Monday, January 24, 2011

The Heinous Act Of Financial engineering

Ed Steer, in his Gold & Silver Daily report, on Saturday shared the following from Silver Analyst Ted Butler regarding the recent market action in the Precious Metals:

Ted had a couple of things to say in a private note to clients early on Friday. The first was this..."The sole reason for this latest swoon in the price of silver is coordinated and collusive manipulation upon the part of the big commercial interests, including JPMorgan, on the CME Group's Comex market. I realize that I have to make this statement repeatedly whenever there is a significant sell-off in silver. I don't set out to be repetitive, nor do I have my mind made up in advance; it's just that commercial manipulative behavior always stands out as the sole cause of every silver sell-off. Certainly, one would think if it weren't so clear, that the commercials were engaged in collusive illegal behavior on what I call a criminal enterprise of a market [the CME], one of them would object to my characterization of them as crooks. I'll let you know when, and if, that occurs."

"Collusion is a strong word. I don't use it loosely. It's easy for me to label the large Comex commercial trading entities as operating collusively on this sell-off, because they have operated collusively on every silver sell-off over the past 25 years. The proof is simple and clear...and contained in CFTC data...and both the COT and Bank Participation Reports. This sell-off...and every sell-off...have always been met with uniform commercial net buying. There has never been an exception to this pattern. How is it possible that the big commercials can always find themselves to be net buyers on every sell-off? Easy--they are acting collusively. In fact, considering their easily-documented history, it is not possible for them not to be acting collusively. How otherwise could one cohesive group always end up buying big on every decline?"

Then there was this comment on what happened in the silver spread market earlier this week. This is only two of the many paragraphs that silver analyst Ted Butler used in his explanation...and I don't completely understand it myself... "On Wednesday, the Comex experience an epic event in the silver spread market. Let me state this clearly--the spread difference between the various trading months in Comex silver futures experienced the largest price changes in history. The price direction of the spreads was to relative price strength in the nearby months...and weakness in the more deferred months; a dramatic "tightening" of the spreads that may be a precursor to backwardation, or a premium developing on the nearby months. Let me by frank--I'm not sure what this monumental spread price move may mean at this point. There is no news from knowledgeable and trusted observers, just that the market changed."

The spread tightening was unusual in that it didn't appear driven by delivery considerations. Generally, spread pricing is more gradual and trending than the sharp out-of-nowhere event that occurred on Wednesday. It appeared to be driven by spread traders for financial reasons. The tightening was completely at odds with the dramatic fall in the price of silver these past few days, as such spread tightening would normally be thought to result in sharply rising silver prices. Instead, the opposite occurred. I don't know how this is connected to the manipulation, but I have been conditioned to believe that there can be no coincidences in a market as crooked as silver. I don't mean to leave you with more questions than answers regarding the spread event, but I don't want to make things up. I'm sure we'll know more as time rolls on."

Despite it being annoying, it is quite amusing that with physical demand surging for Gold and Silver around the globe, the price would be falling.

Chinese Silver Demand Surges Four Fold in Just One Year
by Tyler Durden on 01/21/2011
Gold is flat and silver marginally lower despite dollar weakness this morning. Some market participants are blaming the precious metal sell off on speculation that China may take more monetary action to curb surging inflation. This is unlikely to be the reason for the sharp selloff, rather it looks like another paper driven sell off in the futures market by leveraged players on Wall Street with various motives.

The fact that silver is again in backwardation at the front end of the curve suggests that tightness in the physical bullion market continues and may even be deepening. Indeed, the massive increase in silver bullion demand from China (confirmed overnight - see below) suggests that silver’s bull market remains very much intact despite becoming overvalued in the short term towards the end of 2010.

Surging inflation in China, India, wider Asia and much of the world is of course positive for gold and silver as it will likely lead to an even greater appetite for the precious metals in order to protect against the ravages of inflation and the further depreciation of paper currencies.

Russia plans to buy 100 tons of gold a year
by Grigori Gerenstein
January 24, 2011 (The Wall Street Journal) — The Central Bank of Russia plans to buy from domestic banks 100 metric tons of gold a year in order to replenish the country’s gold reserves, Deputy Head of the bank Georgy Luntovsky said Monday, according to the bank’s press service.

In 2010 Russia’s gold reserve increased 23.9% to 790 tons, or 25.4 million Troy ounces.

Every day we see another story about rising demand for "physical" Gold and Silver, and/or a story about rising premiums being paid to take delivery of physical metal, yet the "price" continues to fall? Why certainly! On the CRIMEX, anything is possible...

Consider that in just this week we have begun, the following "anti-Gold" events are on the immediate horizon:

January 25th: The State of the Union Address

January 25-26: The Fed's Open Market Committee meets to discuss interest rates

January 26-30: The World Economic Forum Annual Meeting 2011, Davos, Switzerland

Are the criminals on the CRIMEX, and their brothers operating over in London on the LBMA, going to allow the price of Gold and Silver to rise as the World's fiat money leaders espouse the virtues of their monopoly money flooding the planet? Of course not!

And let us not overlook the expiration of options and futures contracts this week on the CRIMEX. Nothing says a drop in price like an expiring CRIMEX option or futures contract. However, one might consider that with Gold down 6% already this month and Silver down 12%, we could see a rush to cover here with an abrupt rally in price into the week's end.

