February Comex Gold Comes In With a Bang

Deliveries on February Comex Gold contracts came in with a bang.

Silver, not so much.

The customers were disgorging positions, with a huge one coughing it up at JPM.

Let's see if the metals can finally put together a breakout over this stubborn overhead resistance.

As large as this 'delivery' might be for Comex, it is still relatively peanuts compared to the physical markets of Asia.   That is where the action is.

Another Huge Delivery Day For Gold - Over 1,176,000 Ounces Delivered for June

There was another big delivery day for the June Comex Gold Contract on Friday.

HSBC was the big 'seller' from its house account, as the big stopper for the gold bullion was the house account and mystery customer(s) at JPM.

This type of delivery volume is a very big change from more recent history in New York, and reminds one of the bigger volume days of 2006 and the years following into the crisis period.

What do I make of this?

Speculatively, any number of things, including increasing pressures on physical supply around the London free gold float, despite the re-repatriation of the gold bullion of the people of Venezuela.

But this sudden burst of activity on the predominantly paper Comex is a change of what has been customary, something different.  I might be even more impressed if there was gold actually leaving the Comex warehouses, although given the times it may leave there through a proliferation of claims, and not ever physically leave the vault.

Gold Deliveries on the Comex For Friday, April 22

HSBC delivered 94,500 ounces of gold bullion at 1228.70 from their house account to the market on Friday.   I wonder if their house account includes their custodial activities.

In this case the biggest takers were the house accounts at Nova and JPM, and that big 'customer' at JPM who keeps standing for gold this month.

I just like to take the occasional note of these things.

Let's see if gold bottoms here for the short term and goes back up next week.

Currency Wars, Gold Pools, and Comex Potential Claims Per Deliverable Ounce

Based on some interactions with newer patrons of Le Café, I thought it might be a good time to restate the general lay of the land in the gold market.   The occasion for this is the latest measure of what might be called leverage in the futures market, what it is, and what it may or may not mean and why.

Clearly the paper markets, involving associated trades in ETFs, mining company stocks, derivatives, and so forth are much broader than the futures market alone.  But the futures market is what one might call the locus of execution for our drama.

The potential claims number for gold at the NY Comex is calculated by Nick Laird at Sharelynx.com by taking the amount of gold bullion marked as 'registered' for delivery at current prices by the number of contracts open on the futures market at 100 ounces of gold per contract.

Yes there is more gold that the 373,000 ounces currently marked for delivery in all the warehouses.  But that gold is merely there in storage by its owners, so counting it towards delivery, without the prior consent of the owner, is a bit presumptuous to say the least.  One might safely assume that market rules apply, and more gold will become deliverable at higher prices.

With a potential 111 claims per ounce of gold marked 'registered' for delivery at these prices, one might expect to see quite a move higher in prices to reach a market clearing price, and perhaps even a significant short squeeze.

But we probably will not see any such short squeeze, and maybe not even a breakout from this price range, unless something unusual happens outside of the New York and London markets.

The Comex, aka The Bucket Shop on the Hudson, does not set prices in the usual supply and demand dynamics.  And London and New York are playing a tag team with any number of markets these days, from forex to LIBOR to bonds.

Gold could break out in a big way.  It would not take all that much for a large hedge fund, or even a well-heeled world class individual, to turn about three thousand of those contracts in for delivery AND take the gold bullion out of the warehouses, moving them to Asia and pocketing a substantial profit on the gain.  

This assault on an unsustainable price peg is how Soros and associates in Zurich took the Bank of England for over a billion in their selling of the pound against an unrealistic price  point. 

Why doesn't anything like this happen?  

Is it because people do not have the money to do it?  In times of billion dollar art auctions and $500M homes being built on spec?   Don't make us laugh.

Is it because people do not want gold bullion?    The Shanghai Gold Exchange is routinely moving  physical thirty to forty tonnes per week out of its warehouses.   Thirty tonnes is about 965,000 troy ounces, about three times the total deliverable at the Comex now in total.

No, it will probably not happen because the big money has been warned off the Banks' turf, and their game is to keep the wash and rinse price cycles running to provide a steady profit as long as they can.   

As long as price is the 'only component' in the market dynamics, with demand and supply artificially dampened by a 'no withdrawals' house rules,  the liar's pokers carney games based on very loosely regulated price action can continue.  

