Thursday, November 11, 2010

Lies Cannot Float A Sinking Boat

“We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy.”
-Tim Geithner, US Treasury Secretary

Isn't it interesting, some might say amusing, that within hours of the Fed's QE2 announcement and the global criticisms of it, the spectre of Euro Zone "debt fears" suddenly reappears in the global financial news headlines.

This pathetic ploy of "fear mongering" worked spectacularly one year ago as the US Dollar stared over the cliff at 74 on the Dollar Index. Recall the sudden financial media obsession with Greek Debt late last Fall that continued through the Spring of 2010, and the subsequent rush into the "safe-haven" US Dollar and US Treasury Debt. Against all odds the US Dollar rose from the depths at 74 all the way to a bear market rally peak of 88 in early June. It has been all downhill since, as the economy's floundering recovery ramped up expectations for the Fed to set sail aboard its QE2 money bomb.

QE2 is now sailing the high seas of global currency war, clearly received as a negative for the US Dollar. Time to trot out the fear of a Euro Zone debt implosion to scare global investors back into the Dollar to "protect" them.

Fool me once, shame on you. Fool me twice, shame on me.

There is NO protection in the US Dollar or US Treasury debt. That ship has hit the iceberg, and she's taking on water. The US Dollar is a sinking ship. A line to board this disaster in progress is not going to form this time. In fact, the imminent move below 76 on the Dollar Index will likely lead to a rush to the exits along with screams to "abandon ship".

Despite comments to the contrary, the European Union is now prepared with it's own QE mechanism to backstop sovereign debt fears within the Union, the European Financial Stability Facility. The EU will not this time fall prey to big US Banks making bets against the sovereign debts of countries like Greece, Ireland, or Portugal and Spain...and neither will global investors. In fact, once this weeks bloated G20 summit passes without substantive results, global investors are likely to call the US Dollars bluff here, and begin to sell it and US Treasury debt with impunity.

Managers fear 'domino effects' after Portugal and Irish debt blowout‎ - Investment Week

Euro-Zone Debt Problems Getting Worse‎ - Wall Street Journal (blog)

Barroso reaffirms offer of help to Ireland
ByPeter Spiegel
José Manuel Barroso, European Commission president, said Ireland had not requested financial assistance from the European Union but that the bloc was prepared to assist Dublin if requested.

Speaking in Seoul on Thursday where he is attending the G20 summit, Mr Barroso said the commission, the European Union’s executive branch, was monitoring Ireland’s fiscal situation “on a permanent basis” and could act if called upon.

He said: “What is important to know is that we have all the essential instruments in place in the European Union and eurozone to act if necessary, but I am not going to make any speculation”.

Meanwhile, the Precious Metals are continuing to recover from Tuesday's desperate CRIMEX margin requirement increase for Silver futures. How convenient to just simply "change the rules" in the middle of the game when your side is getting an ass whuppin. The question that nags at me is why did the Silver market go down when there are so many shorts in this market? Didn't margin requirements rise for ALL participants in the futures markets?

I'll speculate. The CRIMEX board of directors raised the margin requirement for Silver claiming that "volatility" in the markets demanded it. Funny, they only volatility in the Silver market the past two months is that the price has continued to rise despite every cheap trick the bullion banks could throw at it. As the price of Silver was quickly approaching $30 an ounce Tuesday, the board of directors, meaning "the traders" were staring a catastrophic loses on their overwhelmingly naked short positions in Silver. Something had to be done immediately.

A decision was made to "change the rules" [which is actually in the rules], and a margin increase in Silver [and only Silver] was determined to be the best course of action to best throw water on a raging fire. Traders were given the heads up on the margin increase announcement. And prepared their assault on the market.

Has anybody found it odd that the "crash" in Silver prices Tuesday began at exactly 1PM, yet the margin increase announcement came AFTER the close of trading at 1:30PM? Does anybody suspect that the criminals of the CRIMEX, armed with "inside information", loaded the pipe with shorts leading up to the margin increase announcement? And that it was this tsunami of shorts "ahead" of the margin increase announcement that forced prices down 10% in a matter of minutes as the announcement hit the floor and the wires? Seriously, does anybody believe that a margin increase announcement "alone" forced this large of a correction in price IF both sides of the trade are subject to margin increase? Not bloody likely!

Tuesday's move lower in Silver prices was a clear and present example of market manipulation AND Insider Trading. Where was the CFTC during all of this? Do you really need to ask that question? They were, once again, ASLEEP!

The Precious Metals have reacted about as one would've expected following this CRIMEX chicanery. The Asians bought the gift of lower prices gratefully, the Europeans stood aside, and then the Americans sold the rebound thankful to have gotten out at a higher price on Wednesday. Now we consolidate price as the dust settles and we work our way through the blah-blah at the G20 summit, and the fear mongering over Euro Zone debt.

Gold is stuck between $1385 and $1410. Silver is stuck between $26.50 and $28. The fundamentals have not changed one bit, and they won't be anytime soon. The US Dollar is a sinking ship, only a fool would bet otherwise. Do not forget that Gold rose during the bear market rally in the Dollar last Fall and Winter, though a rally here in the Dollar seems highly unlikely given the Fed's QE2 plans to debase the currency, despite Timmy Geithner's claims to the contrary.

