Tuesday, May 26, 2009

Obvious Attempts To Suppress Gold Prices Are A Sign Of Desperation

Another Smoking Gun
By: Theodore Butler
From almost the day of the recent price lows in gold and silver, as measured from the COT as of April 21 to the close of business May 19, the commercials have increased their total net short position in silver by more than 16,000 contracts (80 million ounces) and in gold by more than 33,000 contracts (3.3 million ounces). The reciprocal of this is that the non-commercials and non-reportable traders have increased their net long positions by those same amounts. In a moment, I’ll introduce some new data intended to show why this is manipulation. Further, since the cut-off in the most recent COT, there appears to have been an orgy of additional speculative buying and dealer selling, especially in gold, maybe in excess of another 30,000 contracts.

We are now at COT levels in silver and gold more negative than anytime since last summer. (Including the amount thought added in gold since the cut-off Tuesday). Please don’t interpret this as a suggestion to sell long-term positions. That is not my intent, nor the purpose of this article. There are many positive factors, just not the COTs any longer. Silver is going much higher in the long run, for sure, regardless of what happens in the short term. The COTs are short term in nature and have nothing to do with the long term. Besides, the manipulative silver shorts could always get overrun and that would add incredible fuel to an upside move.

A manipulation cannot occur when many unrelated and diverse entities buy or sell. The free market thrives on many unrelated participants buying and selling. You can have mass hysteria and a price bubble on extreme group behavior, but not a manipulation. A manipulation can only occur due to the buying or selling by one or a few entities, where such buying or selling influences price. With that in mind, let’s take a detailed look at the recent data in the COTs for silver and gold.

As I indicated above, COT data shows more than 16,000 silver contracts and 33,000 gold contracts were sold by the commercials and bought by all other traders on the price rally, with more since the cut-off. As expected, most of the commercial selling was by the raptors, the smaller commercials who were net long. But roughly 40% of the commercial silver and gold contracts sold were by the four largest traders, commercials who already held a large concentrated short position. In fact, the 4 big shorts accounted for all the new short selling in silver and nearly all the new short selling in gold, and that includes all the other traders in every category - commercial, non-commercial, and non-reporting. Both before the recent rally commenced and since, there would be no commercial short position, at all, in silver and a tiny total commercial short position in gold, were it not for the four large traders. A very few big traders exist on one side of the market - the classic hallmark of manipulation. Nothing new here.

What is new is this. On the rally, in which the 4 big traders accounted for almost all the short selling, what was the concentration on the long side? You don’t hear me talking often about the 4 big long traders in COMEX silver and gold futures. There’s a good reason for that. The concentrated long position is tiny compared to the concentrated short position. In gold, the largest four short traders hold a position almost double the position held by the largest four long traders. In silver, the big 4 shorts hold a position more than four times the size of the big 4 longs. As lopsided as that is, the data on the recent rally is even more extreme.

Whereas the four big shorts in silver and gold accounted for nearly all of the short selling on the recent rally, guess how much buying the big four longs accounted for? The answer is zero. In fact, less than zero, in that the four big gold longs sold 9,000 contracts net, while the four big silver longs sold 2300 contracts net. Let me repeat that - while the 4 big gold and silver shorts added significantly to their already large short position, the 4 big longs in gold and silver reduced their long positions. No buying by the big longs, massive short selling by the big shorts. What does this mean? It means lots of smaller entities bought, while just a few giant traders sold a lot. Many bought, few sold.

Remember, you can’t have a manipulation if many diverse entities are buying or selling. You can only have a manipulation when a few entities act in concert to influence price. This is exactly what just occurred in COMEX gold and silver. It couldn’t be clearer and it comes from government data. Alarms and whistles should be blaring at the CFTC, at least enough to wake them from their deep slumber. And to those who might say prices did actually rise in spite of this additional and concentrated short selling, so what? If these big four shorts in silver and gold hadn’t added to their already concentrated short positions, wouldn’t prices have rallied much more than they did? That’s why rising prices alone don’t negate the possibility of short side manipulation.

How is it possible that the short concentration in gold and silver futures can run to record levels when all reports of hedging by the miners is shown to be at a decade low? What are they hedging?


Gold derivatives -- The tide turns
Reginald H. Howe
On May 19, 2009, the Bank for International Settlements released its regular semi-annual report on the over-the-counter derivatives of major banks and dealers in the G-10 countries and Switzerland for the six months ending December 31, 2008. See A. Moses, Derivatives Market Declines for First Time on Record (Update1), Bloomberg.com (May 19, 2009). The total notional value of all gold derivatives declined from $649 billion at mid-year to $395 billion at year-end, or almost 40%. Although gold prices fell from $930 to $870 (London PM) during the period, gross market values dropped only marginally from $68 to $65 billion, probably reflecting the impact of increased volatility on valuing options.