It is not all that dissimilar to a poker game in which there are unlimited raises, the rule of table stakes does not apply, and one does not have to show their cards, and can only be called if the house allows it. Those with the biggest wallets can keep selling paper gold as long as they wish at whatever price they wish, and never have to even show their cards, and cannot effectively be called unless they permit it. 

I know this example is a bit rough, but not all that much.   It almost looks like a scam, rigged in favor of the deepest pocketed players, doesn't it?   And what if they get additional information about the hands of the other players and the size of their wallets.  Well, now you know why I consider those smaller players who keep coming back to the action in that casino to be a bit out of touch.

So the bullion banks and their friends can keep cranking out steady profits while holding bullion prices within a range that is a comfort to the nervous money printers in the Federal Reserve.  This keeps the government happy, the regulators off their backs so to speak, and the wash and rinse cycles rolling.

The reason why this sort of imbalance could get sorted out in the currency markets but not in commodities is illustrated by the relative experiences of George Soros and the Hunt Brothers.

Lucky for Soros that the forex markets are so broad and deep that no single group of cronies can control the exchange rules in the 'cash markets' to suit their plays.  Yes some central banks can make it quite risky, even painful, but the solution is not so neat as what happened in with the Hunt Brothers and silver.  There the exchange the US regulators just changed the rules of the game and that was that.

If one were to do something about a price imbalance in a commodities market, as opposed to an unregulated global market, you would tend to wish to do it off exchange by slowly accumulating a large portion of the available global supply, as quietly as possible.  This only works obviously with a commodity that has inherently has a relatively stable supply.

The spoiler in the gold paper game might then be expected to be  those 'outside' the range of the gold pool.  They are those who do not do their business primarily in the betting parlors of New York and London.

If one cannot secure a sizable portion of supply via paper on the exchange where the cronies make the rules, one just cuts out the middlemen and buys it directly, and it works as long as they do it off exchange and have an unimpeachable line of credit.   And then one would keep stacking their physical metal while enjoying what they think are very attractive prices.

Some analysts think that they know 'what China wants.'   Who is China?   Have the Chinese had a meeting and hammered out a single, unified policy plan?  How about the Americans, and the Russians? Or are there various competing domestic factions in every country?   And even more significantly perhaps, are there special interest groups, a self-defining elite, without preferences except for themselves?  As you can see this is a complex scenario with many variables.  

And in compressing the complexity of the scenario, we lose information and applicability, always, and sometimes intentionally.  Simple sells, and is successful depending on your sales objective.  Nothing was simpler and more powerful than the efficient markets hypothesis with perfectly rational actors.   It led to an otherworldly market ideology that caused one of the greatest financial crises in history.

This is not the first time we have seen such a de facto pooling arrangement.  There was the London Gold Pool, which sought to 'stabilize the gold price' at $35 dollars from 1961 until it collapsed in 1968.   That mispricing caused a 'run' on the gold in the US, and  led to the Nixon shock in 1971,  the closing of the gold window,  and the eventual rise in the price of gold to $850 in 1980.

Or we could point to the long bear market in gold, which reached its trough with the sale of England's gold in Brown's Bottom around $250 between 1999-and 2002,  This was resolved with the so-called Washington Agreement, which provided a plan for more measured selling and leasing of Western central bank gold to control the price of bullion largely amongst the Europeans.

Their intention was to have had this agreement continue until 2009, but alas, the rising economies of Asia and the BRICS were not sharing their vision of the future.  And so the purchasing of central bank gold reserves turned positive for the first time in over twenty years around 2006-7, ahead of the collapse of the US housing and credit bubble. 

As you may recall, gold subsequently rose to around $1900 in a fairly short period of time, and has now fallen back to the current price range in dollars of $1180-1230. 

And where are we now?

The BRICS are still buying.   There is quite a bit of secrecy and jawboning surrounding the actual levels of bullion available and unencumbered in the Western central banks.  The IMF, a ringmaster for the States if you will, has offered (threatened) to sell the same gold on about ten occasions. 

Not all the Western banks are holding to plan.  Some are even taking the unusual steps of repatriating their gold from the Anglo-American vaults where it has been since the Second World War.  They fear that if things go off the rails, and there is a reckoning of ownership claims, possession will once again be nine-tenths of the law.

