Tuesday, August 24, 2010

Mr. Obvious Hands A Blind Squirrel A Nut

"The country cannot recover until the only thing politicians stimulate is demand for new economic leadership."
-Peter Schiff

Gold hits 1-week low on weak equities, firm dollarninemsn 24-Aug-Tue

Gold Drops for Third Straight Day as Dollar's Gain Pares Investment DemandBloomberg 24-Aug-Tue

Gold retreats on rising dollarMarketWatch 23-Aug-Mon

These headlines are a load of crap. Gold is "weak" for obvious reasons, the headline writers just don't want you to see them.

Mr. Obvious dropped a note in my email box this morning to remind me that options and futures on the Precious Metals expire on the September contracts this Thursday and Friday. Hey, even a blind squirrel finds a nut occasionally. But that doesn't mean a blind government regulator will stumble across a commodity manipulation even once in his career.

It would appear that every effort will be made to contain Silver under $18, and Gold will be pushed under $1200, for the balance of this week. Certainly, by now, we understand this is done to steal the profits of legitimate traders in the Precious Metals, and protect the bullion banks from the devastation of having to scramble to find bullion to meet delivery demands of those whose contracts might close the month in the money.

This is the BS that occurs EVERY month because our blind government regulators REFUSE to stop these bullion banks from selling Gold and Silver contracts without the Gold and Silver to back them up. I am convinced the CFTC regulators sit idly by chuckling at the stupidity of Precious Metals traders asking themselves, "If they know the markets are rigged, why do they keep doing business with these crooked banks?"

Well if these lard asses would step up and do their jobs, there would be no crooked banks. But this theory does raise an interesting thought. Why do Precious Metals traders do business with these crooked banks? Because they are traders, and NOT investors. Investors buy physical bullion to own, not trade. Investors should thank these foolish traders, and crooked banks for making available the penultimate vehicle to dollar cost average an investment.

Think about it... Despite every effort by the banks to halt the rise in the "price" of Gold, the have completely failed. Imagine the opportunity for the savvy investors that has been presented EVERY month to buy Precious Metals on sale, and add them to their hoard. It's time to quit bitchin, and buy, buy, buy at the end of every month. And don't forget to send a thank you card to Gary Gensler at the CFTC. Of course make sure it is a card written in braille.

China Swallows Obama Stimulus Meant for U.S. Economy
By Andy Xie
American pundits, Nobel laureates included, are predicting Japan-style deflation for the U.S. and Europe. They are urging the Federal Reserve to pursue another round of quantitative easing to stop the onset of an Ice Age for Western economies. The Fed didn’t oblige at its last meeting, but it threw a bone to the deflation crowd by promising not to pull money out of its previous round of asset purchases to stimulate a recovery.

On the other side of the world, consumer prices are surging. Emerging markets as a whole now have an inflation rate of more than 5 percent. India is registering price increases of more than 13 percent. China’s are more than 3 percent. But it surely feels a lot higher for average Chinese.

The emerging markets are on fire.

Deflation prophets in the West are in for a rude awakening. Eastern fire will turn Western ice into a mess, and 2012 looks like it will be the year of melting. The fuel for the fire is coming from deflation-fighting stimulus programs, such as that of U.S. President Barack Obama.

Stimulus is prescribed as a panacea for recession. In today’s global economy, it isn’t effective in the best of circumstances and is outright wrong for what ails the West now.

Trade and foreign direct investment total half of global gross domestic product. Multinational corporations drive both. They shop around the world for the lowest-cost production centers and ship goods to wherever the demand is. Demand and supply are dislocated. So when a government introduces stimulus, the initial increase in demand doesn’t necessarily boost local supply. More importantly, if multinationals decide to invest somewhere else, there wouldn’t be an increase in jobs to sustain the growth in demand beyond the stimulus.

Just as water flows down, stimulus affects low-cost economies more, wherever it is initiated. As the West pours money into the global economy through large fiscal deficits or central banks expanding balance sheets, the emerging economies are drowning in excess liquidity. Everything is turning red-hot.


Huh? No Inflation?
Dave Kranzler, The Golden Truth
So I decided to update some prices of select everyday commodities - the kinds of goods that the Government conveniently overlooks when calculating its PPI/CPI metrics. This should be eye-opening: measured over the last 12 months, prices of all these items have increased by: copper 37%, corn 35%, pork bellies (bacon anyone?) 350%, cotton 74% and heating oil 33%.

