How Are 'Risk Free' Bonds Performing Relative To Gold And Silver?

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The sudden and highly unusual appearance of Blackrock CEO Larry Fink and his entire Blackrock board of directors in London to meet with Prime Minister Keir Starmer in London was noted in this post last week: https://jensendavid.substack.com/p/blackrock-ceo-larry-fink-sashays

London is ground zero for the global rigging of physical gold and silver prices using promissory note gold and silver contracts that can be created there without limit. And Goldman Sachs’ former Global Head of Commodity Research Jeff Currie’s statement in November 2021 that Exchange Traded Funds (ETFs) short their client shareholders’ silver bars into the market potentially implicates Blackrock which operates the world’s largest silver ETF iShares Silver Trust ‘SLV’ also draws our attention.

The estimated silver short position of 4.2 billion (B) to 6.4B oz. in the London cash/spot physical silver market represents an existential risk for the banks and financial market player that have created this large short position.

Incentives for containing gold and silver prices are twofold: 1) when gold and silver prices have historically run, interest rates have run higher in concert thereby limiting loose monetary policy that drives both speculation and financial markets higher and 2) gold and silver directly held as physical metal by investors competes with financial market investment products limiting profits that can be gleaned by financial market players from investors maintaining their assets in the financial system.

Now the financial industry uses Treasuries as an investment benchmark touting their yield as ‘risk free return’.

However, when taking a closer look, the thought occurs that perhaps the moniker is mere jest as even government bonds, in addition to equities, have material risk including:

1. Monetary Policy Inflation Risk - as central bankers print currency and goods price inflation appears and persists, the value of the principal and returns of bonds are eaten away by the degradation in buying power of the currency;

2. Currency Risk - sudden changes in relative currency values can yield both a rapid decline in buying power of currency and a sudden rise in interest rates. Payment of bond yield in currency by federal government bond issuers may be guaranteed however the buying power of that currency is not guaranteed.;

3. Banking & Financial System Risk - banks are highly leveraged directly holding only a small fraction of their assets in cash needed to allow withdrawal of cash by bank deposit holders. As interest rates rise and loan defaults rise and then financial asset values decline, deposit holders stand merely as ‘unsecured creditors’ in the legal system. A banking system upset can knock-on to a broad financial system upset, as brokerages and traders also depend on their bank deposits to function, thereby distressing financial assets held for clients.

4. Ownership Risk / Expropriation Risk - Starting first with Patrick Byrne more than a decade ago then further amplified recently by David Webb, most US financial securities held by brokerages and fund managers are legally owned by securities depository CEDE and Co. leaving investment holders with only a claim on these assets (an ‘IOU’ from CEDE) but ownership legally with CEDE. Webb warns that in the next financial crisis, these assets will be expropriated by other entities standing first in line in front of investors.

Physical bullion directly held by investors does face day-to-day price fluctuation risk however many of the above risks are mitigated.

How Have Gold And Silver Performed Relative to ‘Risk Free Return’ Bonds

Given the above and other risks of government bonds as commonly held, one would expect that they would have nominally outperformed gold and silver. However, that is not the case as can be seen in Figure 1.

Figure 1 - Gold & Silver Compared To Treasury ETFs ‘TLT’ (long term Treasuries), ‘SPTI’ (intermediate term Treasuries), ‘SPTS’ (short term Treasuries) from 2015 to Present; source: TradingView.com

The paradox of market reality compared to the story given by the financial industry and central banks is not lost on everyone and we see a nascent global shift into gold and silver and increasing physical demand for both metals.

This may be what has motivated Larry and Blackrock’s board of directors to visit Keir Starmer as sufficient physical demand leads to demands for delivery on cash/spot contracts sold into the London gold and silver market - and ultimately default by the contract sellers (the 'shorts’).

Default can then trigger rapidly spiraling prices for gold and silver inducing massive losses by the London market players that have sold short the metals, likely for decades, thereby further triggering additional demands for delivery. That would end the London gold and silver price rig overseen by the Bank of England since 1987 and drive much higher global interest rates.

Cash/spot gold and silver contracts sold into London’s gold and silver market do not typically allow for cash settlement and the liability with these party-to-party contracts is for metal delivery to the buyer on demand.

In the case of a run, the consequences for many of the financial market players that have sold an estimated ~ 5B oz. of silver and 400 million oz. of gold in largely unbacked cash contracts into the market would be terminal especially if these metal sales have been by a few participants.

Frauds always collapse with time.

Let’s continue to watch to see if we can determine who the players are and also see how this situation develops.

Best regards,

David Jensen