Thursday, July 15, 2010

Crepe Paper Caps To Be Shredded Soon

"I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them."
- Thomas Jefferson

Gold and Silver remained capped by not for profit sellers. Gold at 1217, and Silver at 18.50. It would appear that this capping is related to options expiration on shares of the Gold ETF, GLD and the mining shares tomorrow, Friday July 17.

No matter how how look at the prices Of Gold and Silver...the markets are blantantly rigged. Consider today's drop in the US Dollar and one must vigorously scratch their head to try and understand the lack of reaction in the prices of Gold and Silver.

Consider that since June 6th, the Dollar has dropped 7%, from 88.70 to 82.48 as I type this this evening. Over the exact same period in time, Gold has fallen 1%. The US Dollar has dropped 7% in six weeks and Gold has not only not risen a dime, but has actually fallen 1%? Go figure...

Look for Gold to close the week below 1220, with Silver below 18.50. Expect a powerful rally in the Precious Metals and their mining stocks next week.

BIS swaps seem meant to stretch out paper gold
Submitted by CHRIS POWELL, Secretary/TreasurerGold Anti-Trust Action Committee Inc.
Reginald H. Howe of, plaintiff in the 2000 federal lawsuit against the Bank for International Settlements for gold market manipulation, analyzes the recent massive gold swaps undertaken by the BIS and figures that they are likely "the latest technique for giving official support to an increasingly shaky gold banking business," a way of "increasing the ratio of paper claims on gold to the underlying amount of available real metal." Howe concludes: "The growing reluctance of central banks to part with whatever gold they have left can only be a positive development for committed gold investors."

Howe's analysis is headlined "Gold Derivatives Update: BIS Swaps" and you can find it at the Golden Sextant here:

Gold Price Swings on Swap News
By Patrick A. Heller
The publicity over the existence of this gold swap, for which it appears that the Wall Street Journal’s article deserves a lot of the credit, led the BIS to take an unusual step of issuing a news release with supplemental information about the swap. The BIS news release provided a few more details, all of which the BIS obviously had preferred to not reveal to the public.

Normally, the BIS only deals with central banks and monetary authorities. Upon the initial discovery of the existence of this gold swap, some analysts thought that this swap was done on behalf of some the central banks from troubled nations participating in the euro (such as Greece, Spain, or Portugal). When further examination showed that such a swap would not practically facilitate any easing of financial problems for such central banks, suspicion next fell on the International Monetary Fund. It is known that the IMF is trying to improve its cash flow, which is why it has been selling part of its gold holdings. The IMF theoretically has enough gold to have offered as collateral to the BIS and apparently could have used the cash flow from the swap, which would not force the IMF to sell this additional amount of gold.

However, the BIS announcement destroyed all of these analysts’ theories. The news release stated that the gold swaps were being done on behalf of commercial banks. Further, the BIS disclosed that the size of the swap had grown larger since the March 31, 2010, financial statements were released. Former central banker and market analyst James Turk stated that the details of these transactions will probably never be made public.

In order for any commercial banks to conduct such transactions, they would have to be able to produce the more than 11 million ounces of gold for collateral. For all practical purposes, the only commercial banks that could mobilize that amount of gold are the so-called bullion banks. These banks, which act as wholesale market makers for gold, include Goldman Sachs, HSBC, Bank of Nova Scotia, JPMorgan Chase, Deutsche Bank, Barclays, UBS, Societe Generale, Mitsui, and others. However, it is highly unlikely that any of these banks would use a gold swap for the purposes of raising up to $14 billion of cash flow. There are less cumbersome ways to acquire these funds, mostly by dealing with central banks. Adrian Douglas, an analyst whose work I have previously cited, suspects that the use of commercial banks was really a means of hiding the identity of one or more central banks that ultimately ended up with the cash realized from this gold swap. He said, “So the BIS swaps look like a tripartite transaction. The commercial bank or banks made a swap with a central bank or banks and then the commercial bank or banks made a swap with the BIS.” For the BIS to be willing to conduct such transactions with a commercial bank would almost require a guarantee from one or more central banks or monetary authorities, which makes Douglas’s theory all the more plausible.

Since this news has come out, there has been a lot of uncertainty in the gold market about what effect this gold swap may have. As I see it, the three most likely scenarios all would be bullish for the price of gold. First, I suspect that much of the gold involved in these swaps (now totaling more than 12 million ounces) has already been delivered against orders on the physical market. If this is true, then existing demand for physical gold is much higher than generally perceived. If the public were to find out that much of this gold were already sold onto the market, this news would boost future demand.

