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Posts Tagged ‘CFTC’

May 9, 2011
Avery Goodman
SeekingAlpha

As we warned our readers on May 1, 2011, when silver had clawed its way back to about $48 per ounce: “We expect another massive price attack in the next few days.”

We came to this conclusion based upon a number of factors, including the impending opening of the Hong Kong Merchantile Exchange, which will be controlled by many of the same international players who control NYMEX. Like clockwork, a vicious attack, perhaps the most ferocious one ever mounted in the history of precious metals, began on Monday, May 2, 2011. We knew it was coming, but to be honest, we didn’t expect the level of ferocity. Following our own suggestions, when silver had tanked by about 18%, we entered into a small speculative long position, using the SIVR silver trust. The price punched right through the minor support level we had chosen, and continued down.

Had we realized the depth of the silver short seller despair, we would have played the game a bit differently. We would have waited longer, bought a lot more later on, and created a much longer term position. As it is, we have lost nearly nothing, and will do it anyway. Nevertheless, as irrational as this kind of thinking is, and as much as we warn people against it, human beings are human beings and we are not happy about putting on a little bet, no matter how small, that fails to catch the bottom of a dip.

The level of despair among short sellers, which is motivating this attack, is growing. Anything could happen at this point. They could give up entirely, or the attack could become more ferocious. We don’t know. What we do know is that the short sellers’ predicament has just grown worse. They will eventually become even more desperate than they are now as weeks and months pass by. We will explain why shortly.

New and ever larger performance bond deposit requirements are being announced by the NYMEX so-called “clearing house risk committee” (performance bond committee) almost every other day. On top of these substantial increases, the individual clearing members are often making even bigger demands and hiking up performance bond requirements even higher.

We cannot help but wonder if some of these clearing members are themselves short silver, or if they are deathly afraid that other clearing members will default, leaving them footing the bill? Or are they trying to help attack their own customers? To the extent that a clearing member is raising performance bonds above the level of the exchange, customers should say goodbye and never do business with them again.

According the official spokesperson for CME Group, which owns NYMEX, the performance bond increases are designed to address “increased risk”. If this were so, however, such changes would apply only to short sellers and new long buyers who purchased up in the higher price ranges. Most of the older long buyers were sitting on huge profits from the upward movement of silver, when the new bond requirements were imposed in the $49 range. They posed no greater risk at all than they did back when they made their purchases at $18, $20, $25 per ounce, etc.

But the exchange and its dealers don’t play the game that way. Instead, they apply these changes to everyone, even people who may have bought when silver was down near $18 per ounce, even though these older position holders pose no greater risk of defaulting than before. The exchange committee members are quite expert at all this, and are well aware that the net effect of what they were doing would be to throw people involuntarily out of positions. The effect is carefully calculated and thought out, and is part of the overall process used to artificially control silver prices.

Coupled with the sudden increased performance in bonds, there has been an all-out media effort to convince people that a “bubble is bursting” even though, as we will shortly explain, anyone who is worth his salt as an analyst knows it isn’t true. There has NEVER been any bubble in silver in 2011, and therefore, it cannot possibly “burst”. There has simply been an unwinding of a grossly underpriced asset that has been subject to a multi-year price suppression effort.

Be that as it may, this downturn provides, for the first time in a long time, more than mere gambling opportunities. Highly leveraged and undercapitalized speculators have been kicked out of their positions, and they had pushed the price of silver up very fast. It would have gone to the same levels, anyway, and beyond, but the process would have been slower and steadier if the market had been limited to cash buyers and well-capitalized investors.

We have been carefully observing the methods used in this attack and have reached some conclusions. The attack is not sophisticated. It is NOT rocket science. The method is so simple that it is astounding that so few people see it for what it is. Regulators could put an end to it any time they want to. They simply don’t want to. That means, of course, that they are essentially complicit. There are genuine folks over at CFTC, like Commissioner Bart Chilton, but they are operating at an agency which is structurally corrupted, with a revolving door swapping employees to and from the regulator and those who are supposed to be regulated.

The current price attack involves an overwhelming creation of transient short positions that last less than one day. This is expensive to do in terms of upfront cash. But it isn’t quite as expensive as it may seem at first glance. Each day, except on Friday, May 6th, more than 10,000 short positions appeared to be transiently created, closed and recreated during the trading day. This must have required posting at least $180 million in performance bonds. However, to give credit to the ingenuity of the manipulators, most cash is recouped by the end of the trading day. With access to Federal Reserve loan windows, putting up an infinite amount of upfront fiat cash in the morning of a trading day is no deterrent.

From what we can see, this is what they are doing, in a highly coordinated fashion:

1) Either using control over the exchange committee system to induce sudden hikes in performance bond requirements, or opportunistically using such hikes. The hikes soften up the market by causing an initial destabilization of accounts of overleveraged long position holders. Some of the big clearing members of NYMEX have enhanced this effect by raising their own requirements higher than the exchange committee, and thereby softening up their own customers more substantially;

2) Using analysts to make extensive commentary to the mass media to the effect that the “silver bubble has burst” in the hope of inducing fear in the marketplace, further softening it up, in preparation for step 3.

3) Using trading “bots” to transiently create thousands and, sometimes, tens of thousands of intra-day short positions, designed to soak up opportunistic buying by better capitalized long side oriented investors. The flooding of the market with this paper supply of imaginary “silver” prevents futures based prices from rising and triggers stop-loss orders among leveraged customers.

4) Closing most intra-day positions into the mass of involuntary liquidations. Sometimes, “artillery” is left on the battlefield by the close of the day. This happens when transient short positions cannot be fully unloaded. In other words, the bots are competing with heavy buying from well-capitalized buyers who now want to pay the “bargain” prices created by the bots, and taking over those positions before the bots have the opportunity to buy them back. This shows up as a net increase in the “open interest” in silver, even as the price is falling. That aberrant result is impossible if a bubble were really “bursting”, because we would have run out of such buyers by now;

5) Rinsing and repeating the same process the next day, and on various days after that, allowing for a few “up” days centered around points of natural technical support, in order to preserve plausible deniability.

