Thursday, July 2, 2009

This Smells Worse Than Fish

If the month of June now passed coughed up anything of value to the Gold/Silver Bugs it was more proof that their markets are a scam.

We learn early in our Gold Bug apprenticeship that Gold is "the inverse of the US Dollar". Silver Bugs recognize early on that Silver is more often tied to Oil's hip, or Coppers leg, than it is to the US Dollar.

We also learn early on that both Precious Metals are of finite supply, limited by their availability "in the ground", and that the US Dollar has an infinite supply, unlimited thanks to the invention of the printing press.

Therefore, in theory, if the supply of US Dollars rises unchecked, the price of Gold and Silver should rise. Too many Dollars chasing too few goods. Inflation.

But that "theory is only valid in a "free market" unhindered by derivatives and flim-flam. Enter the CRIMEX over at the New York Mercantile Exchange [NYMEX]. This is where the supply of Gold and Silver becomes infinite through the wonder of the "futures contract". This is where criminals, working for the US Government, create Gold and Silver out of thin air, and sell it to an, until now, unsuspecting public.

Supposedly, the NYMEX is regulated by the U.S. Commodities Futures Trading Commission [CFTC].

From the CFTC home page:

Congress created the Commodity Futures Trading Commission (CFTC) in 1974 as an independent agency with the mandate to regulate commodity futures and option markets in the United States. The agency's mandate has been renewed and expanded several times since then, most recently by the Commodity Futures Modernization Act of 2000.

In 1974 the majority of futures trading took place in the agricultural sector. The CFTC's history demonstrates, among other things, how the futures industry has become increasingly varied over time and today encompasses a vast array of highly complex financial futures contracts.

Today, the CFTC assures the economic utility of the futures markets by encouraging their competitiveness and efficiency, protecting market participants against fraud, manipulation, and abusive trading practices, and by ensuring the financial integrity of the clearing process. Through effective oversight, the CFTC enables the futures markets to serve the important function of providing a means for price discovery and offsetting price risk.

The CFTC's mission is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets.

Too bad they don't practice what they preach. The CFTC is an utter failure. Today the NYMEX futures markets, in almost any commodity you chose to observe, hardly represent "price discovery". They are much more representative of a casino where the house rarely loses. The house being the the "big banks" financed by the US Government's unending supply of Dollars.

How is it then, if the CFTC is doing its job, that just in Silver alone, position limits are exceeded by as much or more than 100%?

According to statistics compiled by Ted Butler, "In silver, there are no hard position limits in force. There used to be, but the CFTC allowed the COMEX to replace hard position limits many years ago. Instead, now there is an “accountability limit” of 6,000 contracts. This limit is regularly exceeded by the big silver shorts, but rarely by the longs. Since there are 5,000 ounces in a COMEX futures contract, the accountability limit is equal to 30 million ounces."

Let's do a little math. [This is why, as much as we hated it in junior high school and swore we would "never need to know this stuff", we still payed attention.] As of last week, the number of open futures contracts in Silver was 105,699. If each contract represents 5000 ounces of Silver then these futures contracts "represent" 528,495,000 ounces of Silver.

Let's hop over to the COMEX Silver warehouse and see how much Silver they have in there to back up those 105,699 contracts. Oh my, look at this. There is ONLY 117,583,739 ounces of Silver in storage in the COMEX Silver warehouse. Doing some more math we can see that the COMEX futures contracts represent three and a half times as much Silver as there is available to cover these contracts. This smells worse than fish.

Ted Butler points out that "CFTC data show that the 4 largest shorts currently hold an average position of almost 12,500 contracts each, while the 4 largest longs hold an average long position of just over 3500 contracts each."

"The current Commitment of Traders Report (COT) for positions held as of June 23, indicate the 4 largest traders as holding a net short position of 47.2% of all COMEX futures contracts, as well as almost 38% of equivalent world silver production. Over the last year, the CFTC has reported, via its Bank Participation Report, that 1 or 2 US banks have held a net short position of more than 33% of all COMEX futures contracts and 25% of world production."