 

It will be interesting to see where the market forces take us eventually, if they are allowed to do so.  I do not assume necessarily that they will.     

However the fact remains that the existing 'Bretton Woods II' de facto reserve currency arrangement for global trade, based on a fiat US dollar, which was unilaterally put in place by the US in 1971 on the closing of the gold window, has reached its point of unsustainability.

I do not believe that there has ever been a purely fiat global currency of this magnitude before in recorded history.  So we should not be too surprised if the situation seems to evolve rather slowly,

There is already a great deal of posturing by cross national special interest groups, with 'negotiation' on multiple levels from financial to diplomatic.  We may even expect the abusive use of the military to push certain proposals forward rather forcefully.

Bureaucrats can become quite draconian when their schemes for personal power go awry.  And in my own monetary thinking a purely fiat currency for international trade ultimately implies the development, or imposition, of a global government controlled by the monetary authority, whatever they may choose to call themselves.  The imposition of fiat valuation relies on control, which means power, and often plenty of it.

 

The future composition of any world government is a very open question.  There is very obviously an Anglo-American faction for 'the New American Century.'  But there are also Pan-Asian, Pan-Pacific, sub-Saharan, Eurasian and Pan-European elements as well.  Although it is most likely a bit of a reach, one has to wonder if this odd construction of the European Monetary Union is not some sort of a testbed for the future cooperation of regional oligarchies. 

 

I am not saying that there is 'A Plan' but there are certainly plans that some groups are clearly pushing towards their own objectives and agendas, and have been doing so for some time.   Professor Carroll Quigley, Bill Clinton's mentor at Georgetown, has been instructive on this subject.

We are in exciting times with history being made it seems.  There are a number of possible outcomes, which quite frankly no one can accurately forecast at this point.  There are too many degrees of freedom, so they literally cannot.   But they can throw up theories and strawmen of what may happen, and charge you to read about it.  It is an honest source of income, rather like writing racing forms or novellas, or the weather report in the 1950's.  And it is fun to talk about while we watch things develop.

But make no mistake, when some of these fellows overreach with their claims of certainty, if they really knew what will happen they would  not be telling it to you.  They would be playing with their own money in the casino, for all they were worth.   Or running funds that increased their leverage for their theories, while providing a steady management income.  This is a longer term play after all, and so speculative leverage is a short term risk to be managed.  Banks like to catch the players indisposed.

And then, alas, there are those who play for pay, who promulgate their ideas for the special interests, spreading disinformation.  Or just make the most dramatic sort of stuff up, selling a kind of financial pornography.

This landscape is what I, and several others some more notable certainly, have called The Currency Wars.  

Ted Butler: Why Not Just Close the COMEX

This column tonight from Ted Butler at Butler Research set me back a bit. It would be like one of the most die hard economist Fed watchers, after forty years in the business, coming out and saying that the Fed has gone so far off the rails that we ought to just shut it down.

It is a subscription only site, and so I cannot do justice to his reasoning which was far more extensive and complete than what I excerpt here.

Rather than closing the COMEX, engaging in some substantial reform and bringing it back to its original purposes would be preferable. But in the current climate of financial corruption and regulatory weakness it is not practically achievable, at least not yet.

Here is just a snippet of what Ted had to say.

"Not to be delusional, I have little expectation that the COMEX will be closed; but I think the idea has merit and should be considered. In fact, the vast majority of market participants and society as a whole would benefit from a closing of the COMEX for the simple reason that all the commodities traded there have been manipulated in price. The simplest way of ending these manipulations is to shut down the mechanism of manipulation...

Since it can be demonstrated and proven thru CFTC data that prices are set on the COMEX with no input from the real world producers or consumers, society as a whole would benefit if the COMEX didn’t exist. This is a private club that has no legitimacy in dictating to the world what prices should be.

The COMEX has undermined and replaced the free market law of supply and demand with a phony price-setting mechanism never intended when Congress authorized regulated futures trading. The COMEX is not functioning as intended and it’s hard to see what might change that. As such, it should be shut down."

COMEX Gold and Silver Futures Product Calendars for the Remainder of 2013

 

Physical vs. Paper: The Shanghai Gold Exchange vs. the COMEX

When push comes to shove, the COMEX is only pushing paper.

Weighed, and found wanting.