Again, CME officials claim that the sudden margin changes are motivated by “high volatility”, and that their actions are not a cause for the recent crash of silver prices. That is disingenuous at best. The changes are not “motivated” by high volatility — they are the initial cause of the volatility. They knowingly destabilized the accounts of highly leveraged buyers. Those buyers were highly leveraged because the exchange previously encouraged high leverage by marking down performance bond requirements. Sudden upward adjustment of performance bonds creates an opening for trading “bots” to move in, and helps make the manipulation less costly.

If performance bonds were never set in the first place, at ridiculous ultra-low levels, then suddenly raised, then suddenly lowered, over and over again – which is exactly what the exchange has done for years – prices would be stable. Substantial performance bonds, kept the same at ALL times, would mean no “pie-in-the-sky” undercapitalized long buyers drawn into the market. The ability of the manipulators to flush them out, collect their performance bonds, and periodically crash commodity prices would end.

In that scenario, silver and gold would transform back to their 10,000 year old role as the most stable stores of value that exist, and conservative investors would convert their fiat cash, stocks and bonds into precious metals. That is a nightmare scenario for western central bankers, because it is a severe threat to the long term profits of the commercial casino-banks they service, whose tight control over the world economy facilitates the sale of derivatives and control over the contingencies that trigger such derivatives. This tight control cannot exist in an honest money gold/silver base monetary system, and is based primarily upon control of paper and electronic money printing presses

But, in spite of the incredible power of the central banks standing behind them, short sellers are losing this war. Their surface “success” is an illusion. Instead of escaping from liability, their liability is growing. In spite of the propaganda machine, the attack by clearing members against their own customers, and the trading bots, buying interest has remained incredibly high. This is exemplified by the fact that not all of the tens of thousands of transient intra-day short contracts have been closed by the end of the trading day. That is NOT a sign of a bursting bubble but, rather, of just the opposite.

In a normal market, the cost of a relatively fixed supply of goods will always result in rising prices when the number of purchase contracts rise. This is because demand has increased while supply has stayed roughly the same. But, not in our corrupted futures markets. On Tuesday, May 3, 2011, CME Group records show that the silver bars underlying 23 contracts were delivered. That should have reduced “open interest” contracts by 23. Instead, there was a net INCREASE that day of “same-month” positions by 10 contracts. In other words, short sellers will now need to deliver 165,000 additional ounces of silver this month.

On Friday, May 6, 2011, the short sellers must have been proud of themselves. They were able to deliver 243 contracts, or 1.2 million ounces of silver, which is a huge amount. But, the open interest for May delivery only declined by 13 contracts, which means that the artificially cheap prices attracted 230 new long contract buyers who paid cash. The new contracts will need to be delivered this month. As hard as it must have been to find the silver for May 6th delivery, they are now forced to find another 1.15 million ounces somewhere.

The so-called “spot” price is now largely irrelevant, but short sellers have still not acknowledged that fact to themselves. Intense physical silver demand continues. This is amply illustrated by continued backwardation. Dealers at COMEX and the LBMA may create fake prices at will, but the cash market is their achilles’ heel. Short sellers have put paper silver on a fire sale at the futures exchanges. Yet they have not improved their position by doing so. They have, instead, insured a worse problem. Cash buyers put the fear of God in the hearts of silver manipulators. Cash buyers can put them into bankruptcy, destroy their power over the market, and discredit the futures markets, LBMA and the central bankers by inducing multiple defaults.

New “urban” myths about mysterious eastern billionaires buying up silver have spread quickly. On April 28, 2011, silver was selling for a high of $49 per ounce. The open interest had fallen to as low as 129,711 as short sellers slowly capitulated, and serious cash buyers took the bait. Allowing higher and higher fiat prices was effective in allowing open short positions to be closed, which is what short sellers must do before it is too late. On one day, for example, in early Asian trading, prices rose temporarily by over 10%. Asian short sellers were breaking ranks and buying back positions at any price. Then the bull-headed spirit of their European and American comrades awoke, and the current attack on silver prices began.

The market is NOT becoming dispirited or shell-shocked, as would have once been the case under similar conditions. Instead, we are seeing heavy buying by well capitalized long buyers who have probably read Andrew McGuire’s emails. They now know the score. They know that this is simply a manipulation event. As of May 5, 2011, the open interest had already risen to 134,804. The evil “Empire” is facing 5,093 new long positions. Two hundred sixty six of those are “same-month” positions, bought with a 100% cash, and need to be delivered this month.

Tens of thousands of other positions have changed hands. The trading “bots” managed to close most of their intra-day shorts into margin calls and stop loss orders, but have not accomplished much in terms of the level of open interest. Tens of thousands of existing contracts plus 5,093 additional hard long positions were unintentionally created by the trading bots, and all of these are now transferred from undercapitalized longs who would never have taken delivery, into much stronger hands.

The percentage of contracts, going forward, that will be forced into delivery as the months pass, will rise as a result of the transfer from weak to strong hands, and the silver short sellers’ problem is now bigger. New buyers have streamed in and bought at lower prices. That is the natural response of any bull market to a major manipulation event like this one. Silver is in a secular bull market. That has not changed as a result of a manipulation event. In fact, nothing has changed, except the unfavorable position of the silver short side manipulators, who are facing a much worse picture now than they did before they started this manipulation.

They have collected performance bond “candy” from undercapitalized investment “babies”. But, they need much more. Short sellers need to create the type of dispirited shell-shocked market they managed to create in late 2008. The effort, back then, made use of the demise of Lehman Brothers to offload hundreds of billions of dollars worth of short positions in all the precious metals in the OTC derivatives market. So far, however, this manipulation event isn’t working very well. The only way to bring the number of positions down is to allow the price to rise substantially.

If they abandon the effort now, as Friday’s action implies they might, it will be impossible for them to shift their short term price reduction into a longer term situation of altered market perceptions, which is their end goal. The Federal Reserve can give them as much cash as they need to mount as many paper-based attacks as they want, but it can’t give them physical silver. Short sellers will need to “put up” or “shut up”. They need to pay the price for their misconduct over many years.

