Continued Controversy About Manipulation/ Lack Of Physical

Last week's discussion of the position-limits controversy and a supposed scandal with the SocitaMocatta Toronto vault gained enough traction that this week's Financial Sense Newshour podcast revisited the subjects. There were some people who did not like what Jeffrey Christian had to say in defense of his opposition to position limits, enough so that he's been invited to appear on next week's podcast. Regarding the ScotiaMocatta controversy, Nick Barisheff was on again this week. He repeated his belief that the person who saw a storage room that was near-empty of gold was not the custodial vault but the storage space for the retail desk on the main floor of Scotia's main Toronto branch. He also said that the fund he manages, which has physical gold stored with Scotia, is regularly subject to physical audits.


Before I weigh in, some disclosure. I know exactly where the retail-sales desk at Scotia's main Toronto branch is, because I bought some physical silver there some time ago. I also bought, and later sold, a little physical gold. When I was down there, the line was slow-moving but it wasn't that long. Most of the people ahead of me were there to buy or sell foreign currencies, as the foreign-exchange desk and the bullion desk are combined. Back then, between one and two years ago, the lack of any crowd convinced me that there wasn't any kind of precious-metals bubble then extant. Had there been, the line-up would have been much longer and there would have been far more employees staffing the desk. (Half the booths were unstaffed when I was there.) The time I was down there to buy a little gold was the same time when the 100-oz bar shortage had erupted on the silver market. A fellow ahead of me was there to sell a non-standard bar that looked, by my gaze-at-a-distance estimate, about 100 oz in size. It looked like a paperweight and was poured. Although I had come down to buy gold, I was tempted to try and buy that bar - even if Scotia's procedures would have prevented it. Since it was unlikely that Scotia would have had any (other) 100 oz bar, I gave up on the idea and bought some gold instead. I might as well admit that buying a hundred ouncer would have cleaned me out, even at the lower silver prices prevailing back then.

That gold I bought, as I mentioned above, I later sold back. I got full credit for the proceeds in my Scotia bank account, which I withdrew without any trouble. The only bullion products I have now from Scotia are four 1-oz silver Maple Leafs. Other than an account which I set up solely for the proceeds of the gold sale, which now contains only a few dollars, I have no accounts with Scotiabank or its affliliated subsidiaries. By normal standards, the extent of my dealings with Scotia (and my risk if anything funny's been going on) are minimal. I don't own a single share of any stock issued by Scotia, not a single dollar in the form of any debt instrument. All I have is that few bucks in a deposit account. My own reaction is influenced by my Canadianness, both emotion-based and knowledge-based.

I have to say, flatly, that the possibility of Scotia perpetrating a massive fraud in which gold held for clients was defalcted and sold off, is infinitesimal. Had I been less jaded, I would say right off the bat that it was utterly impossible. Canada's big banks have been criticized often in certain circles, but the idea that Scotia would be another Enron would be shocking even to confirmed bank-bashers. The big banks are criticized for being stingy, for being too reluctant/unimaginative to lend, or for giving too little service for too much fees extracted. Never for engaging in a company-wide fraud.

The surviving big banks in Canada have never done so, even during the Great Depression and lesser economic calamities. The last major bank to have engaged in corporate-wide (not-rogue-employee) fraud was the Home Bank in 1923. Not since then.

Given we Canadians' relative probity in banking matters, the possibility that Scotia is perpetrating an Enron-scale fraud is as shocking as, say, would be a revelation that the U.S. military's nuclear arsenal is full of duds without one working bomb among them.

[Now, that would be an interesting conspiracy theory...]


To get back to the podcast, Frank Barbera announced that he's become a believer in the current U.S. equity bull market. He was on the bearish side until very recently; contrarians might want to take note. He also believes that upwards moves in stocks will preface a big move up for precious metals once reflation turns into the nastier sort. The hosts also mentioned Jim Puplava's hunch that the climax for stagflationary troubles will hit in 2014.