Second, the cash received in the gold swap and the gold could be returned to the original parties without the gold being sold onto the market. That would be an indication that there is no quantity of physical gold hanging over the market, which is currently perceived as a risk that has held down prices in the past week.

Third, one or the other parties could end up selling some or all of this gold in the market in the future. It may seem counterintuitive, but I expect that such a sale would actually increase demand for gold. The reason for this (beyond the mere indication that this swap shows that one or more parties involved in this swap is in dire financial straits) is that there are several central banks and sovereign funds that would jump at the opportunity to acquire $14 billion worth of physical gold. The speed with which such a modest quantity of gold would be snapped up would spur others to jump on the gold bandwagon.

While all this turmoil is going on in the gold market, the COMEX silver inventories are continuing to be depleted. At the close on June 16, the COMEX had a total of 119.5 million ounces of silver in bonded warehouses. By the close on July 12, inventories had dropped to 112.78 million ounces, a decline of 6.72 million ounces (5.6 percent) despite extraordinary efforts to try to beef up COMEX inventories. On July 12 alone, about 1.3 million ounces were withdrawn from just two depositories – HSBC and Scotia Mocatta (a subsidiary of Bank of Nova Scotia). These are the two depositories strongly suspected of not having enough physical silver on hand to cover their legal obligations to the COMEX and other customers. The run on the COMEX is obviously serious enough that a massive effort seems to be going on behind the scenes not only to scrounge up whatever physical supplies that can be located, but also to keep the news of the run from being widely reported.

Gold Options Surge by More Than 1,000% in 10 Weeks
Data from the gold options market shows that smart money believes that gold will go higher in the coming months and that the recent fall in prices may be another correction and consolidation prior to another move up in prices. Open interest in options which allow holders to buy gold at $2,000 an ounce by December 2011 has surged a massive 11-fold on the Comex since May 11. Open interest to buy at $1,500/oz by the end of the year has fallen by 33 percent which suggests that gold market participants remain unsure of gold's short and medium-term prospects but confident of higher prices in the long-term.

Trade Deficit Gets Even Worse
By Dirk van Dijk, CFA
In May, the trade deficit expanded to $42.27 billion from $40.32 billion in April. Relative to a year ago, the trade deficit is up 70.0%, but May of a year ago marked the low point in the trade deficit after world trade collapsed following the 2008 financial meltdown. The May trade deficit was also significantly worse than the $39.5 billion that was expected.

The trade deficit is like a cancer on the economy. We don’t feel it acutely at any given time, but slowly but surely it is going to kill the economy. Not just put it into a recession for a few quarters (although each dollar increase in the trade deficit translates to a dollar decline in GDP) but a real tangible and permanent decline in the standard of living for the country.

The trade deficit is a far bigger problem than the budget deficit. Right now a budget deficit is needed to fill a huge gap in aggregate demand as the consumer is trying to deleverage and repair his balance sheet. There is no such temporary need for a trade deficit -- it is simply harmful to the economy, both short-term and long-term.

Fed eyes steps to bolster sputtering recovery
WASHINGTON (AP) -- Federal Reserve officials cut their forecasts for growth this year and signaled they stood ready to take new steps to keep the recovery alive if the economy worsens.

A new document, released Wednesday, revealed a more cautious mood among the Fed policymakers in light of Europe's debt crisis, a volatile Wall Street, a stalled housing market and high unemployment.

With risks growing, Fed officials at their June 22-23 meeting saw the need to explore new options for bolstering the economy. That's a turnaround from earlier this year when they were moving to wind down crisis-era supports.

No new specific steps were disclosed or agreed upon at that time.

However, if the recovery were to deteriorate, Fed policymakers have options. They could revive programs to buy mortgage securities or government debt. They could lower the rates banks pay for emergency Fed loans. The Fed also could create a new program to spark more lending to businesses and consumers in a bid to lure them to ratchet up spending and grow the economy.

In short, the Fed is planning to print money to infinity to revive the economy. This revelation by the Fed this week should have sent the price of Gold soaring, yet nothing happened. The caps on Gold and Silver can not last forever. The news this month of the Gold swaps at the BIS are proof of that. Toss in the pending defaults at the CRIMEX in Silver, and the caps on the prices of the Precious Metals begin to look pretty thin here.

Be right and sit tight.

1 comment:

  1. In short, the Fed is planning to print money to infinity to revive the economy. This revelation by the Fed this week should have sent the price of Gold soaring, yet nothing happened. The caps on Gold and Silver can not last forever. The news this month of the Gold swaps at the BIS are proof of that. Toss in the pending defaults at the CRIMEX in Silver, and the caps on the prices of the Precious Metals begin to look pretty thin here.