Tuesday, October 28, 2008

P.U. - What Stinks?

What's that smell?

In the Fall, in farm country, the farmers spread manure on their fields. You can smell it for miles around as you drive through the country. They use the manure to make the soil more fertile for next years crops.

This Fall, on Wall Street, The Fed is spreading manure [Dollars] on all their banks. You can smell it around the entire globe. The use the manure [Dollars] to make the the economy more fertile for next years Inflation.

And judging by the cart above from the St. Louis Fed, The Fed is shoveling serious mountain of Shit!

Economic Basics and Today’s Gold Market
Can’t we have something like an inflationary depression? That is a good question because it leads to some very definite conclusions about whether to buy or to sell here in late October 2008.

All that exist are money/credit expansions or contractions. In the first case, the quantity of money will rise; in the second case it will fall. Prices will then rise (fall) a few years later.

So we can cut through an awful lot of nonsense in economics if we just understand that there are only two things which can happen: expansion or contraction. And if we want to know which, all we need to do is look at the money supply figures published by the Fed.

Let’s see. The monetary base has increased by 35% in the past 6 weeks. This does not look to me like a contraction. It looks like the biggest expansion in U.S. history. And if you just cut through all the nonsense, the answer is obvious. The “depression” of the 1930s was caused by a 30% decline in the U.S. money supply (over 3 years). It was this factor which was responsible for the high unemployment. Anybody who can look at this chart and conclude that we are going to have a depression has his head screwed on backward.

But what about an “inflationary recession?” Haven’t we had such phenomena? Well, in today’s intellectual climate where most people run around shouting slogans and trying to create the greatest panic, almost anything can be alleged. There will be a period when money/credit is expanding. This will cause prices to rise. Then the rate of increase in the money supply is reduced. We would expect prices to continue to rise but at a slower rate. And the slowdown in growth of the bankers and their associated vested interests (the paper aristocracy) might be called a recession by the banker economists.

However, this case simply does not fit the facts of today’s situation. The money supply was flat for a few years up to September ’08. It has not reduced its rate of expansion. It has sharply increased it. So the “inflation” (currency depreciation) part of the prediction is correct, but the “recession” part is all wet.

By the way, outside of economics an inflation implies a going up, as in inflating a balloon. Why use this word to indicate a going down (depreciation) of the currency? I guess these banker-economists just don’t know up from down. But in predicting the markets it is very important to know up from down.

So the idea of a mysterious force from outer space which comes out of nowhere and causes a general fall in wealth in a free economy is nonsense. (This idea, by the way, came from Karl Marx.) Read Adam Smith. He taught that economics is the science of stability. High prices cause increased supply and cure themselves. Low prices cure themselves. Whenever an economic system is destabilized by an outside event (like a hurricane, a war or a Federal Reserve chief), it moderates the destabilization. It bounces back like one of those round-bottom dolls. Whenever you knock it down, it springs back.

So I say again to Paul Volcker in regard to his 10-10-08 (WSJ) prediction that “a full-scale recession appears unavoidable,” IN YOUR FACE PAUL VOLCKER, IN YOUR FACE.

Over the past two months virtually every good that is traded has gone down: stocks, crude oil, precious metals, the grains. And all this selling is due to stupid speculators who believed the media reports of recession/depression. Gold is a good example. Every measure of fundamental supply/demand shows that demand is far outstripping supply. The coin shops are no longer selling gold coins because they simply cannot keep up with demand. The U.S. Government has failed to keep up with demand for the American Eagle coin (although it is mandated to do so by law). The only reason that gold has been down is a large number of stupid speculators who have been selling it based on idiotic comments like that of Volcker. This surely is one of the great buying opportunities for gold and gold stocks that gold bugs will ever see.

In essence, the Fed is using a "deflation" in asset prices and a recession scare as cover for fertilizing the monetary system. When you fertilize a plant, it doesn't "grow over night". It takes weeks, months, for the fertilizer to work its way from the soil, into the plants roots, and then into the plant itself to make it grow. September's build in the monetary base at the Fed will find it's way into "the system" soon enough. Rising asset prices [the result of today's silent inflation in the money supply] will begin to sprout next Spring. As prices begin to rise rapidly into the summer, the media will have changed their clarion call from recession/deflation to Inflation, Inflation, Inflation. But we'll know better. The inflation is occuring today, right now, while everybodys focus is on "falling prices". Rising interest rates will then swoop in in an attempt to eradicate the inflation, and that is when you get a deflation in the money supply, and a recession.