Short sellers have proven to be so bull-headed that one has to doubt whether they will do the smart thing. The next move might be to flood physical markets with newly “cashed out” baskets of silver bars from the SLV silver trust stockpile. That might dampen pressure from increasing demand, and might even meet the immediate need for physical delivery in the OTC cash markets. Over the long run, however, assuming that the price remains discounted, the bars will quickly disappear and as they raid the stockpile, others will buy SLV shares and also raid the stockpile. SLV may end up stripped of its silver.

Does SLV really have the full amount of silver claimed? It does have a solid-seeming inspection report that says it does. If it doesn’t, we may be finding out soon enough. If those who have been dismissed as paranoid people end up being right, and there is not enough silver in the stockpile to cover claims, jail cells will be waiting. The CME Group clearing house risk committee can raise performance bonds to 100% of the amount that long buyers paid for their positions in silver. They can even raise it higher than that, but only at the risk of jail cells, and/or triple damages that cannot be discharged in bankruptcy for its individual members. Meanwhile, manipulators can continue to flood the market with bidding-bots and intra-day transient short positions. They can theoretically absorb all the buying pressure if they are stubborn enough.

They can continue to raid the SLV stockpile to make deliveries, and spin those withdrawals to the media as the “public getting out of silver”. But this is not 1980. No one remotely similar to Nelson Bunker Hunt is relying on bank financing to corner the silver market using leveraged positioning. Price pressure is from the cash physical market, not derivatives. COMEX is relatively irrelevant. Nothing the manipulators can do in derivatives markets will relieve the physical market pressure.

Short sellers have replaced weak hands with strong ones who are much more likely to take delivery. This manipulation episode will dramatically unwind, just as it dramatically began, when silver short sellers capitulate, as they must. Prices will shoot far beyond the recent high levels. “Bottom picking”, therefore, may be nice but it isn’t absolutely necessary. The prospective price appreciation over the next few months or years should overwhelm any differences in price right now. It won’t matter whether you bought at $50, $40, $35, $20 etc. In a few months, the price will likely be back up, and, in a few years, the price will be many multiples of all those numbers.

Technical support levels still have meaning because manipulators want it to be so. Cash fueled trading “bots”, filled to the brim with Federal Reserve funny money, can be programmed to open as many transient intra-day short positions as needed to punch right through any support levels. But manipulators must preserve an illusion of natural market movement. We can expect loose adherence to chart patterns, allowing bounces where appropriate, and then, punch-throughs.

The only way a psychologically depressed market could now be achieved is by crash prices beneath the long-term trend line, which is around $22.50 per ounce. This would require hundreds of millions of additional trading bot dollars to do. They might try it, at some point, but more likely, they will give up for the moment and return to a slow capitulation. Even if they do push prices down below $22.50, we doubt it would work for very long. Such a battering would cause heavy technical damage, but as noted, this market is not being driven by technical trends.

If they don’t achieve the sub-$22.50 level, even most technical analysts relied upon by the big non-manipulation-involved hedge funds and other big players will assume that the silver bull market is still running and that this is merely a deep correction. They will buy back in and run the price back up. In other words, if the manipulators do not achieve a sustainable self-perpetuating shell-shocked market, as was achieved in late 2008, the manipulators will not be able to close short positions without great losses.

It may be possible to use technical analysis to make intra-day, or multi-day gambles on bounces. We would not feel comfortable, however, with recommending that this be done with substantial capital, because the manipulators could suddenly attack again at any time. If they decide to punch through the strong technical support level at $33-34, they will do so with everything they’ve got. They will need to take down the price very quickly because they need to get it done before so much of the month has passed that they will be impaired in their ability to gather silver to make delivery in the OTC market.

You must think long term now before entering this silver market, because you may well get stuck with a silver position for a longer term than you may expect. But if the manipulators do press the price down below the $22.50 level, you should buy with every dollar you have available, because even though things will look bleak by then, with every media outlet heralding the “bursting of the silver bubble”, a few months later, the price will be back to way above $50 again. Prefacing the big fall will probably be a huge technical rally in the U.S. dollar, and a big fall in the stock market. These events may not happen until the end of QE-2 in late June.

On the other hand, if you don’t buy now, and, instead rely on the forlorn hope that manipulators will push hard enough to take prices into $20-22 level, you may well lose the excellent opportunities that now exist. There is no way to know, in a manipulated market, whether the manipulators will decide to punch through a particular support level. As we have stated in previous articles, the better way to deal with this is to pick a reasonable price level acceptable to your pocketbook, put in a buy order, and wait. If your buy order is successful, and the price turns up immediately, great. If not, be secure in knowing that you have a long term view, and a position in an asset destined for much more appreciation than we’ve ever seen before, over the next few years.

In short, it is time to stop thinking about short term gambling, because no metric you use is safe against the depredations of a manipulation that regulators refuse to stop. Buy with the long term in mind and wait for the market to punish the manipulators, which it will. Take physical delivery if you buy at the futures markets. Remember, the primary value of precious metals is NOT in making “big money” from gambling in the banker-controlled gambling casinos. We have always strongly suggested that only very small gambles like those you would make in Las Vegas should be made on a speculative basis. But buying on big dips, like this one, is not a speculative undertaking. It is long-term investing. The long term power of silver, like gold and platinum, is to preserve the buying power you’ve worked for all your life.

The powers-that-be want the U.S. dollar and all other paper fiat currencies to lose value every year. In fact, 2% inflation is their openly stated goal. If you consider compounding, that is an inflation rate that destroys the value of money very rapidly. But the true inflation rate in America is already closer to 6%, not anywhere near the low official numbers that the government likes to report to the media. With a huge increase in the amount of circulating funny-money liquidity around the world, including but not limited to the U.S. dollar, inflation is likely to rise much more sharply from here forward all over the world, not just in the U.S.A. The willingness to tackle this inflation, on the part of policy-makers, is very limited because serious efforts involve a lot of pain to powerful constituencies.

