International Forecaster Bob Chapman discusses the Chinese derivative time bomb set to explode very soon. Upon detonation it may result in a complete collapse of the COMEX gold, silver and commodities markets and pretty much a total SHTF scenario. Excerpts from Mr. Chapman’s article are below, but to get a complete understanding, it is recommend that readers follow this link for a complete overview of Floating Derivatives In Uncertain Waters Increases Risk of Drowning :
Now, suddenly, we hear that China is considering walking away from responsibility on certain OTC derivative contracts held by foreign banks as counterparties, which contracts cover various commodities, in the event that those contracts result in losses to their sovereign wealth funds.Â You may recall from prior discussions in the IF that these unlisted OTC derivative contracts include massive short positions in both gold and silver, but especially in silver, and are used to back the listed COMEX short positions of the large commercials in both gold and silver.Â In other words, the CFTC is allowing COMEX commercials to justify their ludicrously concentrated short positions in both gold and silver by backing those positions with contracts about which the CFTC has no direct knowledge, over which they have no regulatory authority thanks to the Commodity Futures Modernization Act, and which the CFTC knows are backed by foreign governments outside the jurisdiction of the US who can renege on those contracts with impunity!!!Â How’s that for reckless regulation of commodities by the CFTC?!Â And now everyone’s worst fears are about to be realized as China announces its intention to renege!!!
These two developments, namely the Chinese government’s promotion of gold and silver to its public as an investment, along with its intention to renege on its OTC derivative contracts covering certain commodities, are obviously interrelated.Â If you are going to ask your public to invest in gold and silver in a massive way in order to save both your and their bacon, while at the same time diversifying a goodly portion of your trillions worth of dollar-denominated paper assets into physical gold and silver, you might expect that this would put massive upward pressure on gold and silver prices.Â But if you also had massive holdings of short positions in OTC derivative contracts covering both gold and silver, would you not be shooting yourself in the foot?!!!Â So now we can understand why the Chinese have decided to renege.Â Otherwise, they are caught in a trap!Â
The Chinese may very well renege on their positions as this WSJ’s Chinese Defaults Worry Foreign Banks points out. But, Bob Chapman does suggest, in the article referenced above, that there is hope for the COMEX:
If the very angry, and very duped, Chinese renege, the entire COMEX is going down, big-time baby!!!Â The whole system is about to blow if the Chinese renege on these contracts!!!Â We wonder what the Chinese want in return for not reneging!Â Whatever it is, we can guarantee you that the US government is not going to like it very much.
The only hope is that the China gets something in return for NOT defaulting on their obligations. It is an interesting question – what will the Chinese be given in return for not defaulting?
Perhaps they get Taiwan?
Or, perhaps another scenrio: An orchestrated manipulation of the US Dollar in the upward direction? This may be beneficial to the Chinese as they would be able to close out most of their gold/silver positions, while also acquiring more gold once the price reaches a reasonably lowerÂ level. This may be a crazy idea, but it may, in part, satisfy the Chinese. Perhaps the US Dollar isn’t dead — yet.
Ideas here are welcome. Other than my suggesting above I’m drawing a blank this early in the morning.