Jan 16, 2012
A lot of the gold community has suddenly, and somewhat erroneously, as you shall see today, got very interested in SCD (stock certificate delivery) and DR (direct registration). These items have a role to play, but sadly, the situation is perhaps more subtle than Ann Barnhardt realizes.
When Ann's brokerage was closed as MFGlobal imploded, there was panic and misunderstanding, and wild statements made. YOU were told.... "sell everything now, because Ann's brokerage just closed down!". Let's peer beyond this fog of "are my accounts safe?!?!" panic that has currently enveloped many investors, and see where the real SCD and DR situation stands:
I emphatically recommended SCD (stock cert delivery) and to a much lesser extent, DR, years ago, into the lows of 2008, when it appeared the system could close down. MF Global and the Corswine swindle made it clearly important again.
I like to keep inner core positions in SCD form as a first choice, DR as a 2nd choice, and street form as a 3rd choice.
If you are dealing with a tiny brokerage, securities held in DR may or may not protect you. Holding securities in street form with a company like JPMorgan could potentially protect you better than holding them in DR form with a small broker.
Why? Answer: Because of the "too big to fail" policy, and because of the big firms' obsession with maintaining a "nothing is wrong here at our bank" appearance, and a 3rd even more interesting reason....
Some MFGlobal customers had apparently gone thru the delivery process with the comex, but took warehouse receipts, rather than bars.
That's a lot like DR with stocks. SCD is a step ahead of DR, because it puts the cert in your hand. The warehouse receipts were ruled to be in the customer's account in the MFG case, not in the customer's hand.
If the warehouse receipts were held in an account at a firm like RBC, JPMorgan, HSBC, rather than at MFG, the customers could stand a higher chance of being protected, by the firms as well and the govt.
What matters with hypothecation is whether the firms are putting the money back into the customer accounts at the end of the day or not, AND whether the firm dipping its hand in the cookie jar can make good on what it steals/borrows.
Large firms can get the capital to fix things, if they have been dishonest. Firms like MFGlobal have no real means of putting cash back in the accounts, if they blow it on leveraged OTC derivative bets.
Also, and this is a mighty important point, I would strongly suggest that you need to think about placing yourself on the winning side of the OTCD theme, because this theme is what the crisis is all about. It's not about govt spending. It's about hundreds of trillions in OTCD bets. There's a winner and a loser to every one of those trades.
The question you need to ask yourself is, are the OTCD bets held by your broker/bank winning trades, or losing ones? When you are dealing with a small firm, small relative to the monster banks, these smaller firms typically have joined pension funds, corporate hedging departments, and govts in betting against the big banks in OTCD arena.
So, if your accounts are with an "OTCD wiener-brain firm", so to speak, YOU get to pay the banks their winnings. In the case of MFGlobal, the customers got fried because Corswine bet against the banksters and lost. The banksters wanted their winnings, collected, and had no intention of handing back those winnings just because Corswine said it was customer money that he bet, lost, and had no way of paying back.
Just because a firm engages in hypothecation does not mean it is taking huge risks with customer assets. They could be placing those funds in US govt bonds for the day. MFGlobal violated the spirit of the law, if not the letter of the law, by placing massive amounts of customer funds into OTCDs.
If YOUR broker is betting your account on an OTCD trade, you want, if you are sane, your broker to be on the winning side of that OTCD trade. In the case of the smaller firms, they are generally betting on the losing side of the trade, much like the large speculators consistently take the losing side of the comex metals market trades.
When a big bank broker puts customer funds illegally into an OTCD bet, you at least know the odds are that your money is on the winning side of the trade, and they want to collect their winnings. The bet is also likely held with them or with a clearinghouse controlled by them.
The bottom hypothecation line: Your risk is drastically lower when your brokerage is either not engaged in OTC derivatives, which is apparently the case with firms like Interactive Brokers, or is a big bank broker that is on the winning side of its trades, like JPMorgan.
"Oh no, I need DR now, before my account at JPMorgan is destroyed, because they just won another $2 billion on an OTCD bet! If JPM gets any richer, I'll be destroyed!" - Not you, Jan 16, 2012.
QE, quantitative easing, allows the few OTCD bets the banksters lose on to be traded to the taxpayers to baghold, generally at par for the banksters.
On the week-end I showed you the long term silver picture. The road to Pluto is going to be a rocky one. Keep in mind that rather than decoupling from comex markets, like the silver bugs "know" will happen, what could happen instead is that silver decouples from gold in 2013-2014, and follows the Dow into the tank in a horrific crash, while gold skyrockets. That would destroy the silver bugs, financially and emotionally. Silver would rise from the silver bug ashes, but the question is, would YOU?
In the final analysis, some investors who own far more silver than gold in many are not taking this crisis very seriously. Hopes that bustouts crouched in a breadline will buy our silver are ridiculous. They won't buy anything.
The bottom silver line: Silver may well be the poor man's gold, but it is not the breadline man's gold. I own silver and nothing changes that ownership. If it goes lower I own more. If it goes higher, I own enough. Ego will totally destroy most silver owners as price rises violently higher. Own silver bullion, not silver pipedreams. The crisis has barely started, and the volatility in silver has also.... barely started.
Click this Shorter Term Silver Chart now. The h&s bottom is tiny, but when its positioning within the bigger picture" is considered, this "little powerpack" carries far more horsepower than its small size indicates. Watch the green neckline and the right shoulder low. Price needs to stay above there.
Gridtime! Check the website within an hour to view the Dow Components update, as I take a chartwalk through all 30 Dow stocks individually.
Thanks
Cheers
St