Investing in precious metals means converting U.S. dollars, pounds, euros, etc., into hard “money” that can be manipulated in price, but which cannot be debased. Manipulation has its limits, and since it appears to have been happening in the gold and silver markets for decades, in one form or another, the unwinding that is now beginning will just get more intense with time. No matter what technical support levels they target and take out, the short sellers are not going to extricate themselves without paying big bucks. Knowledge of how the price suppression scheme operates is in the public domain, and it is highly unlikely that manipulators will succeed in shell-shocking markets with their shenanigans, nor suppressing prices, for any significant period of time.

The next step to control prices for several more months will be borrowing enough money from the Fed’s loan windows to keep their trading bots active whenever some type of opportunity presents itself, and to become even more aggressive using control of exchange mechanisms to continue sudden increases in performance bonds. Because SLV shareholders tend to be unaware of the fact that they are dealing in a manipulated market, they continue to buy and sell the trust at whatever the spot price may be manipulated to. Thus, short sellers can use opportunistic futures markets attacks to raid SLV silver stockpiles “on the cheap”.

This should allow them to obtain enough silver to meet physical delivery demands, and even to periodically flood physical markets. Meanwhile, the reduction in the stockpiles will be spun into a claim that the “bubble is bursting” as “big players” “sell” SLV shares. In fact, they are not selling at all but, rather, cashing shares for silver to meet delivery demands. We doubt, for this reason, that the speculations about impending COMEX defaults have any basis in fact.

Silver investors should understand that the ride is going to be a roller coaster, as it always has been. Going forward, the intensity of that thrill ride is likely to increase proportionally to the desperation of short sellers. The biggest threat to silver prices will be the supposed end of QE-2. Short sellers are likely to view it as another opportunity to attack. But July is also a big delivery month in silver, and the delivery demand will be considerably higher than now, as a result of this price attack and the replacement of weak hands with strong ones.

If the manipulators had strong faith that the cessation of QE will save them, they wouldn’t have launched the ongoing attack we are now suffering through. The most likely outcome of the end of quantitative …

Read the entire article HERE.

Associated Press
DANIEL WAGNER
Published: Yesterday

WASHINGTON (AP) – Treasury Secretary Timothy Geithner has decided to let companies continue to trade certain contracts used to guard against swings in currency values outside regulators’ view.

New rules require that many such trades happen more transparently, on exchanges where regulators can see them. But Geithner is exempting certain contracts used by companies to hedge currency rates.

The new financial overhaul law authorized Geithner to carve out such an exemption to stricter regulation.

Business groups argue that tighter oversight of such contracts would be costly and unnecessary. But critics, including some regulators, counter that the whole market for financial contracts called over-the-counter derivatives should face stricter supervision.

The value of derivatives hinges on an underlying investment, such as currencies, stocks or mortgages. Speculators who used over-the-counter derivatives helped fuel the 2008 financial crisis.

Sen. Carl Levin, who pushed for tighter regulation after the crisis, said Geithner’s decision might open the door for lax oversight in the future.

Treasury’s top markets official said the contracts already include many of the safeguards the new rules impose. Investors can find information on the price for each contract, for example. Some of the contracts are traded on electronic platforms, which are less likely to freeze up after an unexpected financial shock.

Imposing new rules would mean “introducing an additional process into what is a very well-functioning market today, and you would be putting more steps into the settlement process,” said Mary Miller, assistant Treasury secretary for financial markets.

Miller argued that even with the exemption, the market will become more transparent. Companies will have to report the contracts in real time, after they make a trade. The information will go to central databanks that regulators can see.

Still, the contracts, called foreign-exchange swaps, wouldn’t be subject to other requirements that experts say would make them more transparent.

The contracts that Geithner carved out account for about $30 trillion of the $600 trillion global market for over-the-counter derivatives, Treasury said. The new, tougher rules will apply to currency swaps, options and other contracts used for similar purposes.

Multinational corporations such as Cargill and 3M argued for the exemption. They said the new rules would have raised their costs, thereby limiting their ability to grow and create jobs.

Advocates of tighter regulation say closer oversight is needed at each stage of the process – before, during and after a trade. They say the exemptions will make some types of trades harder to oversee.

Michael Greenberger, a former official with the Commodity Futures Trading Commission, which is responsible for policing much of the derivatives market, disputed Treasury’s main defense of the exemption – that the contracts expire so fast that they don’t pose serious risks to the financial system.

“Within the next 60 months, there will be a systemic break in this market, said Greenberger, now a law professor at the University of Maryland.

The decision technically is a proposal. Treasury will accept public comments for 30 days before finalizing the exemption.

Read the entire article HERE.

Charles Hugh Smith
OfToMinds.com
March 26, 2011

When the consensus is confidently weighted on one side of a trade or view, reality has a nasty habit of introducing blowback and/or unintended consequences.

In a followup to yesterday’s entry A Contrarian Take on the Dollar’s Demise , here are some other contrarian views culled from readers and recent news items. When does a contrarian view or bet become mainstream? Sometimes the answer is ambiguous. When do you look around and realize (usually with some dismay) that “everyone” now agrees with your once-lonely point of view?

Consider gold as an example. I am a fan of gold for the simple reason that it won’t go to zero–something that cannot be said of purely financial assets. But as a technical observer, I can’t help but notice just how lopsided the trade in gold has become.

According to the CFTC data, there are now 192,838 long contracts on gold and only 3,636 short contracts. That is a remarkably one-sided trade, and one that is technically ripe for a major reversal. When everyone agrees you can’t miss on a trade, and punters are betting 50-to-1 that the trade can only go one way, then that’s when it reverses and crashes.

As a technical observation, this is completely disconnected from all the fundamental reasoning behind owning gold. In other words, if you are one of the many readers who own gold long-term for peace of mind and insurance, then a 20% decline in gold is merely a “buy the dip” opportunity. For traders, it may offer an opportunity to gain on the downturn and then again on the inevitable upturn.

Correspondent Martyn T. recently made what I consider an important and contrarian point about the financial consequences of Japan’s devastating earthaquake and tsunami.

So far you have not noted the way in which the Japanese insurers will affect stock markets. The Japanese government has long insisted that insurers prepare for a major event. This was expected to be an earthquake hitting Tokyo.

Obviously, they would need to have massive reserves, and these should be abroad, so that secure cash can be found.

