Reports came out earlier this month about a destructive “Trojan Horse” malware program that has infected critical U.S. software infrastructure capable of penetrating power plants, electrical grids, water treatment plants, natural gas pipelines, etc. Although there has been no attempt yet to “activate” the trojan horse since 2011, this malware sits ready to wreak havoc on industrial control processes, and could potentially cause economic chaos.
Interestingly, authorities continue to point to the Russians as the suspected culprits.
In reports from ABC News and other sources, there is little or no mention of the possible threat this malware trojan horse and others pose on the financial markets. Jim Rickards, however, has done a tremendous job pointing out that state-sponsored hackers from Iran, China, Russia, etc. are absolutely infiltrating capital markets.
Rickards mentions the force multiplier scenarios of cyberattacks and financial warfare, citing the recent Knight Capital fiasco (August, 1, 2012) and the NASDAQ market seizure (August 22, 2013), as examples of possible hacker attacks on U.S. financial markets.
In thinking a bit more about Rickards’ most recent work, The Death of Money, something struck me that intertwines the trojan horse reports above, financial markets, hackers, gold markets, Russia, the dollar, and even a bit of Hollywood.
In The Death of Money, Rickards describes the “wobbly” state of the international monetary system, and details the potential of collapse through sudden and unexpected gold delivery requests. He notes:
Despite the discreet and delicate handling of the global gold rebalancing, there are increasing signs that the international monetary system may collapse before a transition to gold or SDRs is complete. In the argot of chaos theorists, the system is going wobbly. Almost every “paper gold” contract has the capacity to be turned into a physical delivery through a notice and conversion provision. The vast majority of all futures contracts are rolled over into more distant settlement periods, or are closed out through an offsetting contract. But buyers of gold futures contracts have the right to request physical delivery of metal by providing notice and arranging to take delivery from designated warehouses. A gold lease can be terminated by the lessor at the end of its term. So-called unallocated gold can be turned into allocated bars, typically by paying additional fees, and the allocated gold can then be delivered to the owner on demand.
Certain large gold exchange-traded fund (ETF) holders can convert to physical gold by redeeming the shares and taking gold from the ETF warehouse. The potentially destabilizing factor is that the amount of gold subject to paper contracts is one hundred times the amount of physical gold backing those contracts. As long as holders remain in paper contracts, the system is in equilibrium. If holders in large numbers were to demand physical delivery, they could be snowflakes on an unstable mountain of paper gold. When other holders realize that the physical gold will run out before they can redeem their contracts for bullion, the slide can cascade into an avalanche, a de facto bank run, except the banks in this case are the gold warehouses that support the exchanges and ETFs. This is what happened in 1969 as European trading partners of the United States began cashing in dollars for physical gold. President Nixon shut the window on these redemptions in August 1971. If he had not done so, the U.S. gold vaults at Fort Knox would have been stripped bare by the late 1970s.
While I have limited insight into this, I began wondering how possible it would be for hackers to leverage a trojan horse malware program like above and infect gold delivery instructions. As Rickards notes, most futures contracts are rolled over, and physical gold delivery is rarely requested. However, if a trojan horse virus sitting idly within “paper” gold markets ever activated itself and triggered coordinated “notices” and/or “conversion provisions” for simultaneous physical delivery within the futures/ETF markets, it is likely the current international monetary system will have seen its last “snowflake”.
Although it doesn’t sync up 100%, the relatively unnoticed film, Jack Ryan: Shadow Recruit vividly plays out a comparable scenario where hackers coordinate a financial cyber attack on the U.S. dollar, involving who else…the Russians.
Rickards, James (2014-04-08). The Death of Money: The Coming Collapse of the International Monetary System. Penguin Group US. Kindle Edition.