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The Gold "Rehypothecation" Unwind Begins: HSBC Sues MF Global Over Disputed Ownership Of Physical Gold
That paper gold, in the form of electronic ones and zeros, typically used by various gold ETFs, or anything really that is a stock certificate owned by the ubiquitous Cede & Co (read about the DTCC here), is in a worst case scenario immediately null and void as it is, as noted, nothing but ones and zeros on some hard disk that can be formatted with a keystroke, has long been known, and has been the reason why the so called gold bugs have always advocated keeping ultimate wealth safeguards away from any form of counterparty risk.
...we read with great distress a just broken story by Bloomberg according to which HSBC, that other great gold "depository" after JP Morgan (and the custodian of none other than GLD) is suing MG Global "to establish whether he or another person is the rightful owner of gold worth about $850,000 and silver bars underlying contracts between the brokerage and a client." The notional amount is irrelevant: it could have been $0.01 or $1 trillion: what is very much relevant however, is whether or not MF Global was rehypothecating (there is that word again), or lending, or repoing, or whatever you want to call it, that one physical asset that it should not have been transferring ownership rights to under any circumstances....
As for our advice: move any gold out of the LBMA or CME warehouse system immediately. And only treat any GLD investment as a day trading vehicle that can and will be lost the second there is a global liquidity or solvency freeze, because that particular asset will be wiped out as easily as "C:format C:"
The judge handling the bankruptcy said today he would deal in January with issues about distributing physical goods, such as gold and silver bars, after lawyers for some customers said they couldn’t get their share of the payouts because bars can’t be broken into pieces.
There was a twist: as most regulars here know, the key topic of the past week, of December, and potentially of 2011, is the limitless "fractional Prime Broker lending" of assets-cum-liabilities (and when it comes to the realization that one's gold itself may be rehypothecated, via GLD, it is no surprise why paper gold is plunging, with the expected delayed effect of slow comprehension) in an infinite loop of daisy chained counterparty exposure, also known as rehypothecation.
SAN FRANCISCO (MarketWatch) — Gold futures fell nearly $100 Wednesday before recovering a bit, weighed by year-end profit-taking and a drop in the euro that signaled a new level of anxiety about the region’s sovereign-debt crisis.
The decline blew the yellow metal past some long-held technical levels that exacerbated the selloff. Silver futures, which often shadow gold’s moves, were down 7%; copper lost nearly 5% and palladium sank 7%.