In their rush to bring in some cash they have sold some and bought yen. This has resulted in other central banks helping to reduce the value of the yen.

But this is only the first tranche of selling. So far they won’t know what liquidity they need, but as it rises so will selling, all across the developed world.

In other words, if the rebuilding and insurance claims will end up costing $300 billion, a significant chunk of that will come from insurers and re-insurers who will have to liquidate globally distributed assets such as stocks and bonds to raise the cash.

Let’s assume the Japanese government will cover half of the costs of rebuilding and insurers will have to cover the other $150 billion. What will the liquidation of $150 billion in financial assets do to a vulnerable market? I hesitate to offer a prediction, but it is unlikely to be bullish.

Frequent contributor Dr. Ishabaka offered up this menu of other consensus views that “everyone knows to be true”:

– the U.S. dollar will continue to decrease in value indefinitely
– U.S. real estate will continue to decrease in value indefinitely
– the standard of living in the U.S. will decrease
– the U.S. stock market is in a bubble
– commodities will continue to rise
– China will overtake the U.S. as the next great power
– U.S. manufacturing is dead
– U.S. debt will increase indefinitely
– emerging markets will provide the economic growth of the future (along with China)
– everyone in poor countries wants to eat more meat, and own a car
– energy will increase in price indefinitely
– wars and revolutions will continue to increase, perhaps leading to another world war
– Social Security and Medicare will go bankrupt
– defined benefit pension plans are dead
– health care costs will continue to increase at a rate that outstrips inflation indefinitely
– unemployment will be serious in the U.S. for the foreseeable future
– Fenders beat Gibsons hands down (pre CBS Fenders, I mean)
– the gap between the wealthy and the rest of us will continue to increase
– government in the U.S. is controlled by lobbyists, unions, and other big money interest groups (banks)

What if all these things “everybody knows” are wrong?

I am not at all sure that “everyone” knows Fenders beat Gibsons, but the list is certainly food for thought. As someone who has played both Stratocasters and my Gibson Les Paul Deluxe, I would say it’s more like the difference between a cabernet and a zinfandel wine: sometimes you’re in the mood for one or the other, but arguing about which is “best” is pointless, as both are superb but in slightly different ways.

Mark Twain commented on the dangers of consensus thusly: “Whenever you find yourself on the side of the majority, it is time to pause and reflect.”

As I concluded yesterday:

When Bears have been eradicated, then the trade has become so lopsided that when it rolls over, it does so suddenly. When everyone agrees, then things become highly unstable. It’s ironic, isn’t it; on the surface, when everyone shares the same convictions and is on the same side of the same trade, things look rock-solid. Yet that very unanimity guarantees instability.

There is always someone on the other side of a trade, of course: someone originated the option or futures, and someone sold the shares that someone else bought. The problem arises when a “can’t lose” trade rolls over, then there are no longer enough buyers to offset the panicky, underwater sellers who are overleveraged via margin or other forms of debt.

This is in effect what still plagues the U.S. housing market: there are still plenty of sellers in the wings, hoping to unload properties, and a dearth of buyers willing to gamble that “the bottom is in.” Even worse, there is a dearth of buyers qualified to buy properties at today’s prices. That will become even more of an issue as interest rates rise.

As a reminder of how things can play out at real bottoms: in the depths of the 1930s Depression, a Manhattan skyscraper was sold for the original cost of its elevators. In other words, the rest of the building was “free.”

People talk about replacement cost as a metric of value in homes and buildings. In other words, this house can’t drop much below $200,000 because it would cost that much to buy the lot and construct a replacement house.

That is another thing “everyone knows to be true” that is actually not true at real bottoms. Stocks can end up trading for less than the cash the company is holding.

We might conclude that being contrarian is simply considering very few possibilities as being “impossible,” especially when it comes to herd behavior and investments.

Read the entire article HERE.

By Joe Klein
Time Magazine
Thursday, Mar. 03, 2011

“Three years after a horrific financial crisis caused by massive fraud, not a single financial executive has gone to jail,” said Charles Ferguson, accepting a well-deserved Oscar for Inside Job, his documentary about the great Wall Street heist. “And that’s wrong.” Of course it is — but that shouldn’t be a surprise. To put bad guys in jail, you need police and prosecutors. The financial police we have, agencies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), have been laughably inept in the era of financial deregulation. The SEC wasn’t even able to spot the broad-daylight highway robbery committed by Bernard Madoff. And so, in 2010, the Obama Administration nudged through Congress the Dodd-Frank financial-reform bill, which was designed to put real cops, with real regulatory heft, on the financial beat. And now, in 2011, the Republican House seems intent on quietly gutting the bill under the sordid camouflage of budget cutting. “They’re defunding the police after we had the biggest bout of looting in history,” an Administration official told me. “That’s just crazy.”

Let’s review the outrage: the heart of the financial collapse was a fraudulent effort to sell home mortgages to people who couldn’t afford them. Some of these mortgages were truly mind-boggling — no money down (but a hefty interest rate hidden in the thicket of contractual codicils), no documentation (like proof of job and salary). The mortgages were then thrown together into giant, opaque bond packages and sold again as solid investments. (The ratings agencies, Moody’s and Standard & Poor’s, were essentially unindicted co-conspirators in the scam.) And those packages were then sliced up, resold and transformed into exotic derivatives, which were bet on by bond traders and investors. (See “The Demise of Bernie Madoff.”)

Confused? Well, that was the point. According to Michael Lewis, whose book The Big Short is a riveting encyclopedia of the disaster, even the SEC was confused by the actual contents of the most far-fetched packages, called collateralized debt obligations (CDOs). Wall Street spewed terms like collateralized debt obligation in order to mislead: a more accurate abbreviation might have been RCLs —repackaged crappy loans. When the crappy loans couldn’t be repaid, the housing market, Wall Street and the American economy imploded. The Wall Street traders pocketed hundreds of millions in profits; the American taxpayer, and homeowner, picked up the losses.

