A report filed by zerohedge.com’s Tyler Durden on June 4 tells the story of how thousands of tons of copper and aluminum have gone missing in China. The complicated ebbs and flows of the investment world indicate that as a result of these missing metals, the market prices for them will drop.
Durden refers to the copper and aluminum as “rehypothecated”; Investopedia defines rehypothecation as “The practice by banks and brokers of using, for their own purposes, assets that have been posted as collateral by their clients.” Durden quotes one warehousing source as saying, “Banks are worried about their exposure. There is a scramble for people to head down there at the minute and make sure that their metal that they think is covered by a warehouse receipt actually exists.”
As of the time of Durden’s report, an investigation was underway, at least one port had stopped shipment of aluminum and copper because of the investigation, and the copper discrepancy was rumored to be 20,000 tonnes (the aluminum discrepancy rumored at 80,000 tonnes).
Related story: U.S. Customs intercepts $1.2M of stolen copper headed to Asia
An unnamed “trading source” commented, “Once the investigation is over, it could be bearish for metals. I think that a lot of Western banks will try to offload material …”
The report puts forth the notion that if and when nonprecious metals do decline in price as a result of the missing rehypothecated aluminum and copper, gold prices will climb.