Forwards and swaps declined from $222 to $152 billion, and options from $428 to $243 billion. Converted to metric tonnes at period-end gold prices, total gold derivatives dropped by almost 7600 tonnes during the last half of 2008, with forwards and swaps falling nearly 2000 tonnes to somewhat over 5400, and options by over 5600 tonnes to almost 8700.

The significant declines in worldwide gold derivatives reported by the BIS for the last half of 2008 stand in stark contrast to the figures for U.S. commercial banks reported by the Office of the Comptroller of the Currency. From June 30 to December 31, 2008, the total notional amount of gold derivatives held by U.S. commercial banks fell from $114 billion to $107 billion, or just over 6%, compared to the 40% drop for all major banks and dealers in the G-10 plus Switzerland. JP Morgan Chase's gold derivatives fell from $85.3 to $82.5 billion, scarcely 3.3%, and HSBC's from $27.5 to $19.2 billion.

As argued in numerous earlier commentaries on gold derivatives, the best approximation of the total net short physical position in gold arising largely as the result of gold lending in one form or another by central banks is the total notional value of gold forwards and swaps as reported by the BIS and converted into tonnes. Accordingly, the recent data suggests that this short position was reduced by some 2000 tonnes in the last half of 2008, and that as a consequence of the fall financial crisis, official gold lending is now definitely on the ebb even if, like a modern King Canute, the Federal Reserve and JP Morgan Chase are trying to stand against the tide.

Gold bugs at last have their perfect trinity
By Ambrose Evans-Pritchard
The world's top hedge fund manager John Paulson has built a gold position of at least $5.5bn, the biggest such move since George Soros and Sir James Goldsmith bet on Newmont Mining in 1993.

Britain has become the first of the Anglo-Saxon "AAA" club to face a downgrade. As feared, the cancer of bank leverage is spreading to sovereign cores.

Gold prices tend to slide in late May and languish through the summer, because of the seasonal ups and downs of jewellery demand. The trader reflex would be to short gold at this stage after its $90 vault to $959 an ounce over the past month. They may think again this year.

Paulson & Co has bought $2.9bn in SPDR Gold Trust, the biggest of the gold exchange traded funds (ETFs), which now holds 1106 tonnes − three times the Brown-gutted reserves of the United Kingdom.

GMO's Jeremy Grantham says in his latest note, Last Hurrah And Seven Lean Years, that the market value of equities, houses and commercial property in the US reached $50 trillion in the boom. This "perceived wealth" sustained $25 trillion of debt.

The crash has cut this wealth to $30 trillion, but the debts are still there. America's debt-gearing has exploded, as it has in the UK and Europe. This looks awfully like Irving Fisher's "debt deflation" trap of 1933. It will be a long slog for households to bring their debt-to-wealth ratios down to manageable levels.

You can argue – as do UBS, Merrill Lynch, ING, and Capital Economics, to name a few – that massive global stimulus is merely struggling to off-set a massive deflationary shock.
So how will gold fare in a "Japanese" stalemate world where neither inflation nor deflation gets the upper hand? The eight-year rally that has lifted gold from $254 to $959 may lose momentum for a while.

"The air is getting thin up here," said John Reade, precious metals guru at UBS. "Rich investors are no longer rushing out to buying gold bars as they did after the Lehman collapse. Still, we think it is highly significant that both China and Russia – two of the biggest holders of foreign reserves – are both buying gold," he said.

Personally, I remain a gold bug out of fear that the most corrosive phase of this crisis lies ahead. There are two more boils to lance: Europe and China. As the IMF keeps telling us, Europe's banks are still covering up their vast toxic debts. Nor has the G20 begun to address the root cause of the global crisis, which lies in excess exports from East (aided by currency manipulation) to an over-spending West. China is putting off the day of reckoning with its crisis response, which is to build yet more plant to flood the world with yet more over-capacity.

For "political bears" the risk is that the EU polity fragments under strain, and that governments restrict basic markets to defend themselves – whether by imposing exchange controls to stop bond flight, or shutting derivatives markets used as hedges, or putting up trade barriers. We will find out if and when unemployment hits 10pc in America, 12pc in Germany, and 20pc in Spain, or if migrant workers rampage in Shenzhen.

James Turk: Updating the charts
GoldMoney founder James Turk, editor of the Freemarket Gold & Money Report anad consultant to GATA, writes that Treasury note yields have made "a huge round trip" and now are rising as the U.S. government devalues the dollar by turning debt into currency. "The more Treasury paper the Fed buys, the lower the dollar will fall in the foreign exchange markets and, more to the point, the higher gold will rise." Turk's new commentary is headlined "Updating the Charts" and you can find it at the GoldMoney site here:

US bonds sale faces market resistance
By Ambrose Evans-Pritchard
The interest yield on 10-year US Treasuries – the benchmark price of long-term credit for the global system – jumped 33 basis points last week to 3.45pc week on contagion effects after Standard & Poor's issued a warning on Britain's "AAA" credit rating.