The Dodd-Frank law was an imperfect remedy. It didn’t restructure the big banks, which are still too big to fail. It didn’t tax or outlaw the casino-game derivatives. But it did boost the power of the SEC and CFTC to regulate derivatives trading, and it set up a new agency, the Consumer Financial Protection Bureau (CFPB), to protect consumers from the shyster army peddling tricky mortgages, usurious credit-card rates and unscrupulous payday-check-cashing shops. The agencies need larger payrolls to perform those functions, and the Republican House has now stripped much of that money from the federal budget. “It’s a back-alley maneuver,” says Representative Barney Frank, whose name is on the law. “Unlike health care or environmental regulation, the Republicans didn’t try a frontal assault. They hid behind the budget, which means that they’re embarrassed by this. They don’t want people to know that they’re letting Wall Street off the hook.” (Read “Strapped Consumers Paying Credit-Card Bills Before Mortgages.”)

But what about the Democratic-majority Senate? Can’t it restore the funds for the financial police? Maybe, maybe not. Wall Street has some reliable Senate Democratic defenders, like New York’s Charles Schumer. And there are a whole lot of higher-visibility — and more easily comprehensible — battles for Senate Democrats to fight. “I expect the President will take a stand soon,” says Illinois Senator Dick Durbin, who chairs the Appropriations subcommittee that funds the regulatory agencies. “He’ll probably emphasize the three areas he mentioned in the State of the Union speech: education, research and development, and infrastructure.” And Wall Street regulation? “Well, I hope he does,” Durbin says. “But you run into the problem of message overload. Will the public understand the importance of the issues at stake?” (See “Protesting the Bailout.”)

And then there’s the question of Elizabeth Warren, the Harvard law professor who invented the idea of the Consumer Financial Protection Bureau and should be its first director. The Administration seems undecided on whether to appoint her, fearing a Senate confirmation battle that could last for months. “The banks are scared to death of her,” one Senator told me. “She speaks in clear, simple sentences. That terrifies them.”

Which means this is a fight worth having — and a way to dramatize the complicated issues at the heart of regulatory reform. The President should appoint Warren. The Senate should be forced to vote on her, so the public will know who really wants to clean up Wall Street and who doesn’t.

Read the entire article HERE.

Submitted by Jim Willie on Wed, 3 Nov 2010

A love affair with silver is so natural. The fundamentals are astoundingly positive and bullish in price prospects. My basic argument has been repeated many times. Industry has countless uses for silver, significant demand. But industry has only miniscule isolated uses for gold, in trivial demand. So silver wins on the Demand side of the equation. Central banks own a huge amount of gold. They frequently sell it, even through their slippery surrogate the Intl Monetary Fund. Central banks own zero silver. So silver wins on the Supply side of the equation. My motto is that gold fights the major political and financial war, but silver will ride in on a shiny white horse and take much larger spoils. That effect has already begun. Since the significant game changing FOMC meeting on September 21st, where the telegraph message delivered to the world financial markets was made by megaphone, the impact has been clear and stark. Compared to closing prices on September 21st versus October 29th, just five weeks, the silver price had risen from $20.64 to $24.56, up 19.0%. During the same timespan, the gold price had risen from $1274.30 to $1357.60, up 6.5%. My claim, a loose forecast often repeated, has been that the silver breakout gains would be at least double and possible triple the gold gains. We have seen exactly that in recent weeks.

An extremely fuzzy factor is the CFTC attention. The Commodity Futures Trading Commission is supposedly investigating the Big Four Banks for gigantic concentrated short positions in the silver market, for naked shorting of silver, and for collusion with other banks. Commissioner Bart Chilton has made a lot of noise, but has done next to nothing. Some find encouragement, an absurd notion in my view. Let me know when court injunctions are slapped at JPMorgan. Several class action lawsuits against JPMorgan have begun, also encouraging, but unclear on substance. They crop up every couple weeks, the latest citing a RICO aspect. Let me know when the full force of the USGovt regulatory bodies order JPMorgan, Goldman Sachs, Citigroup, and Bank of America to liquidate even 10-20% of their short positions. Unless and until such action occurs, the CFTC chirping is just that, noise from the managerie of obedient pets who work on short leashes at the behest of bankers. Mail room clerks do not give orders or make demands to the executive suites, not now, not ever. The regulatory chiefs are mere squires to the bankers, and will follow orders, not give them. By the way, the Big Four positions are naked short positions in all likelihood. They are immune from posting collateral, as required by the metals exchanges. So they routinely sell a stack of silver whenever the price moves have been made, like in the wee hours this Wednesday and very early at the New York open. Good Morning New York resulted in almost a full $1.00 drop in the silver price, undoubtedly another naked short raid before the QE decision by the US Federal Reserve and its statement. The full impact of the ambush decline was reversed by afternoon. Right before important events deemed negative nasty to the USDollar, the Big Four go wild with naked shorts, called ambushes. The evidence, the trails, the fingerprints are easily seen except by blind men, official gold industry wonks, and USGovt regulators.
SUPPLY & DEMAND BASICS

Silver total demand was essentially flat in 2009 versus 2008, as the world adjusted to a mammoth meltdown late in 2008. During the extraordinary disruptions, disturbances, and sudden insolvencies, JPMorgan liquidated much of the inherited (commandeered) precious metals accounts from Bear Stearns and Lehman Brothers. In the case of Bear Stearns, a solid argument can be made that they were targeted for kill due to their long gold account. In the case of Lehman, they were targeted fro kill in order to consolidate the power structure in the twin monoliths at JPMorgan and Goldman Sachs. On silver demand, the bulk of the 11.9% decline in the 2009 fabrication demand was primarily driven by the global financial crises. The reduced drop in industrial requirements was the lowest level since 2003. Total fabrication demand totaled 729.8 million oz and industrial demand was 352.2 moz in consumption. Much of the decline in factory demand was attributed to the car industry.

Implied net silver investment increased by a staggering 184% to 136.9 million oz last year, reaching its highest level in 20 years. Overall jewelry demand fell slightly by 1.1% in 2009 to 156.6 moz, a testament to the historical norm. It falls with a bull market, not to contradict it, but to confirm it!! That is the opposite message, contrary to what the official gold industry propaganda preaches. In fact, India and China posted increases in jewelry demand last year, outside the global trend. Silverware demand rose by a decent 4.6% to 59.5 moz, largely due to a surge in Indian fabrication. Their middle class grows impressively.