Let's be clear about one thing. The true definition of inflation is not higher prices of assets, goods and services. Prices in the system that we observe and experience are nothing more than the manifestation of the underlying cause, which is currency devaluation from an increase in the money supply in excess of a country's real economic output.

Another way to look at the devaluation of the dollar is to measure it against the price of gold. After all, up until FDR did his magic in 1933, anyone could exchange their dollar bills for gold or silver at the Fed "window." In 1971, when Nixon completely shuttered the gold window, thereby completely unleashing the dollar from its tether to to gold, the price of gold was $35.

...the price of gold has increased 3500%, or the dollar has lost 97% of its value since 1971. Again, try to think about the long term affects of this insidious, long term devaluation of the dollar. My parents bought the home I grew up in 1969 for about $45k. The last sale I heard about around the peak of Denver real estate was $450,000. Given the devaluation of the dollar vs. gold, they would have been much better off taking that $45,000 and buying gold and renting.

Let's tie this back to the opening comments about the surprisingly large 12 month price increases in basic commodities. I would argue that a significant portion of the money that the Fed/Treasury has printed and injected into the system since the credit crisis of 2008 has flowed into commodities. This would be a natural place, besides gold and silver (up 31% and 37% respectively over the last 12 months), for printed money to flow into, as they represent consumable, depletable goods which have value to everyone and could ulitmately be used in a barter system if/when the dollar is ultimately rejected as a medium of exchange. Are you better off holding gold, silver and select commodities or holding paper dollars backed by a Government that would be insolvent if it weren't for its ability to use the printing press?

Silver Velocity- The Coming Bullet
Uniquely silver has been in a multi-decade imbalance between annual "production" and demand from industrial, jewellery and investment. Ted Butler of Investment Rarities Incorporated has become the most ardent silver analyst and has done extensive research into the issues of dwindling stockpiles. His well documented research extended into the leasing market and the existence of huge short positions on Comex (namely among a few large bullion houses) that have been allegedly used to manipulate the price of silver lower for benefit of the "users". This supply of paper silver has undoubtedly arrested the rise in the price of physical silver bullion, as there would appear to be a structural imbalance in supply vs demand, which can only be resolved by a much higher increase in price in order to encourage ‘normal’ free market forces of supply and demand to interact.

The world annual silver mine output is approximately 650 million troy ounces (average of last decade), with about another 180 million ounces from recycling, and possibly another 100 million ounces from selling from other sources. Industrial consumption is almost 45%, jewellery consumes about 25%, photography is down to about 15%, leaving 15% for investor demand. Investors buy about 100 to 150 million oz. of silver per year, which is barely $2 billion. Yet the BIS estimates that most all of the worlds' banks have $200 billion in ‘other precious metal’ (i.e. silver) notional value worth of derivatives on the books. This seems somewhat incongruous with the lack of supply. It tends to point to a potentially more sinister occurrence.

In July to November 2008 silver net US bank shorts rose from 9% to 99% of the Comex commercial net short positions in one shot. Equal to some 27,000 contracts or 30mm tr.oz of silver sold, just prior to a 50% plus collapse in the silver futures price. The issue we and others in the market have with this egregious positioning is that it was concentrated between two commercial banks. Flip such a position around to the long side and regulators would be screaming ‘blue murder’ and accusations of market manipulation and market ‘cornering’ would be rife. Remember Bunker Hunt.

The two commercial banks held 140% of annual mine supply in OTC positions. These two bullion banks dominate the OTC silver market. They range in concentration from 85% to 100% at any one time.

Unwinds of these positions would require more silver than is readily available and will lead to much higher prices as sellers are sought.

The manipulation of this small market has led to low prices whilst a structural imbalance of some note has been growing.

“What’s unique to silver is that it has been in a deficit consumption pattern for more than sixty years, with very low prices over most of that time. That would be impossible for any commodity, except that it has actually occurred in silver. But the very reason it has occurred in silver is the reason I think silver is the best thing to own”.
Theodore Butler, Investment Rarities , first mentioned in 1998

The laws of supply and demand dictate that when there is a chronic production shortfall, inventory can only be bid away at higher, not lower prices. Ted argues that most of the inventories consumed over the last 60 years came from government holdings. This amounted to a stupendous 6 to 10 billion ounces, some 100-150 million ounces of silver each year for 60 years. So lets put this in perspective it took 5000 years to accumulative these stockpiles and in sixty, they have gone. Above ground silver is rarer than gold….