These large shorts [aka US Government funded Banks] are represented in the COT Report as "commercial". What is a commercial trader according to the CFTC? Glad you asked.

Commercial and Non-commercial Traders. When an individual reportable trader is identified to the Commission, the trader is classified either as "commercial" or "non-commercial." All of a trader's reported futures positions in a commodity are classified as commercial if the trader uses futures contracts in that particular commodity for hedging as defined in CFTC Regulation 1.3(z), 17 CFR 1.3(z). A trading entity generally gets classified as a "commercial" trader by filing a statement with the Commission, on CFTC Form 40: Statement of Reporting Trader, that it is commercially "...engaged in business activities hedged by the use of the futures or option markets." To ensure that traders are classified with accuracy and consistency, Commission staff may exercise judgment in re-classifying a trader if it has additional information about the trader’s use of the markets.

A trader may be classified as a commercial trader in some commodities and as a non-commercial trader in other commodities. A single trading entity cannot be classified as both a commercial and non-commercial trader in the same commodity. Nonetheless, a multi-functional organization that has more than one trading entity may have each trading entity classified separately in a commodity. For example, a financial organization trading in financial futures may have a banking entity whose positions are classified as commercial and have a separate money-management entity whose positions are classified as non-commercial.

I find it difficult to believe that a "bank" is involved in the Silver Futures Market to hedge their business. I don't know of any banks that operate Silver mines, do you? Why would a "bank" then be hedging their production of Silver if they aren't producing any?

Oh wait, I get it. They are hedging their production of Silver that doesn't exist? That has to be it! The banks have "created" 410,911,261 ounces of Silver via their production of 105,699 futures contracts. Futures contracts that according to CFTC regulations they are not "legally" permitted to possess. [I understand these four or less banks don't own "all" the COMEX futures contracts, but for the sake of argument we will use the toal number of cotracts in our calculations because these banks hold such a high percentage of them.]

Does this strike you as an example of the CFTC "protect[ing] market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options"? No I didn't think it does either.

The CFTC itself is a fraud. The Gold and Silver Markets on the COMEX are a fraud as well. Need more proof? Let's go back to our opening observation that Gold trades as an inverse of the US Dollar. Consider the following statistics and tell me if you still believe that Gold trades in the inverse of the US Dollar.

June 1, 2009 / Close July 1, 2009 / % Gain / Loss

GOLD 975.30 / 940.80 / -3.5%

SILVER 15.60 / 13.77 / -11.7%

OIL 68.58 / 69.31 / +1.0%

USD 79.21 / 79.66 / +.005%

COPPER 231.90 / 233.05 / +.005%

The US Dollar was virtually unchanged during the month of June, yet the price of Gold dropped 3.5%. Silver, which trades in the shadow of Gold dropped dramatically, falling 11.7% in the month of June. Interestingly, the prices of two key industrial commodities, Oil and Copper, remained virtually unchanged in the month of June along with the Dollar. Something smells worse than fish.

We can only surmise that something nefarious is at work behind the scenes of the COMEX Gold and Silver Markets that negates the hugely bullish fundamentals that "should" be supporting both of them in these souring economic times. I have posted a continuous stream of essays on this blog that attempt to identify the manipulation of Precious Metals Markets, so I will refrain from trying to do so myself here. I just find these statistics from just the past month a bit "disturbing" and certainly revealing.

The frustration that we all feel because of this "obvious manipulation" is certainly beginning to feel like a weight we Gold / Silver bugs seem destined to bear. We have been rewarded with rising prices in these two Precious Metals since the inception of their Bull Market in 2001, but we haven't been fully rewarded. I still feel like I am being robbed each and every day by my government, and cheated by those that are supposed to be protecting my interests in these markets. I remain vigilant, and you should too. The TRUTH is out there. And in time, the TRUTH will crush the lies we are forced to endure. The TRUTH will eradicate the stench of Bullshit.

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