The yield has risen over 90 basis points since March when the US Federal Reserve first announced its controversial plan to buy Treasury bonds directly, a move designed to force down the borrowing costs and help stabilise the housing market.

The yield-spike may be nearing the point where it threatens to short-circuit economic recovery. While lower spreads on mortgage rates have kept a lid on home loan costs so far, mortgage rates have nevertheless crept back up to 5pc.

The Obama administration needs to raise $2 trillion this year to cover the fiscal stimulus plan and the bank bail-outs. It has to fund $900bn by September.

"The dynamic is just getting overwhelming," said RBC Capital Markets.

The US Treasury is selling $40bn of two-year notes on Tuesday, $35bn of five-year bonds on Wednesday, and $25bn of seven-year debt on Thursday. While the US has not yet suffered the indignity of a failed auction – unlike Britain and Germany – traders are watching closely to see what share is being purchased by US government itself in pure "monetisation" of the deficit.

The US is not alone in facing a deficit crisis. Governments worldwide have to raise some $6 trillion in debt this year, with huge demands in Japan and Europe. Kyle Bass from the US fund Hayman Advisors said the markets were choking on debt.

"There isn't enough capital in the world to buy the new sovereign issuance required to finance the giant fiscal deficits that countries are so intent on running. There is simply not enough money out there," he said. "If the US loses control of long rates, they will not be able to arrest asset price declines. If they print too much money, they will debase the dollar and cause stagflation.

"The bottom line is that there is no global 'get out of jail free' card for anyone", he said.

Why Wall Street Is Deserting Treasuries and the Dollar
By Tom Petruno, Los Angeles Times
This week couldn't end fast enough for the Treasury bond market or the dollar, both of which were hammered again today as investors bailed out in thin pre-holiday trading.

The yield on the 10-year T-note jumped to 3.45%, up from 3.35% on Thursday and 3.14% a week ago. The yield now is the highest since mid-November.

So much for the idea of Treasuries being a haven: The iShares Barclays 20+Year Treasury exchange-traded fund, which owns long-term government bonds, has lost 22% of its value since the start of the year as rising market yields have depressed older bonds' prices.

In the currency market the euro shot up to a five-month high of $1.40 from $1.39 on Thursday and $1.35 a week ago. The dollar also slumped further against most other major currencies and a lot of minor ones.

As for the stock market, it performed a modest levitation act for much of today's session, only to surrender to gravity in the last hour.

Global investors and traders suddenly seem to have every reason in the book to sell Treasuries and the greenback, and no reason to buy.

The Obama administration might not care much about rising Treasury yields and a falling dollar, except for the velocity of the moves: The U.S. can't afford a continuing spiral up in yields and spiral down in the dollar's value because they could feed on themselves and unnerve our foreign creditors, particularly China.

And although it hasn't happened yet, at some point the jump in Treasury yields will begin to push up mortgage rates. Then say goodbye to any hopes for a housing recovery.

All of this sets up markets for another big test next week, when the Treasury plans to sell a total of $101 billion of two-, five-, and seven-year notes Tuesday through Thursday.

"When the market is against you it's very hard to have a successful intervention," warns Dominic Konstam, an interest-rate strategist at Credit Suisse in New York.


*****Who sold 65 tons of COMEX gold in the last two days?*****
by Eric deCarbonnel
Notice the dollar breaking down? This is very bullish for gold.

Normally, a very bullish development, such as the dollar’s current freefall, would lead to a decrease in bearish bets against gold.

Despite what one might normally expect, open interest on the COMEX did not fall. In fact, it rose by 22,992 contracts in two days. That is 65 tons in just 2 days.

So then, who sold 65 tons (2.3 million ounces) of gold on the COMEX in the last two days? Where did this 65 tons come from? Why sell it now, as gold soars and the dollar crashes?The only logical answer is that this is a blatantly obvious attempt to keep gold prices in check. The 65 tons of gold was conjured out of thin air.

Conclusion: There are two key points to take away from this.

1) Despite the best efforts of gold shorts, physical demand is driving prices higher. The 65 tons of paper gold sold on the COMEX was to absorb as much investor demand as possible, keeping it out of the physical market where it would send prices upwards.

2) Such obvious attempts to suppress gold prices are a sign of desperation. Each new piece of evidence of manipulation pushes new investors into the physical gold markets, which can’t be controlled. So while shorts on the COMEX managed to absorb 2 billion dollars of gold demand, they also provided near indisputable proof that the COMEX gold market is rigged, damaging faith in the US financial system.

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