Wednesday, January 19, 2011

The Saga Of The Not For Profit Seller

Yesterday evening, as the Hong Kong markets opened, the US Dollar slipped below it's 78.70 USDX support line. This support line goes back to a low last December on the 14th. Over the last five weeks, the US Dollar had traded in a range between 78.70 and 81.50. The breakdown last night may signal that the next leg down in the US Dollar has begun. Should the Dollar break below 78, there is an open pit to 76.

Yesterday evening as the US Dollar was slipping through a five week support line, Silver lifted off from it's strong 28.89 CRIMEX close and raced through the 29 handle around 7:30 PM est. Silver continued to rise overnight through the Asian AND European markets. And as the world turned, Silver found itself at 29.48 as the CRIMEX threw open it's doors to the criminals that trade there. From 8:30 AM est., until now as I type this, Silver has given up $0.84 thru the CRIMEX trading session and into the after hours "thieves market". It is presently 3:15PM est.

This reaction in Silver during the CRIMEX market hours has occurred with the US Dollar under strong pressure all morning.

Folks, this is "crime in broad daylight".

How can the price of Silver be "under pressure", when demand for physical Silver is at record highs?

Silver Up as US Mint Reports January Eagle Sales Reach Record High
The US Mint has reported that sales of American Eagle silver bullion coins (1 oz) have reached 4,588,000 ("in ounces / number of coins") which is a record since the US Mint commenced selling the coins in 1986.

This shows that retail bullion demand remains very robust despite the recent feeble economic recovery. It also shows that silver buyers have not been deterred by the surging price of silver. On the contrary, higher silver prices and increased concerns about the US dollar, the euro and other fiat currencies are leading a minority of 'hard money' advocates to increase allocations to gold and silver.

Silver bulls are ├╝ber bullish but they are a tiny minority of the American and international retail investment and savings marketplace. The average investor and saver in the US has no allocation to gold, let alone to silver.

Therefore it would be wrong to assume that these record sales are a negative contrarian signal and that silver has become a bubble with the so called "dumb money" "piling" in.

Rather, a tiny segment of the US public, many of whom are contrarian investors who are worried about the dollar and other macroeconomic and geopolitical risks, are going overweight silver.

However, the majority remain blissfully unaware of silver at this time and the majority of the retail public could not tell you the spot price of silver today or the gold to silver ratio let alone how to invest in it.

This report is shocking! More Silver Eagles have been sold "so far" in the month of January 2011 than were sold in the entire year of 1996 when only 3,466,000 were sold.

And yet the price of Silver is down? Only at the CRIMEX.

We should all thank the CRIMEX for creating an environment whereby the average investor can buy into the "greatest investment opportunity of a lifetime" at discounted prices.

The failure of derivatives regulation of precious metals
By Alasdair Macleod
The regulatory failure of precious metal contracts in US derivative markets will have important systemic consequences, and nowhere is the problem becoming more obvious today than in silver. Several banks have been running a substantial short position for a considerable time. This position has been permitted to continue because of weak management by both Comex as the principal dealing exchange and by poor oversight from the US Commodity Futures Trading Commission as regulator.

Between them Comex and the CFTC have ignored two fundamental truths about the market. The first truth is that the continual rolling of short or long positions is fundamentally unhealthy, and is indicative of a growing risk of trader default over time. The second is that no market participant in an open outcry system has any commitment to deal or provide liquidity, unlike a market where there are licensed market-makers who have to make two-way prices at all times. There is therefore no reason why such a long-running speculative position should be permitted even for the Commercials (the banks), and their long-term presence, for which there must be a reason, may be evidence of price manipulation.

The deficiencies of the system have led to the silver market becoming completely polarised. There is a divorce between derivatives, where there is inadequate control over large long-running positions, and the physical market, where there is now virtually no metal for delivery. It has become a dangerous reversal of functions that is now complete: paper silver is no longer priced on the back of physical metal; it is the physical that is notionally priced on the back of paper. The tail is wagging the dog to the point that the free supply of derivatives has led to the metal being driven from circulation. [i]

While the market for silver derivatives may interest only a minority, the same problem occurs for gold, which is a far more serious systemic issue. The separation of functions between market and regulator has facilitated a similar price suppression scheme, totally negating the principal function of derivative markets, which is to provide liquidity by harnessing speculative demand for the benefit of prudent hedging activities.

This simply does not happen for precious metals. The Commercials on Comex are mostly banks that also provide unallocated gold accounts, which they manage on a fractional reserve basis. Their basic risk requirement is for a hedge to offset the effect of a rise in the gold price on these unallocated accounts, so they should be holding long, and not short gold contracts. Unfortunately, the size of unallocated account business is too large to hedge on Comex anyway. Furthermore, the majority of the speculating public are and always will be net buyers when they have any interest at all, so both non-Commercial and Commercials are fundamentally buyers. For this reason the concept of an effective public derivatives market for precious metals is flawed from the outset, and must not be confused with those commodity derivatives where there is a healthy deal flow provided by product suppliers and industrial demand.