As for supply, the silver mine production rose by 4.0% to 709.6 moz in 2009. Gains came both from primary silver mines and output from mining by-product. The strongest growth came from Latin America, where silver output increased by a hefty 8%, the biggest gains logged in Argentina and Bolivia. Again Peru was the world leader in silver production in 2009, followed by Mexico, China, Australia, and Bolivia. All of these countries saw increases last year except for Australia, where output was dragged down from the lead/zinc sector, with the by-product impact. Some mines are devoted solely to silver targets, called primary silver projects. Global primary silver output saw a 7% increase in 2009, accounting for 30% of total mine production last year. The cash operating costs for primary silver mines remained relatively stable, rising by less than 1% to $5.23/oz in 2009. The big story is the huge decline in net silver supply from above ground inventory stocks, which were reduced by 86% to 20.2 moz in 2009. The drawdown was driven mostly by the surge in net investment, higher de-hedging (the active reduction in forward sale contracts), lower government sales (like official mints), and a drop in scrap supply. The scrap supply came down by 6% from 2008, enough to register a 13-year low of 165.7 moz. It was the third consecutive year of losses in the scrap category. Government stocks of silver, the feeder in official coin mint programs, fell by an estimated 13.7 moz last year, to reach their lowest levels in more than a decade. Data was supplied by the Silver Institute (SEE LINK).

IMPACT OF Q.E. CANCER

The big event on the horizon has been the US Midterm Elections, just completed. Its outcome was close to poll expectations. Many decisions have been delayed. Much detail has been withheld. Unfortunate pauses have come as a result. A palpable dread can be identified and pointed to. Difficult unpopular decisions will now be made. Some of the decisions will involve continued bank sector welfare after failed fiduciary responsibility. Some of the next programs or legislation will involve devious political and legal cover for criminal bond fraud related to the mortgage industry, which is fully in the open for dissection, outcry, and acrimonious debate. Basically, the bank sector will see great maneuvers to be supported, protected, with escape routes, now that the consequences of voter backlash are out of the picture. Furthermore is the issue of political partisan gridlock. Only dim bulbs would call the gridlock constructive or a good thing in the current setting. When a nation is mired in a financial crisis, requires leadership, demands restructure, and urgently needs reform, any inaction from gridlock is like fighting over the steering wheel on a big tractor trailer truck unable to manage a winding road, certain to careen over the cliff. Some analysts use the term public serpents to describe public servants, which seems spot on. Activists should demand that private bank accounts be investigated of committee heads, or even past Secretary of State (Colin Powell), or joint chiefs of staff at the Pentagon, or past SEC and CFTC heads. While at it, check the bank accounts of past presidents too.

The most reliable and expert sources within my contacts mention a specific point, with consistency. When the US elections are over, and after the USFed gives some guidance on the QE2 Launch for monetized debt, the system will experience tremendous added strains and will gradually show signs of breakdown again, in accelerated mode. This time, unlike September 2008, efforts to stabilize will not be possible. The system will degrade, as supports, pylons, control cables, levers, guy wires, and buttresses will be removed in the coming weeks. The Midterm Elections served at the roadblock event, the beacon on the horizon, the gate factor, the delayed lit fuse. The actions taken in November will involve both the US captains and foreign entities. The US brass can act without as much concern of voter backlash. The foreign financial decision makers can act with knowledge that the USGovt, the USFed, and Wall Street will not make a single solitary move toward bank system reform, toward bank debt restructure, or toward debt liquidation on the balance sheets. Instead, the US will redouble the magnitude of what failed, their habit, their engrained failure in policy, their legacy.

The main worry by the USFed and USDept Treasury will center on foreign creditors and abandonment. US bank leaders will ramp up the monetization under the QE2 banner with added motivation. Trade war stokes the fires of hostility, angst, and rebuke. Foreign creditors are worried that their debt security paper is being diluted. Its value will be diminished, but later in time. Expect a new European Dollar Swap Facility to be announced soon, but with less delay than the last one. They must match and offset the power of the QE2 initiative. It could be urgently declared by EU in next several weeks. They must defend against a rising Euro currency. Do not be trapped into thinking a USTreasury Bond rally means a USDollar coincident rise. The USTBonds are from the Printing Pre$$, which means no source of funds to convert. The Jackass still believes 2.0% is an important 10-year USTreasury yield target. All hell breaks loose after the target is hit, as the USTBond bubble is likely to give off massive greenhouse gas afterwards.

UNWIND OF TREMENDOUS SUPPRESSION

When professional equity analysts ply their craft in examining the merits of a certain stock, they often use a simple statistical technique. They fit a model of the growth in a stock Y versus the sector X in which it trades, like BAC (Bank of America) versus the BKX (bank index). They fit a model of the growth of a major stock Y versus the X market backdrop, like IBM versus the S&P500 index. A stock Y performs well if it does better than its sector or does better than the entire market. That shows up as a BETA over 1.0 within the fitted model using data as weekly change entries in price for X and Y. Take silver as Y and the entire commodity arena as X, as measured for instance by the CRB index. Clearly silver rises and falls with the commodities, and even makes swings with more volatility than other items. That testifies to a high silver BETA. Lately, the silver move has been powerful, much bigger than other commodity items since it is being recognized as a currency hedge, a safe haven asset, with the menace of lawsuits and investigations hanging overhead. In fact, Silver is a currency, if pure money can be classified as currency at all. Like gold, silver is a super-currency.

Y  =  ?  +  ? X

The important aspect to highlight of the linear price change model is the ALPHA component. When an asset or stock has a particular advantage or unique strength, it can outperform its class. Take for instance a pharmaceutical firm with a vaccine discovery, or a computer firm like Apple with a nifty IPod winner, or a mining firm with a huge ore discovery or great process improvement. Silver and gold each share a robust ALPHA feature that is not often mentioned, even in the gold community. As the monetary system crumbles further, as the big banks topple amidst insolvency, as the sovereign debt for certain nations defaults, as the USGovt deficits spiral endlessly into the $trillions, the concept of real money is being questioned by important chambers of global finance. Money wants to escape the false monetary clutches, and find true safe haven. Sound money is sought out with increased vigor and even desperation to preserve wealth. At the same time, illicit activity from two to three decades of gigantic price suppression, extended from enormous naked short positions being revealed, has conspired to suppress the price of gold & silver. The slow healing of the market infestation reveals the manifestation of the Silver Alpha, during its release.