Shanghai Gold Exchange (SGE)

Weekly Gold Delivery From Vault

The above graph of physical gold delivery out of the Shanghai Gold Exchange (SGE) vaults was prepared by @KoosJansen based on the weekly reports from the Chinese portion of the SGE site. The SGE has confirmed these are deliveries from the vault and the numbers are updated on a weekly basis (each Friday). I will publish the links to the exact Chinese pages next week and will ensure there is updated weekly delivery data available here.

Monthly Physical Delivery From Vault: SGE Versus COMEX

The above graph of monthly gold delivery from vault demonstrates very clearly what many have expressed repeatedly on sites such as KingWorldNews -- the COMEX is a paper gold market while the SGE is quite clearly a world class market for physical gold.

Source: GoldMiner Pulse

Caveat Emptor: Another Level of Non-Quantifiable Risk Added to Trading Metals On the Comex

The disclaimer below has recently been added to the Comex warehouse report.  Sharp-eyed Dave from Denver and His Band of Merry Pranksters spotted this little addition at the bottom of the page.

This is from the report that shows the amount of gold and silver said to be available at the Comex.

"The information in this report is taken from sources believed to be reliable; however, the Commodity Exchange, Inc. disclaims all liability whatsoever with regard to its accuracy or completeness. This report is produced for information purposes only."

So much for even any pretext of audits and inventory controls.   Just numbers on a piece of paper when push comes to shove.

One can only wonder why the Exchange felt the need to add this statement now, after all these years.  Especially when Comex eligible gold inventory levels are approaching record lows, and there is widespread mistrust of certain parties and their opaque market positions on this list.

And there are rumours of forced cash settlements in lieu of bullion delivery floating around. The Hong Kong Metals Exchange just folded, and forced cash settlements. And banks are cancelling physical delivery arrangements.

How can someone who is trading metals and storing them at the warehouse not be concerned about a declaration of force majeure without liability recourse? What is the purpose of a commodities exchange when there are no representations made that they even possess what one is trading?

Who does the PR for these jokers? Or do they just not care anymore?

We'll have to call the Waffle House and see if Bart Chilton has any comments to make about this.

I wonder if we will see more disclaimers like this. The supermarket can put a disclaimer in the meat department that says that while they buy their product from believable sources, they make no representations or accept no liability with regard to the actual species of the meat which you are buying.

Weighed, and found wanting.

Fekete: Who Said the Hydra Would Take It Lying Down - A Failure Not of Knowledge, But Character

"Corruption is a tree, whose branches are
of an immeasurable length: they spread
Everywhere; and the dew that drops from thence
Hath infected some chairs and stools of authority."

Beaumont and Fletcher, The Honest Man's Fortune


“In the eyes of the empire builders men are not men, but instruments”

Napoleon Bonaparte


"When I despair, I remember that all through history the ways of truth and love have always won. There have been tyrants, and murderers, and for a time they can seem invincible, but in the end they always fall. Think of it-- always...

First they ignore you, then they laugh at you, then they fight you, then you win."

Mohandas K. Gandhi

By way of introduction, Professor Antal Fekete defines the gold basis as the difference between the price of gold in the nearest futures contract and the price of gold for immediate delivery.

In commodity trading contango is the situation where the difference is positive, that is, there is a premium placed on the futures contract. In backwardation, there is a negative difference, that is, one will pay more for gold for immediate delivery than you will for the futures contract, or a promise of delivery.

Contango is the normal condition in most commodities because of the time value of money or inflation. I think most are familiar with that concept. Think of it in terms of Net Present Value. If something will become more valuable in the future because of inflation, it will cost more than the same object if possession is taken today, less any organic growth and dividends.

This is always tied in with the risk free interest rate and the application of a risk factor. If you have not seen the video called Risk then you may wish to see it. Risk is just a calculation that estimates the probability that the underlying value of a thing will deviate from expectations without considering inflation, based on some change in fundamental valuation.

Now for some really good news. You can understand what Professor Fekete is saying without bothering about any of the theoretical.    Academics like to think about this and Fekete is a deep thinker on the subject, and we are glad and grateful for his work.  Theoretical work provides the planks and the plans out of which practical men like me build houses.   But unless you have taken courses in Economics and Finance you probably are not as familiar with the mechanics of this.