For any bank running unallocated bullion accounts on a fractional reserve basis, markets that allow the public to buy gold and silver only increase the price risk to its own position. The temptation to use these markets to manipulate prices downwards, or at least to try to stop them rising is therefore very great, and this is exactly what has happened. There is now an accumulated short position by the Commercials of about 700 tonnes of gold. To this must be added the far larger short position on the bullion banks’ unallocated accounts, and the uncovered sight accounts run by the central banks in the major dealing centres. No one knows for sure how much the total short position amounts to, but we can be certain that the Commercial shorts on Comex are by far the smallest component.

It is the inevitable unwinding of these massive short positions that will have adverse systemic consequences. The unallocated accounts, probably the largest element of the problem, can be closed out for cash under the standard LBMA account terms, probably with a multi-government bail-out. The resolution of uncovered sight accounts at the central banks will be kept a close secret. It is Comex which will probably bear the most visible manifestation of the crisis.

Gold Versus Defective Economists and Delusional Leaders on Drugs
By James West
It has always been my opinion that the so-called science of economics in its current form is victim to the problem of not being able to see the forest because of the trees. The fact that 60 percent of 242 members of the National Association for Business Economics think that the U.S. Federal Reserve is doing the world a favour by maintaining non-existent interest rates is hard evidence in support thereof. If you give something away (money) at no cost, then its value is zero. Something is only worth what someone else is willing to pay for it. Why oh why do our illustrious leaders fail to grasp such elementary logic?

The global economy has just OD’ed on credit, and the Fed’s response is to make the offending intoxicant free for all the junkies. And, to make matters worse, the Fed sees itself as its new best customer. Even street-level drug dealers know better than to get high on their own supply. Metaphors aside, and as increasing numbers of unemployed, under-employed, un-housed and unpaid Americans know, the United States is in the terminal stages of a broad systemic failure brought on by the excesses of too much money in the system. And sadly, the patient is still in denial.

Economics, this now more dismal than ever of sciences, fails to reconcile the fact that the amount of capital available to the global economy and its movers and shakers must needs by directly proportional to real demand for actual products. Opportunity is not created by the mere manifestation of unlimited quantities of counterfeit zero-cost capital. The excessive amounts of ersatz wealth created by the dot com era, the derivatives matrix, and incomprehensibly complex mortgage securities has resulted in the present problem of Too Much Stuff. There are too many houses, too many cars, too many baubles and gadgets and plastic doodads manufactured in China sitting on shelves and in lots around the world un-purchased and un-wanted because the demand for these things is gone. Everybody’s got one or two or three, and the population will not grow fast enough to generate sufficient demand to consume the output of our horribly efficient industrial infrastructure.

All that is accomplished by making capital freely available to the world who doesn’t want it or need is to confirm for even the unborn and newly dead that the capital proffered is worth exactly its cost: zippo bippo.

The distance between the present reality and current delusion under which these doped out leaders and their woefully befuddled economists operate is vast in terms of required economic policy revision. Credit needs to cost, and currency levels need to be reduced. Gambling on Wall Street with taxpayer’s equity needs to be outlawed. The incestuous inter-relationships among government and banking is shockingly blatant. And criminal. Though not in our current legal system, which is presently aiding and abetting as opposed to overseeing and regulating.

Brace for a ‘perfect storm’ in gold
By Thomas Kaplan
Investment implies moving some part of one’s assets from financial safety to a position of acceptable risk with the hope of increasing wealth over time. What qualifies as “acceptable risk” may thus be seen to be the gating question for the investment criteria of a “prudent man”. This has come to be known as the Prudent Man Rule to guide persons entrusted with the finances of others.

Although the rule remains a guiding principle in the fund management industry to this day, at least one key element has changed. In 1971, our understanding of ultimate safety was transformed when President Nixon ended the US government’s certification that each dollar in circulation was, in effect, worth exactly 1/35th of an ounce of gold.

Since all major currencies had been linked to gold via the US dollar since 1945, when the US held the majority of monetary reserves, the announcement provoked a momentous change in the financial culture. Cash no longer meant gold: the amount of dollars the Federal Reserve could print would not be restricted to some degree by a stored metallic tangible asset with a finite supply. In a great leap of faith, paper dollars and traded US federal liabilities became “risk-free” assets while gold, long regarded as money itself, was disdained as a “commodity”, a volatile “risk asset”.

This historically radical new notion was validated by the arbiters of money themselves. Central bankers dumped gold, driving prices down sharply during the 1990s. They thereby reinforced the MBA textbook perceptions that the dollar and US Treasury bonds were “risk-free” assets and gold a “barbarous relic,” as John Maynard Keynes famously called it.

Even today, as the gold rally has reached the 10-year mark (following a 20-year bear market), the metal represents a mere 0.6 per cent of total global financial assets (stocks, bonds and cash). This is near the all-time low (0.3 per cent) reached in 2001, and significantly below the 3 per cent it accounted for in 1980 and the 4.8 per cent it was in 1968.