Were this relief rally to occur, one might be wise to sell going into the weekend, and Monday's First Notice Day, as our criminal bankers are likely to be overwhelmed by delivery demands going into Gold's February Delivery. One more take down in the Precious Metals next week following First Notice Day and this reaction in the Precious Metals may well be over...for the year.

It has been interesting, if not unnerving, to watch the Precious Metals prices fall as the US Dollar has also fallen over the past couple of weeks. This defies all logic in these markets. However, if we consider that the "big trade" late last fall and into the end of the year was to be short the Euro and long Gold, January's bizarre market action might actually make sense if this trading scenario was being unwound here.

Note that the Precious Metals Platinum and Palladium have performed in lockstep fashion with the Dollar of late, yet Gold and Silver have not. This could be further proof that Gold and Silver are now trading more as currencies than as commodities. And taking that into consideration, note that as the Asian currencies have strengthened, Gold and Silver have weakened. Have Gold and Silver forsaken the US Dollar for the rising Asian currencies in a major disconnect foretelling the future disposition of the US Dollar as the World's sole reserve currency? It's too soon to tell, but it is an interesting thought.

The recent rally in the Euro that has coincided with the fall in Gold and Silver prices is looking a bit overheated here. The Euro has almost retraced 61% of it's most recent decline this month, and is now approaching it's broken downtrend line from below. This sort of action often signals a resumption of the previous trend, and exposes the recent rally as nothing more that a "bear market rally". Were this to be true, will Gold begin to rise again as the Euro falls...and the US Dollar rises? This appeared to be the case last night during trading in the Asian markets as the Euro fell to open the week, and the Dollar rose along with Gold and Silver. This move higher in the Precious Metals and the Dollar was quickly squashed as the European markets opened this morning and quickly bid the Euro higher.

James Turk - Silver in Backwardation, Set to Explode
Eric King,
James Turk has alerted King World News that silver is in backwardation. Turk spoke with KWN saying, “Silver is in backwardation which is an extremely important development. Most are aware that when backwardation occurs, the spot price is higher than the futures price. Backwardation happens regularly in most commodities, but it is rare in the precious metals.”

Turk continues:

“Silver is in backwardation not just in the short-term, this time it is extending twelve months forward!

The last time this happened Eric was in January of 2009. Over the next few weeks silver rose from about $10.50 to $14.50, a roughly a 40% move higher. The key to understanding backwardation is that the price must rise to entice holders of physical metal to sell and accept a national currency in return. I think we can expect a similar event to repeat over the next few weeks.

A similar type of move would clearly put silver well above its previous high. What this backwardation shows is that there is a disconnect between the physical and the paper markets in silver. As I said previously, the silver shorts simply cannot hold the paper price down here any longer without seriously discrediting the paper silver market as a price discovery mechanism.

Gold is not in backwardation, nevertheless the demand for physical gold is extremely intense. With the sentiment indicators at very low levels, it suggests we are about to see a stunning short covering rally in gold.”

Weakness in the metals can end as quickly as it began. When the metals turn, this next move should be breathtaking.

Favorable Interest Rates And Inflationary Concerns To Support Gold
By Mike Stall on January 23, 2011
After a record ten straight years of annual gains, gold has entered a critical phase in one of its longest rallies. Markets are abuzz with contradictory views on whether gold will continue to rise in 2011. Signs of a slowdown are apparent in the short to medium-term. However, we investigate two compelling factors affecting gold prices and find out why there is no reason that the prolonged rally does not continue well into this year as well.

Gold to benefit as currency woes continue
By David Levenstein
Since 2000, gold has been in a bull market that has driven the price of the yellow metal from around $250 an ounce to just over $1400 an ounce. Even though this impressive five-fold gain has occurred in the US dollar price of gold, the price has recorded major gains in almost every currency around the world. Although, after ten successive years of price increases, it may be tempting to ask if prices are peaking, I don't believe so. In fact I think this bull market has a long way still to go.

While the price of gold is influenced by a myriad of different factors, the main contributing factor over the last 10 years has been the declining values of the major currencies in particular the US dollar, which as measured by the Dollar index, has dropped from a high of 120 in 2001 to a low of just above 70 in April, 2008.... a loss of some 35%.

A quarter century of uninterrupted and unprecedented credit expansion begun by the US in the 1980's, came to an abrupt in August 2007 when global credit markets froze, precipitating an economic crisis the severity of which surprised all except those who expected it. And, in order to prevent a collapse of our financial system, central banks were forced to bail out numerous financial institutions. But, since these central banks did not have a stash of cash available, and could not borrow money from selling new issues of bonds, they were forced to print more money disguising this in a list of new terminologies like "quantitative easing."

A fiat currency is a medium of exchange composed of some intrinsically valueless substance which the issuer does not promise to redeem in a commodity or a fiduciary money. And, because a fiat currency has no direct legal connection to a commodity money (in terms of redemption) and, therefore, no real economic cost to its production, the supply of a fiat money can never be self-limiting.

The following three links are to a series of interviews with Peter Schiff. They are all well worth your time as Peter discusses how Gold and Silver uncover the lies of the fiat money masters at the Fed:

Brace Yourself: Peter Schiff Predicts U.S. "Inflationary Nightmare", Made in China

Obama Is "Clueless": Peter Schiff Weighs in on SOTU, Jeff Immelt's New Gig

U.S. Markets Breaking Down, Schiff Says: Buy Gold, Energy and Emerging Markets

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