The monetary system works gradually to unmask the corrupt precious metals market, and to lay bare the absent bullion at the official metals exchanges. Angry depositors like the Chinese and Arabs have been demanding their bullion for return back home, no longer trusting the London and New York banksters. They have grown fully aware of illicit gold leasing as commonplace. The fraud of the USGovt balance sheets, recording deep storage gold as a ledge item, an utter absurdity, only adds to the motive to unmask the banksters at their own game. The fast rising deadly USGovt deficits has brought cries to prove the collateral for new debt added upon old debt, in an uncontrollable debt episode. The world pursues gold & silver, knowing the USGovt has none, even as it continues to suppress its price with heavy hands. Foreign creditors are angry that the gold & silver they hold has been pushed down in price by illicit USGovt devices.

The consequence is that SILVER possesses a high ALPHA. What lifts the ALPHA is many factors, each powerful. The Silver price will rise much more than price inflation. The Silver price will rise in response to money fleeing corrosive vehicles like the major currencies, whose basis is not gold but rather rapidly growing debt resting upon broken banking and economic foundations. The Silver price will rise as the USTreasury Bond bubble becomes more widely recognized. The Silver price will rise as greater volumes of freshly printed money undermine the USDollar well behind controlled activity. The Silver price will rise more than most analysts anticipate out of the sheer release from corrupted markets that hold down the price after a mountain of silver has been shorted in the market without collateral. THIS IS THE ESSENCE OF ALPHA!! The shorts are being squeezed, in clear fashion since August. The naked short quantity for Silver is well beyond a full year of annual global output from the mining industry. As the markets work toward a freely traded system that seeks a true equilibrium, the Silver price will move past $100 per ounce easily. Laughter now will be followed by sheepish quiet in three years. But first it will surpass the $40 price, maybe as soon as late 2011 or early 2012. The silver ALPHA is big, and that fact will be quite evident very soon, if not already. My forecast is for a $29 to 31 price for Silver by mid-January. Both December and January are strong seasonal months for silver, just like September. Notice how silver is outperforming the commodity group, and shows a BETA over one.

Read the entire article HERE.

NEW YORK (TheStreet) — Gold price manipulation is the most controversial theory that has circulated among gold bugs for 20 years.

Conspiracy theorists think that gold prices have been illegally suppressed over the last two decades by central banks and governments. GATA or Gold Anti-Trust Action Committee is the biggest complainant.

Central banks reportedly have 32,000 tons of gold, with the International Monetary Fund accounting for 2,800 tons. Under the Washington Agreement on Gold, its members can only sell a maximum of 400 tons a year thereby restricting the amount of gold in the open market place.

GATA argues that central banks in actuality have less than 15,000 tons of gold and that the missing gold has been secretly sold into the market preventing gold prices from rising to their actual price, which helps the country’s paper currency, bonds and interest rates. The suppression theory means that global economies are in worse financial shape than investors think and that gold should be bought as the ultimate safe haven.

The New York Post recently reported that the the Commodities Futures Trade Commission and the Department of Justice have launched criminal and civil probes into JPMorgan’s trading in the silver market to determine if the investment bank depressed the silver price for their advantage. There are also rumors circulating that a major New York law firm will launch a similar lawsuit against the investment bank.

I interviewed Chris Powell, secretary and treasurer of GATA to get the facts of this alleged manipulation.

Can you explain the basics of silver/gold manipulation?

Powell : Gold, and to a lesser extent, silver are currencies. Governments have intervened in the gold market in the open throughout history. Our complaint is that more often now they’re doing it surreptitiously as a mechanism of supporting their currencies, supporting government bonds and suppressing interest rates.

So can you break it down, how the government is doing it on the sly as you said?

Powell: Yes, the manipulation of the gold market now is achieved through two mechanisms mainly. One is the outright sale or leasing of central bank gold reserves to add gold to the market. The other is the sale of futures and options, gold derivatives by the big investment banks that have special relationships with the central banks, particularly with the Federal Reserve. These are essentially naked short positions in the gold and silver markets.

We believe they are pretty much backed up by the central banks, which will, at least in the gold market, provide whatever gold is necessary when somebody actually wants to remove gold from the system to really liquidate a position. The problem is the gold supply has been inflated in the futures market so there’s so much more gold paper out there than there really is gold.

For someone who has no idea what this means, how do the central banks lease to the bullion banks?.

Powell: It basically began as a carry trade. It was in the interest of most central banks and the investment banks. The central banks would lend gold at a very low interest rate, perhaps 1% to an investment bank. The investment bank in turn would sell the gold for cash and use the cash to fund its operations.

And this worked very well for the investment houses as long as they had some confidence that the gold price would not rise and destroy the carry trades. Central banks liked it because it kept the price of gold, the competitive currency down. It kept interest rates down. It supported the government bonds and the government currencies. Now this carry trade is breaking up a bit. We think because central banks are running out of gold that they can distort.

So that doesn’t seem so bad. You lease gold, it goes into the markets. So what’s the problem?

Powell: Well the problem is it’s surreptitious. It’s a matter of deceiving the gold market and more importantly, the currency and government bond markets as to what the government is doing. It also gives inside information to the investment houses that are working the trades that the government wants done. It’s a grand deceit. If it was done in the open, people would understand what the government policy was. But open policy would not have the effect of deceiving the markets. If you remove the deceit from the gold pricing scheme, the scheme is of very little use.

How long do the investment banks get to lease the gold for, from central banks?

Powell: The leases may be written in limited periods of a year or two years or three years. We believe that most of the central bank gold sales, or supposed gold sales in recent years, were not really gold sales at all. They were cash settlement of lease gold that could not be recovered and returned to the central bank without causing a huge spike in gold prices.

Continue the article HERE.

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