Yes, in a way it is double speak. After all, it is 1984 right? Up is down and down is up. NEVER forget: Rising prices are a result of a rise in the supply of money [inflation] relative to the amount of goods for sale. Gold and Silver are confirmed to be in short supply, and the supply of money is rising. Prices will soon be going up...a lot.

COMEX Commercials Least Net Short Silver In Years
ATLANTA (ResourceInvestor.com) -- A few very large short selling players have had their foot on the necks of all those who would dare to either hold on or try to buy into these distressed markets for all things gold and silver. They have had unchecked power now for months. They have had a great deal of “fun.” But the smartest of them are probably getting “smaller,” as legendary trader and Virginia son Dennis Gartman is wont to say. That is, according to commitments of traders data, the smartest and largest of the short sellers are getting smaller, not larger in their short positioning right now.

A few of them are probably turning net long by now or will be by the end of the month as the end of fund tax loss selling arrives on Halloween, five days hence.
Indeed, as discussed below for example, the largest of the largest traders of gold and silver futures, the traders classed by the Commodities Futures Trading Commission (CFTC) as commercial on the COMEX, division of NYMEX in New York, are actually now the least net short contracts for silver they have been in years.
By November 15, the deadline for most year-end hedge fund redemption notices, another layer of forced selling pressure will have come and gone.

For the year 2008 so far, GLD has added a net 119.18 tonnes of gold bars to its holdings. For context, 119.18 tonnes is about 3.8 million ounces. The gold metal on hand in the COMEX warehouses as of October 23, was reportedly a little over 8.5 million ounces. Thus, so far this year one ETF, GLD, has added the equivalent of 44.7% of all the gold actually held on the COMEX. (No, that’s not a misprint.)
Put another way, during 2008, buying pressure for GLD so overwhelmed selling pressure that the authorized market participants had to add just under half the amount of metal that the COMEX (which still more or less sets the price) has to work with in its member’s vaults.
What is kind of interesting about that is that if you add up all the contracts that are traded on just the COMEX, all 319,472 of them as of last Tuesday, that amounts to contracts either side, long and short, of 31,947,200 ounces. That means that the COMEX is trading almost 32 million ounces of gold but only has about 8.5 million ounces backing those contracts up.

Interestingly, during 2008 buying pressure for SLV so overwhelmed selling pressure the trust has added a total of 68,921,884 ounces (2,143.71 tonnes) of silver to its holdings. And for much of that time the COMEX paper-contract dominated spot market was falling?
For comparison, as of Thursday (10/23), the COMEX, division of NYMEX, reportedly held 131,530,256 ounces of silver in its warehouses.
That means that during 2008 one ETF, SLV, added the equivalent of 52.4% of all the silver metal that the COMEX has in its vaults. One ETF and in less than one year.
Perhaps just as interesting, if we consider all of the 95,873 open contracts for silver on the COMEX as of last Tuesday, then we find that the COMEX traders are trading contracts either side, long and short, of 479.4 million ounces of silver but only have 131.5 million ounces behind it.
Let’s see; because of overwhelming buying pressure, during 2008 SLV had to add over half of the amount of silver that all the members of the COMEX have in total inventory, but the COMEX-paper-contract-dominated price of silver metal fell over 50% from its March peak?
How can that be?

Exactly two U.S. banks continued to keep their thumb on the COMEX silver market as of October 7 when the silver price had already declined from $19.00 to $11.00 and change in the face of severe physical silver shortages of metal on the street. As of October 7 the two largest commercial banks still held a scandalous 23,308 net short silver contracts when the entire commercial net short position was 29,829 contracts. That’s right, two banks still dominated the small silver futures market with over 78% of all the commercial net short positioning.
It is not even fair to call the immoral bank’s position a “net short” position. The two U.S. banks were so certain of their dominance, they were so certain they could drive the futures price of silver lower still, that they did not hold a single long contract for silver on October 7. That, my friends, is the smoking gun and all the DNA we need to see.
Who is ever so sure of such a large position? Only those who can control the ball game.
No wonder that metal is now flowing out of the COMEX and into the physical market. Over 2 million ounces of silver have fled the vaults of the COMEX in just the last five trading days alone.