But for most people it does not mean all that much because they do not care about the intellectual arguments and fine nuances of the professors because as non-specialists they lack the context to care or understand it.  And academics like to argue the fine points of contention and sometimes with great passion like knights at a joust.

And unfortunately there is another class of academics who like complex and convoluted argument because it allows them to 'prove things,' that would otherwise be considered nonsense by anyone keeping an eye on the big picture, and especially matters of public policy.  And they often bring shame on themselves and to their profession even if they may make quite impressive amounts of money in the process.

Also, and I am going to steer clear of discussing this, there is quite a bit of distortion introduced at the ZIRP event horizon, and one can get sucked into side arguments about this almost endlessly.

Instead you can think of basis as simply the divergence between the paper metal and physical metal markets with regard to price.

If there is a small and steady divergence, things are normal. If there is a large divergence where paper is worth more than physical, the expectations of future inflation are high and increasing. If there is a large divergence where the physical is more expensive than paper, then there is something odd going on.

That oddness can mean one of two things. First, it can be a signal of future deflation, and especially if the price of physical gold is dropping because of an excess of physical supply. Supply is key to watch as well as price, and people who do not study supply don't really know what they are talking about.

If there is a large divergence in which physical is more expensive than paper, and the supply of physical is tightening, then you have that oddest of conditions where the futures market is grossly miscalculating things as they are and may be.  And this is what has just happened.

There are several reasons for this. One primary reason is that some market participants who are predominant in the futures markets are acting on hidden information. This again could be several things, but it almost certainly involves the willful distortion of the markets for personal gain. This may or may not be technically illegal.

Remember the case of the very obvious and willful distortion of the European bond market by Citi some years ago? As you may recall, the FSA got involved and Citi was fined for dumping a huge amount of bonds into a quiet trading period to knock down the price and run the stops, grabbing a quick profit.

The FSA did not charge them with market manipulation which is quite clearly what they did by any common sense judgement, but rather with failing to observe orderly markets, which is what one might think of as a misdemeanor.  What they really did wrong was to grab their profits from the wrong people, other insiders.  It is similar to what even more recently happened in the case of the London Whale.

So when some regulator stand up and says that nothing 'illegal' is being done, they may be saying the same thing as the FSA was saying. That is, of course these jokers are bloody well batting the price around, but since no one of serious power is complaining, we can't do anything about it, since it fails to meet some difficult to prove considerations of intent and conspiracy within the pathological environment of Wall Street.

So be that as it may, watching the divergence between paper and physical is paramount, while bearing in mind the lags. Markets are not quite uniform and instantaneous even in this age of marvels.

But there is little doubt in my mind that the recent antics in the metals markets were a price manipulation or a market operation with the intent to move the markets for some personal objective. It takes a willful effort not to see it that I could not undertake even if it was to my personal advantage.  And I think when people haven't a leg to stand on they resort to name-calling and ridicule, because the facts are not their friends.  And they need to keep their reputations in mind.

So in summary, a pre-meditated market operation used the futures market to knock down the price of gold and silver recently. This has resulted in greater buying of physical bullion across world markets, so this is not some localized event or prejudice by some domestic political group.  To say so is pure jingoism and disgraceful, absurd and unworthy of anyone who wishes to be taken seriously.

The current physical shortage will be resolved  But it will continue to worsen and become systemic if the distortions in the market, ie. an artificially low price, continues. At some point if not relieved there will be a market break and the paper market will lose all credibility and effect except where imposed by force.

I do not believe in naturally efficient markets. But at the same time, I do not believe that an inefficient market equilibrium can be maintained for long periods of time even with force and fraud.  There are always consequences, and sometimes they are unintended.

I am not delving into motives here, although if this continues I think some of Dr. Fekete's suspicions become much more credible.  For example, I do suspect quite strongly that the gold of Germany held in custody has been misappropriated, or hypothecated if you will.  And if this was disclosed it would prove embarrassing to some very self-important people who will use the excuse of national interest to protect themselves as is the custom amongst the self-rationalizing kleptocracy.

And as an aside, I think that where Dr. Fekete says 'Bernanke' he is really citing a broader financerati, the status quo of the Anglo-American financial sector and their attendants.  There is a currency war underway, and like other wars it is based on power and its distribution and abuse.