As Ted Butler describes it, to look ahead 50 years, it would be appropriate to look back fifty years to gain a sense of perspective. Half a century ago, at the end of World War II, total known stocks of silver amounted to ten billion ounces (with the US government holding 4 billion ounces of that total amount). At that time, we were just entering an era of unprecedented global economic expansion that has lasted to the present. In this era, silver was consumed in a variety of vital modern applications at a phenomenal rate. Today, known stocks of silver have shrunk over 95%, to maybe a half a billion ounces. The nine and a half billion ounce drawdown in total silver inventory, was the result of the persistent shortfall between supply and demand, which continues to this day. Not coincidentally, the current 150 to 200 million-ounce annual deficit in silver mirrors the long-term trend line average. This continuing deficit is remarkable in that there has been decent growth in world production of silver over the past 50 years, but obviously not enough to satisfy the surge in industrial demand.

Fast forward towards the end of 2008 and the seizing up of the financial system saw base metals plummet in value. This was down to a combination of deleveraging and lack of available financing for mining companies. Those encumbered with too much debt and ailing commodity prices had to curtail their current mining operations, in some cases to bare minimums, whilst shelving large capital expenditure projects which would bring on new supply in years to come. As over two thirds of silver production occurs as a by-product from copper, zinc and lead mining, silver mine supply into the future has been stymied.

2009 saw such a swift turnaround in copper prices that silver production was a record 709 mm troy ounces. This was 25 million ounces higher than in 2008 and arguably would have been higher had it not been for the crisis. But this is a moot point as we have just outlined. It took thousands of years to build up ten billion ounces, so to create a current surplus of over 2% does not appear feasible with the supply demand imbalance we have. We will caveat; it is exceedingly difficult to ascertain the true levels of inventories, and there is always disparity on the numbers depending on which data collector you converse with. However as can be seen below inventories remain exceedingly low, irrespective of whose data one observes.

Silver inventories have only turned up as assessed by CPM group, because they have included Silver ETFs, such as iShares SLV. This seems odd, as these inventories already existed, and were merely ‘transferred’ into these vehicles.

In a nutshell- for many decades the world has consumed more silver than it has produced. That has necessitated a draw down of previously produced silver - the existing inventories. There has never been a situation in any commodity where such conditions have failed to cause a dramatic price increase.


Big Autumn Silver Rally 2[informative reading]
Adam Hamilton, Zeal Intelligence LLC, Zeal LLC
Silver has been drifting in a rather lackluster summer. Ever since surging to $19.50 in mid-May, this often-popular white metal has been grinding sideways to lower. By late July it had fallen over 10% to about $17.50. But despite silver’s recent excitement-bereft sojourn, it actually has excellent potential for a big autumn rally in the coming months.

The primary reason is gold. Since the early 1970s, silver has closely followed and sometimes amplified the price moves of the granddaddy of precious metals. Over the vast majority of this decades-long span, silver has been nearly perfectly statistically correlated with gold. When gold is strong, traders flock to silver. And when gold is weak, they abandon its smaller cousin. In hard technical
price-chart terms, there is no doubt at all that silver is a derivative play on gold.

Of course autumn is typically an excellent time of the year for gold, and therefore for the whole precious-metals complex. Big
seasonal factors converge which tend to seriously ramp up global gold demand and hence gold prices. These include income-cycle drivers like Asian harvest, after which farmers invest some of their year’s surplus income in gold. They also include cultural drivers, like Indian wedding season where brides are adorned with intricate and expensive gold-jewelry dowries.

While the usual autumn gold rally is very bullish for silver, it certainly isn’t the only thing silver has going for it right now. This essay will explore those other factors, including silver technicals coiled like a spring and ready to launch as well as silver’s continuing undervaluation relative to gold. Even if gold somehow managed to languish flatlined this autumn, silver’s own intrinsic merits are exceptionally bullish today.


1 comment:

  1. Awesome real estate post. I’ll definitely recommend it to other. Thanks

    Click here for: Homes Hollywood For Sale