Geithner Says Greenspan Wrong, Dollar Fell on Risk Appetite
By Rebecca Christie
Treasury Secretary Timothy F. Geithner said the dollar’s drop in recent months is due to a reversal in safe-haven capital flows, rebutting former Federal Reserve Chairman Alan Greenspan’s assessment of U.S. policy.

Investors are no longer seeking as much of a refuge in dollars, and that’s “a sign of greater confidence that although we face challenges in the U.S. and globally the risks we face are more manageable,” Geithner said in a transcript of an interview with CNBC television distributed by e-mail today. This shift is “the dominant trend that we see,” he said.

The remarks follow criticism from Chinese officials, including Vice Finance Minister Zhu Guangyao on Nov. 8, that the Fed plan to buy $600 billion of Treasuries may “shock” emerging markets by flooding them with short-term capital. German Finance Minister Wolfgang Schaeuble called the Fed “clueless” and Greenspan wrote in the Financial Times today that the U.S. is “pursuing a policy of currency weakening.”

“I have enormous respect for Greenspan, had the privilege of working with him for a long period of years but that’s not an accurate description of either the Fed’s policies or our policies,” said Geithner, who arrived in South Korea today to join President Barack Obama in efforts to rally support for U.S. trade initiatives. “We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy.”

Three’s Company, Silver Margin Change
By James G. Rickards
November 9 (King World News) There's been a lot of buzz about today's price action in gold and silver. Beginning with the Monday push upwards based on the Zoellick op-ed in the Financial Times, the market surged upward through most of the day today and then hit a serious air pocket with gold falling 2% and silver falling almost 5% in a short period of time late in the trading day.

On a technical basis, there's nothing surprising about that; we've seen similar moves before and I expect to see them again. The overall trend has been upward with higher highs and higher lows. The market seems to find a strong bid at progressively higher levels even after sharp corrections. Nothing too disturbing there and nothing to indicate that primary trends are not still intact.

What was noteworthy was the catalyst for the pullback, specifically an increase in margin requirements for silver futures contracts. There was no comparable change in gold futures margin but as often happens in markets there was instantaneous contagion from silver to gold notwithstanding the different circumstances. Again, no surprise that the markets correlate to a great extent even when the news only affects one market or the other.

This is a pointed reminder to the readers and listeners of King World News and something we have discussed before. Most markets consist of two parties, the buyer and the seller. But in futures markets there's a third party in every trade which is the exchange and more specifically the rule making bodies and margin setting panels on each exchange. They act not in the best interests of buyers or sellers but in the best interests of the exchange itself and its statutory duty to maintain orderly markets. Of course, the word "orderly" can be in the eye of the beholder. What may be an "orderly" price spike to a long may be a "disorderly" rout to a short. Either way, the exchange has the last word. They have many tools at their disposal. They can increase initial margin (what you put up when you open a contract) increase the frequency of variation margin (make you post intra-day instead of end of day) and require "trading for liquidation only" which means longs can go short and shorts can go long but no one can expand a position or increase the open interest. Finally, an exchange can suspend physical delivery and allow offsets and rolls only. All of these rules have been invoked many times and will be again.

Invariably the parties disadvantaged by these moves complain that the exchange is "changing the rules in the middle of the game". That's a naive and pointless perspective. The fact is that the ability to change the rule is itself a rule. The exchange is not changing the rules, they are just utilizing an alternate set of rules that are already in place. Traders should stop complaining and read the rule book. It's all there.

What is more intriguing is what motivates the exchange officials to use these rules? Is it truly a disorderly market (the usual reason) or is it part of a larger coordinated effort involving Federal regulators and policymakers to do whatever it takes to push up prices of risky assets such as housing, stocks and junk bonds and push down prices of safe-harbor assets such as gold and silver?

The point is, when buyers and sellers transact in futures markets, they're never alone. Exchange monitors are always looking over your shoulder. Never ignore the power of the exchanges and regulators and always remember they will use this power when it suits them, not you.

Silver Margin Hike Underscores Need for Bullion Ownership
By: Jeff Berwick
On November 9th the Chicago Mercantile Exchange said it will raise its silver futures trading margins by 30 percent to $6,500 an ounce from $5,000 an ounce effective November 10th setting off a rapid sell-off in the metal. No other margin requirement on any other metals was changed.

According to Reuters, "Exchanges often raise margins to mitigate risks as price volatility increases."

But, where is the supposed volatility in Silver?

In fact, the only volatility you can find on the silver contract in the last four months occurred in the moments after the CME announcement...

Clearly silver was targeted as having "gotten too high". When was the last time margin requirements were raised on US Treasuries which are at all-time highs?

The financial authorities pulled the same chicanery in early 1980 when Nelson Bunker Hunt and Herbert Hunt had nearly cornered the market in silver. In 1979, the price of silver jumped from $6/oz to an all-time record high of $48.70/oz. The brothers were estimated to hold one third of the entire world supply of silver at the time.

But on January 7 1980, just like on November 9 2010, the exchange rules regarding leverage were changed, when Comex adopted 'Silver Rule 7' placing heavy restrictions on the purchase of commodities on margin. The Hunt brothers had borrowed heavily to finance their purchases, and as the price began to fall again, dropping over 50% in just four days, they were unable to meet their obligations, causing panic in the markets.

Who is Selling Silver? -Gene Arensberg

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