However, there are changes afoot. After a lengthy absence, some asset managers and central bankers are readmitting gold back into the group of prudent asset classes. Assessing the devastation of financial industry and government balance sheets, fiduciaries have been reminded that one of the principle reasons to hold gold – that it is the only major financial asset that does not represent someone else’s obligation to repay – is not the arcane concept it once appeared.

U.S. National Debt from 1940 to Present
Here's are two graphs of great interest...and importance posted on Ed Steer's Gold & Silver Daily web site.

The title says it all..."U.S. National Debt from 1940 to Present". The year 1971 is pretty easy to pick that was the year that Nixon pulled the pin on the gold standard.

Cumulative Value of Global Gold Production
...the graph looks suspiciously like the U.S. debt chart posted above. This one is entitled "Cumulative Value of Global Gold Production"...and, once again, the title says it all.

The Fed Adds a Third Mandate
By: John Mauldin, Millennium Wave Advisors
The Fed has two mandates: keeping prices stable and creating an economic climate for low unemployment. I am sure I was not the only one to listen to Steve Liesman’s interview of Ben Bernanke this week and shake my head at the spin he was giving us. First, let’s set the stage.

In a paper with Alan Blinder early last decade, Bernanke made the case for the Fed to target a specific inflation number, and the number that came to be accepted as his target was 2%. In his famous helicopter speech in late 2002, he assured us that deflation could not happen “here,” even if the short-term rate was zero, because the Fed would move out the yield curve by buying large amounts of medium-term bonds. This would have the effect of lowering yields all along the upper edge of the curve. This became known as quantitative easing. In Jackson Hole last summer, he made very clear his intention to launch a second round of liquidity-injecting quantitative easing (QE2). In that speech, in later speeches in the fall, and in op-ed pieces he said that such a program would lower rates.

Then a funny thing happened on the way to QE2: long-term rates began to rise all over the developed world. As Yogi Berra noted, "In theory, there is no difference between theory and practice. In practice, there is." It’s got to be driving Fed types nuts to see the theory of QE, so lovingly advanced and believed in by so many economists, be relegated to the trash heap, along with so many other economic theories (like that of efficient markets). The market has a way of doing that.

So, Liesman asked Bernanke about one minute into the clip (link below) about the little snafu that, following QE2, both interest rates and commodity prices have risen. How can that be a success? Ben’s answer (paraphrased):

“We have seen the stock market go up and the small-cap stock indexes go up even more.”

Really? Is it the third mandate of the Fed now to foster a rising stock market? I wonder what the Fed’s target for the S&P is for the end of the year? That would be an interesting bit of information. Are we going to target other asset classes?

Understand, I am not against a rising stock market. But that is not the purview of the Fed. And certainly not a reason to add $600 billion to the balance sheet of the Fed when we clearly do not understand the consequences. If it looks like they’re making up the rules as they go along, it’s because they are.

Here is the clip:

Could the U.S. central bank go broke?
By Pedro da Costa and Ann Saphir
(Reuters) - The U.S. Federal Reserve's journey to the outer limits of monetary policy is raising concerns about how hard it will be to withdraw trillions of dollars in stimulus from the banking system when the time is right.

While that day seems distant now, some economists and market analysts have even begun pondering the unthinkable: could the vaunted Fed, the world's most powerful central bank, become insolvent?

Almost by definition, the answer is no.

As the monetary authority, the central bank is the master of the printing press. It can literally conjure up money at will, and arguably did exactly that when it bought about $2 trillion of mortgage-backed securities and U.S. Treasuries to push down borrowing costs and boost the economy.

The Fed's unorthodox steps helped it generate record profits in 2010, allowing it to send $78.4 billion to the U.S. Treasury Department. But its swollen balance sheet leaves the central bank unusually exposed to possible credit losses that could create a major headache at a time of increasing political encroachment on the Fed's independence.

Asked about the issue of potential losses during congressional testimony on Friday, Fed Chairman Ben Bernanke suggested the risks were minimal. If liabilities on the Fed's balance sheet were to exceed its assets, it would only be so because of rising interest rates in the context of a thriving economy, he suggested.

"Under a scenario in which short-term interest rates rise very significantly, it's possible that there might come a period where we don't remit anything to the Treasury for a couple of years. That would be I think a worst-case scenario," Bernanke said. Customarily, the Fed submits surplus profits from its operations back to the Treasury's coffers.

But the Fed's newfangled policy steps and the potential for credit losses raises, for some experts, the prospect that the Treasury may actually be forced to "recapitalize" the Fed -- economist-speak for what others might call a bail-out.

That would be a strange role reversal given the Fed's efforts to ease monetary policy by buying the Treasury's debt, and it could raise a political firestorm from lawmakers who believed all along the Fed was putting taxpayer money at risk.

No comments:

Post a Comment