A Shock To The System?
By: Theodore Butler
Since the recent top in July, the price of silver has undergone a dramatic collapse. As proven by data released in government reports, a large U.S. bank or two sold a massive number of COMEX silver futures contracts into the top and subsequently has covered a good number of those short contracts on the resultant price decline. Quite simply, this is the single most important factor behind the price collapse. The latest data appear to indicate that the price decline is now largely behind us.
The latest data in the Commitment or Traders Report (COT) indicate a near-record shift in market structure over the past three months. The total net commercial silver short position has been reduced by approximately 50,000 contracts (250 million ounces). This is an absolutely massive amount of commercial buying, and has pushed many COT measurements to their most extreme bullish readings in years. Similar commercial buying has occurred in COMEX gold futures.
Make no mistake, this massive commercial buying was no accident. This was precisely why silver and gold dropped sharply, namely, to enable the commercials to buy at the expense of speculative long liquidation. The commercials don’t do anything on this scale by accident. To think otherwise is na├»ve. Ask yourself this - if silver’s price smash did indicate we faced a long term future of lower silver prices, then why would the commercials, the dominators of the market, buy every contract they could get their hands on?
By no small coincidence, other unusual factors suggest silver prices should soon embark on a significant price rally. A notable increase in demand for 1000 oz bars can be seen in tightening price differentials between nearby futures contract months and by reports in the physical market, a marked increase in deliveries in the nearby October silver delivery contract, as well as recent withdrawals in COMEX silver inventories from those taking delivery on October futures. All are supportive of a pending shortage in 1000 oz silver bars, the industry unit of trade. When the shortage of 1000 oz bars becomes apparent, all talk that silver has only experienced a "retail" shortage, will be dashed. Coupled with the bullish COT structure, it adds up to strong upside price potential ahead.

The Next Bubble?
The danger, according to deflationists is that no matter how much ‘money’ global
authorities throw at the problem, a black hole created by decades of credit/debt (as the primary macro-economic fundamental) is going to suck it all up with a near infinite appetite to correct the mess made by a system in its death throes.
The title of the piece is ‘The Next Bubble?’ and as I see it, there are two primary
candidates; a bubble in financial Armageddon as policy makers’ efforts are rendered null and void by the ‘black hole’ and all hope is lost as even the word ‘depression’ will be an understatement. Or a new bubble, in some asset class, as global money supplies shot out of fiscal Howizters reach their intended target, the investment community.
I will go with number two, because inflation is the increasing supply of money and with the deflationary backdrop and inflation fears nowhere on radar, policy makers have a free pass, a directive, to print as much ‘money’ as they can as fast as they can. This makes Greenspan look like child’s play.
The markets, gripped in fear and panic will take whatever time they need to come around to the new inflation cycle. In fact, they will likely not respond in force until rising prices are evident. But what I am interested in is the first movers in a new inflation cycle –
aside from physical gold, a sound holding about which value, not price is key – and those first movers are likely to be the companies that dig gold out of the ground. Given their outrageous undervaluation vs. the metal itself, when they do emerge from the global stock panic, leverage to the price of gold, the asset outperforming nearly everything except the USD of late (just as it should be) is likely to come into play in a forceful manner. Picture an elastic band being stretched to near the breaking point. If it breaks, it is all done. Nice to know ya and thank you for having been a subscriber to NFTRH for a little while but I’ve gotta go now and hunt me some squirrels to serve the family for dinner tonight. But if the policy takes… if the money supplies continue upward, this ‘money’ will have to go somewhere and it will not go back to where it was so unscrupulously abused in the last cycle, like the credit markets or an unregulated Wall Street.
No, I have to believe that the current crisis may actually inspire a bubble in sound
thinking, at least in the early part of the cycle. The fact is the gold miners are at historic undervaluation vs. the metal and the metal, their product which is first and foremost a monetary and investment safe haven, is outperforming nearly all global assets during the deflationary impulse, including miner cost inputs like energy and industrial commodities along with human hopes for prosperity. Not to sound callous, but a worker who is thankful to have his or her job is more productive and cost effective than one looking over his or her shoulder at the next guy in a ‘I wanna git mine’ inflationary boom.

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