I don't think it is fruitful to argue too much where the resort to name-calling happens so quickly.  Instead I prefer is to see what happens, and to continue to push for greater transparency which makes control frauds more difficult to execute.   Opaqueness in markets is the servant of fraud,  always and everywhere.

And for those who believe that the price of bullion is what they say it should be, then they should be ready and able to stand and deliver at those prices, in open markets, with greater disclosure of their positions.

A futures contract and an option are forms of derivatives. And as with any derivatives they are more susceptible to fraudulent misuse, and therefore require stricter regulation than markets for real goods. And any regulator who does not comprehend that should go find other work.

By the way, some in the media were spreading the rumour on Friday that Goldman Sachs was in the bullion market 'buying physical with both hands.'  If and when that sort of thing comes out, it might prove to be their 'bridge too far' because then those they have betrayed (again) may turn on them as well who are yearning for reform in the markets.

If I have any concern at all it is that those who have held bullion legitimately will get mixed up in the repercussions against those who have gamed and looted the system for their own benefit, as Jeff Sachs has described it.   The hypocrisy of the privileged often knows no bound or restraints of conscience.  But when they stop and look at what they have done, some of them are appalled.  And the great crowd of people may help them come to that self-examination.  Then reform may begin.

Here are is the material from Dr. Fekete:

"Bernanke is trying to stop gold backwardation by selling unlimited amount of gold futures contracts through his stooges, the bullion banks. He is underwriting losses they are certain to suffer in due course. We can take it for granted that they haven’t got the gold to make delivery on their contracts. In fact, delivery of gold will be suspended under the force majeure clause. Short positions will have to be settled in cash, to be made available by the Fed’s printing presses. Gold futures trading will be a thing of the past.

Bernanke and columnist Paul Krugman, formerly his subaltern colleague at Princeton don’t understand that the issue is not the price of gold. The issue is backwardation or contango. In trying to wrestle the gold price to the ground the Fed makes “the last contango in Washington”* an accomplished fact.

From the frying pan into the fire

Ostensibly a lower gold price would solve the problem Bernanke has. Demoralized gold bugs would be forced out of their holdings through margin calls. Disillusioned investors would shun gold. This would make physical gold available to rescue the strapped gold futures market.

In fact, however, a lower gold price is making the problem more intractable, not less. The Fed is diving from the frying pan into the fire. This is the point missed by almost all observers and market analysts. They ignore the underlying flight into physical gold that continues unabated, in spite of (or, better still, because of) the panic in the paper gold market. The Fed’s intervention in bankrolling short interest is going to back-fire, for the following simple reason. The Fed’s strategy is inherently contradictory. A lower price for paper gold makes it easier, not harder, to demand delivery on maturing futures contracts. 

(Note: the delivery process at the Comex is not free and efficient.  The exchange can and does set redemption limits and other special situations without having to declare force majeure.  A minor point but will tend to make one look elsewhere for shortages first. And if in fact there is a control fraud in price setting and the futures markets are the locus, then we would anticipate that the data coming from such a private source would be increasingly less reliable.  - Jesse)

The more paper gold Bernanke sells, the lower the cost of acquiring physical gold in exchange for paper gold becomes. The price of the nearby futures contract will drop to hitherto unimaginable depths, relative to the cash price, making backwardation worse, not better. Ultimately this will make backwardation irreversible. Welcome to the world of permanent gold backwardation.

From what hole does the evil deflationary wind blow?

Academia and the financial press have utterly failed to recognize the relevance of gold backwardation as regards deflation. They might fret about hyperinflation as a result of unbridled money-printing (euphemism for the monetization of government debt). Yet the real danger is not on the inflationary but on the deflationary front as realized even by Krugman – while he is perfectly clueless on the question from what hole the evil deflationary wind blows (other than conservative wishful thinking).

Well, I can pinpoint the location of the hole to within yards for the benefit of Krugman. It is on Constitution Avenue, in Washington, D.C. The evil deflationary wind is blowing from the building of Federal Reserve Board.

If Bernanke thought that his attacks on the gold price would stem deflation, well, his efforts were counter-productive, to put it mildly. They have, in fact, made the flight into physical gold accelerate. Permanent backwardation of gold, and its concomitant, the re-invention of barter – the ultimate in deflation – will be the result.

There is no reason to fear that the Fed is pushing the world into hyper-inflation. In fighting the gold price the Fed unwittingly pushes the world into hyper-deflation.

