as a caddy. It was immediately obvious what a money-maker those cards were for him. So much so, that when Bag moved out to Phoenix at the age of 19 and got an apartment across the street from the local pool hall; he started making his own Parlay cards. Over the next decade, that blossomed into a cash-generating machine.

By the end of that ten-year run, on an average Football weekend, Bag was booking over 200k in action. What is interesting is that Bag rarely had more than 10k in cash on hand to pay the winners. An obvious question might be, how is it possible to take 200k in action, with only 10k in reserve? The answer is balance. As a bookie, you are always trying to equalize the amount bet on both sides of a game. This is best accomplished by altering the spreads. For those not familiar with how sports betting works, think of the spread as a “price”. When properly altered, it prompts your client pool to stop betting certain teams and start betting others. Balance was the key to maximizing profits and minimizing risk. On the rare occasions where a client wanted to bet big on a game, you never said no - you took the action. If it created an imbalance, the risk, if need be, could be quickly eliminated by selling that action “up the chain” to a deeper-pocketed bookie, like Jimmy.

Playing bookie was just a side gig. Bag’s actual profession was as a precious metals dealer. There is a significant overlap in the Venn diagram of what it takes to be successful in both worlds. Precious metals, like bookmaking, is a low-margin, capital-intensive business that requires maintaining balanced positions in order to grind steady profits. This is best illustrated with an example. Client comes in on a Saturday and wants to sell 1000 ounces of silver. At today’s market value, that is roughly 100k. If the silver market opens down 5% on Monday, you’re suddenly stuck 5 grand on that trade. Avoiding that scenario requires getting on the phone immediately after the client leaves, and selling that 1000 ounces “up the chain” to the refiners & bullion banks. This locks in a small 1-2% profit, maintains steady inventory levels, and eliminates market risk.

Perhaps it wouldn’t be necessary to sell up the chain if the number of buyers and sellers coming through the door were about equal. But, after decades in the business, Bag could tell you with certainty that is never the case. The hive-mind of the public always acts in concert. They are either all buying or all selling. In response to the constant one-way traffic, the entire precious metals industry is structured like a pyramid. On the bottom are the local coin shops and pawn shops. They sell up the chain to the gold and metal exchanges, who in turn sell to the refiners, who then sell to bullion banks. Even the bullion banks sell up to a handful of multinationals that bankroll the entire industry. Think HSBC, Scotia, BofA, UBS, Deutsche, BNP, and, of course, the ring leader, JPMorgan Chase.

Sitting atop the Precious Metals pyramid is not without its perks. As titans in the industry, they can see before anyone else which way the wind is blowing. That vantage point gives them the opportunity to position themselves properly, ahead of the crowd, and make some guaranteed money. Most of us would be satisfied to just front-run the crowd. But not the banks. They want both tits in their mouth. Of course, doing that would require them to set their scruples aside. So that’s what they did. More than once, the precious metals trading desk at JP went an entire calendar year without booking a losing day. That could never be accomplished without criminality.

So how do they do it? They muffle the physical market by cloaking it in a paper derivatives wrapper known as “The Futures Market”. They intentionally make the futures market substantially larger in financial scale than the physical market its supposed to represent. This allows the futures to set the price at which physical trades are made. As a consequence, the biggest player in the paper market (JP) is the proverbial elephant in the bathtub. The water level (price) is whatever they want it to be. Anyone looking to invest millions or billions into Gold or Silver doesn’t just walk into their local coin shop and pick up a truckload of Krugerrands. No. They have to go to a market big enough to handle that kind of action. In this day and age, there is only one option - the futures market, aka JPMorgan’s playground.

The derivatives market in Metals, for all practical purposes, was born in 1980. The general public, fresh off a decade of raging inflation and endlessly rising Metal prices, got seduced into getting long gold and silver, in a big way. Back then, most buyers wanted physical metal. But because physical supplies were limited and a pain in the ass to move around, many people turned to the futures market and went long “paper” gold and silver. The banksters were happy to assume the role of bookie, as there was no sense in them parting with actual gold & silver, if some of the marks buyers were willing become a ledger entry instead. This was the birth of Banksters’ short position on the Comex. It was designed to leverage profits from falling metal prices in the 1980s, which it did.

JP and the other banks significantly increased their short positions in the 1990s for a completely different reason. As we discussed above, the public always acts in concert. In the 1990s, they were selling relentlessly, right into the teeth of a generational bear. We had 20 sellers walk through our door for every buyer. With JP and the other bankers sitting at the top of the pyramid, the metal the public was selling flowed up the chain to them. Arch criminals that they are, they decided to rig the price lower by overwhelming the longs and flooding the futures market with “paper” metal. This way, they wouldn’t have to pay so much for the river of actual metal coming through their doors. In other words, they built a position in physical metal at well below the TRUE market-clearing price.

The banks’ short position grew even larger in the 2000s & 2010s. Grasping why requires an understanding of how futures markets function. The winners, oddly, are rarely those who correctly predict long-term price moves. More often than not, the winners are those with the deepest pockets, because they can move the short-term market price at will in the direction they want, steamrolling those with less capital to risk. A good, but not great metaphor would be No-limit Holdem. Any poker pro would tell you most pots are not won by the best hand. They are won by the guy willing to put the most chips at risk. On the rare occasions when two parties are both willing to put ALL their chips in, the cards will break the tie. The poker metaphor diverges from futures in that, in poker, you can occasionally hold a guaranteed winner and know it. In futures, you are always beholden to movements in market price, so no guarantees unless you can push around the price at will. That fact allows those with the deepest pockets in the futures market to BLUFF with impunity. And BLUFF they did, for 40 years.

The breathtaking price run-up of Silver in the last year is all the evidence required to know the banks no longer control the price. A bigger player has arrived: Industry. Sure, the pocket depth of individual companies is no match for the banks. But in aggregate, the corporate world dwarfs the banks. And to be blunt, most industry doesn’t give a F*ck about the price. The higher the price, the more they will pay, and they will be happy to do so because their very existence depends on it. The fact industry needs ACTUAL metal is the mechanism breaking the 40-year stranglehold of the banks. Industry is calling their bluff, in real time. What a JOY it is to watch.

Ted Butler (RIP) was right. The banks perpetrated a decades-long price suppression scheme, and it is finally coming to an end. You can see it in the exponentially growing quantity of parties standing for delivery on the Comex, as well as their dwindling inventory. Several of the banks listed above are underwater and hemorrhaging billions every time silver clicks higher. In fact, Bag would argue that several of them are already dead, their carcasses just haven’t floated to the surface yet. But make no mistake, as soon as they “mark to market,” and they will; we will find out which of those banks are zombies, and which aren’t. It takes a hubristic mix of greed and arrogance to do what those banks have done. Good riddance.

Hubris always comes with a price. The bank’s price is that they don’t learn from their mistakes. How does Bag know? Shortly after Bitcoin became a trillion-dollar asset, the first thing the Wall Street banks did was wrap a futures market (and an ETF) around Bitcoin. Once again, they are intentionally steering capital away from the actual asset into their Playground. It’s the very same playbook they have used on Metals. The good news, though, is that the corporate world, through the precious metals market, has given us all a roadmap for combating their paper scheme… It can be summed up in seven words:

SELF-CUSTODY your Bitcoin, F*CK the banks.