19 February 2011

Silver Bankers May Be Sitting on Big Derivatives Losses and the Fed May Be Funding Them

My question is simple. What are bankers like J.P. Morgan and HSBC doing playing in such size in this market? What is the economic and productive benefit? Perhaps there is a good answer. The taxpaying public certainly deserves to know. The CFTC says they have looked into this, but the detailed results of their findings remain less than forthcoming.

IF this is legitimate hedging for producers then all well and good, but then there is no justification for secrecy. If these are trading positions held by the bank, or by the bank as agent for speculators, then there may be a greater reason for secrecy, but the magnitude of the shorts is far out of bounds in size. Ten years of production is not a short position, but the entire market and then some.

The CFTC certainly appears to be acting poorly as the market regulator for the people. Given the regulatory failures of the past ten years that lead to the financial crisis, it would be useful if the Congress were to make very pointed inquiries regarding this situation. But given the performance of the Congress, and their affinity for the deep pockets and big contributions of the financial sector, that may be too much to hope for.

I think it is worth noting that the BIS data, which I use myself, is very good, but normally six months in arrears or more.  I tend to use it to track the float in eurodollars which the Fed stopped publishing when it also halted the production of M3 data.  But this is not Harvey's fault, but merely another sign of the opaque nature of the US markets.  There is no reason not to demand monthly disclosure.  Investors and depositors are always expected to make informed decisions, and then they are denied the information from large market participants using their positional advantage.

The comment and analysis below is from Harvey Organ's most recent commentary.
"The huge rise in silver price has caught the silver bankers totally offside on the silver banking. The BIS data released in November (www.goldexsextant.com) shows that the G 10 bankers have collectively sold forwards and swaps to the tune of 4 billion oz and short naked calls for another 3 billion oz. The total, 7 billion oz represents 10 years of production. If you just do the forwards, then it is 7 years of annual silver production.

Let us say the average cost of acquiring these derivatives and forwards equate to $15.00 for silver. Thus collectively the entire G10 bankers are feeling massive pain (losses) to the tune of:

7 billion oz of silver( 32.30-15.00) = 7 billion x $17.30 = 121.1 billion dollars of losses.
This is in a market of only 14 billion dollars. It begs the question to what economic need was this done.This is still off balance sheet.

If you include only the forwards or swaps (the lending of actual metal to which nothing has come back yet) then the losses are:
4 billion x 17.30 or 69 billion dollars.
Regardless how you look at it, the bankers are in serious trouble with this huge rise in silver prices. I hope you understand the severity of the situation."
This situation merely highlights Obama's failure as a reformer, and the general failure of both parties to act in positions of trust for the American people, rather than the special interests that provide them money and sincecures after they leave office.

As I noted on my own silver chart, I am no longer will to forecast anything but intermediate targets for silver, given what appears to be widespread imbalances and crisis-inducing leverage in the market, especially given the strong demands on the bullion market from the sovereign and individual buyers in the BRIC countries.

It is never pretty when a fraud collapses, and this one in particular is difficult because it seems to encompass those stewards of the market upon whom one generally relies for information and some measure of confidence in the data.

The market will clear when it clears, and seems to be defying 50% margin requirements increases and well placed disinformation campaigns in the process.