This manipulation of silver and gold could be a John Law class debacle when it is exposed and collapses, depending on how high the leverage in paper has gone. And of course how deeply down the rabbit hole the people are willing to go in the discovery of real value and the truth. Given what has recently transpired, I suspect not too far.
The mailbag this morning has the usual dose of overly kind words for which I am always grateful, useful information and notification of alas, typos. But also of hysteria, from those who fear the government is going to come and take their money, or who think that people like me are going to spoil their good thing by warning people about it. Thank God for spam settings.
I don't think most people realize how little their opinion matters anymore. At some point the truth is simply what it is, without regard to what we think about it, or whether we like it. Their good thing is over. It's in the end game now, and we are all in God's hands.
John Law (baptised 21 April 1671 – died 21 March 1729) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade. He was appointed Controller General of Finances of France under King Louis XV.I believe that "modern monetary theory" owes much to John Law, and Money and Trade Considered, with a Proposal for Supplying the Nation with Money (1st ed., 1705; 2nd ed., 1720).
In 1716 Law established the Banque Générale in France, a private bank, but three-quarters of the capital consisted of government bills and government-accepted notes, effectively making it the first central bank of the nation. He was responsible for the Mississippi Bubble and a chaotic economic collapse in France."
“An abundance of money which would lower the interest rate to two per cent would, in reducing the financing costs of the debts and public offices etc., relieve the King.”Here is a brief discussion of John Law and the parallels for today's crisis from Buttonwood at The Economist.
John Law
I think there is a bit of disinformation going about. The implication from some corners is that those who sell silver as a hedge borrow it from existing physical supply, drawing down physical stocks. What they do not realize, or admit, is that borrowed silver is not held as allocated and discrete collateral in any system with which I am familiar, but is at best resold again into the bullion markets, if it ever experiences any movement at all beyond some multiple ledger entries.
The dirty little story of the metal markets is leverage and fractional ownership, not always disclosed, which some say is as high as 100 to 1. And this is in the so called physical bullion markets like the LBMA. I could not even imagine how badly mispriced the counter party risk is in the hedges. But when the music stops and the tide goes out, we may see who is naked, and there will most likely be a surfeit of some rather ugly bums.
Reuters
US silver term structure inverts as supply tightens
By Frank Tang
February 11, 2011
NEW YORK, Feb 11 (Reuters) - The tightest physical silver supplies in four years have tipped the U.S. silver futures market into backwardation this week, making near-term prices more expensive than more distant months.
Market watchers said that it has been more than 10 years since silver futures were last in backwardation, an unusual term structure, associated with shortage of physical supply. Warehouse stocks of the white metal have dropped to a four-year low on surging demand, while miners have hedged their future production.
Booming industrial demand for silver and record U.S. coin sales, combined with a surge in demand from mining companies to borrow the metal for their hedge programs have led to a squeeze in the physical silver market.
"The problem is that there is great industrial demand for a specific grade of silver, and there is not enough coming fresh from the mines," said Miguel Perez-Santalla, vice president of Heraeus Precious Metals Management.
"The stocks are being pulled for all the high grade and better materials, and that essentially put a squeeze on the physical market," he said.
Perez-Santalla said that silver futures have not been in backwardation since billionaire Warren Buffett bought 130 million ounces of silver between 1997 and 1998.
Backwardation is a condition where cash or nearby delivery prices are higher than the price for delivery dates further in the future. Usually, forward prices are higher than cash prices to reflect the costs of storage and insurance for stocks deliverable at a later date.
"The extent of the backwardation in silver is unprecedented. It suggests that retail investment and industrial demand internationally is very robust and the small silver bullion market cannot cater to the level of demand for refined coin and bar product," bullion dealer GoldCore said in a note on Friday.
Warehouse data from COMEX showed that silver stocks fell to a four-year low at 102.5 million ounces (3,188 tonnes) on Feb. 5, about 30 percent below a peak at over 141 million ounces (4,395 tonnes) in June 2007.
Strong silver coin sales have more than offset outflow from the world's largest silver-backed exchange traded fund iShares Silver Trust (SLV), which notched its biggest one-month drop in its silver holdings in January...