All the same, it is destroying the dollar and the international monetary and payments system."

You may download and read the entire paper here.

Not that it matters but I do diverge a bit from Dr. Fekete's outcome of hyper deflation.  And I do so carefully because of the respect I have for this thinking.

A similar understanding is the basis for my own longstanding forecast of stagflation, which may become severe. I am assuming that the same kind of phenomenon that Dr. Fekete thinks will take place in a rush to gold and away from dollars is being perpetrated now by the Fed in this policy error of bottling up printed money in bank reserves, hoping for a trickle down effect of cheap loans to the real economy based on artificially low interest rates.

Instead what they are doing is subsidizing financial corruption and devastating the middle class, especially amongst those who are not retiring on official government pensions, but on a lifetime of savings.

As an aside, I am not of the Austrian School of economics, but there are several of those who identify with it whom I have read.  And I do consort with the other schools, because  I am of that odd class of people who think for themselves. Schools have loads of baggage and old fights. And people like to think in black and white.  Luckily I think the next financial collapse will discredit most of them again, and something new will come out of it that is a synthesize of the good in all of them.

I don't fear hyper deflation so much but I do think at some point they will have to reset the currency while knocking a few zeroes off in the process, as had occurred with the Russian rouble in the 1990's.  And whether that is called a hyperinflation or a hyperdeflation matters little with regard to the consequences.

Like the financial crisis of 2008, this will not be a failure of knowledge, so much as a failure of character.

Related:  Psy-Ops by Hugo Salinas-Price


 

How the Gold Market Was Crashed - But Most Importantly, Why? Leveraged Default? And Silver?

Many are still sorting through the data to try and figure out what happened, but it is hard to look at the available data and the market action and conclude that the recent 'flash crash' in gold was anything but a calculated takedown.

Some big players had been trying to work the market price of bullion down in stair step fashion for some time.  Their tracks on the tape were big enough to be hard to miss, and any number of people who watch the market structure as it develops were seeing them, and a few were reporting what they saw.

But it just wasn't enough.  The pressures were building, and something had to be done. 

A plan for a market operation to relieve the pressure was made, and then executed ahead of the upcoming option expiration on the Comex on April 25th.  The word was quietly spread so the important monied interests would not make a fuss about losses when the time came, as in the case of MF Global and Cyprus.

And then Goldman gave the signal to the market with their 'short gold' call.

As I said at the time, I was not sure if this was done to try and avert a disaster, or to cover up some longer term corruption. Or perhaps a bit of both.  Motives are never easy to discern where leverage and opaque trading pools are involved.

This could be in advance of a major announcement out of Europe with regard to the Eurozone and also their monetary policy following along the lines of Japan.  Perhaps it is even something regarding US policy.  Obviously one has to have an open mind about that.

But there were persistent rumours of a potential default situation at both the LBMA and the Comex. Well, one has to take those with a skeptical eye.  But there are some data that point to the LBMA in particular, although the drawdown of bullion from the two exchanges could have been more general. 

Linked just below is a report that includes more data and it well worth reading. It tends to concentrate on the Comex.

How the Gold Market Was Crashed.

It seems that the word has gone out to the media and the stories are being spun to protect the system.   And the parrots dutifully pick up the chatter, without knowing why.

The story being spun that there was a speculative excess in gold being held by pension funds that panicked.   Foolish people, outsiders really, got over their heads and caused this regrettable incident.

There is probably a grain of truth in that, but I think it is more likely that they were forced out of their positions by a market operation designed to do just that.  And market insider knew exactly what they were holding.

Price declines caused by legitimate selling and panicked longs are not marked by increasing open interest. That is the hallmark of short selling with a purpose.

This is a big deal, and it was writ large across the media.  And that suggests that there is an equally big problem that had to be dealt with quickly and brutally.  Ordinarily market operations are more adept and protracted.

Something was close to breaking, and it most likely still is. 

And if it broke, it would prove to be embarrassing to quite a few very important people.  At least, that is what this situation suggests to me. 

Even the endlessly levitating stock markets seem a bit 'edgy' with a tension on the tape.

I cannot possibly know what is at the root of this.  Can't find Germany's gold, and can't buy enough at the LBMA to deliver it, because the market is leveraged 100 to 1?

Maybe not that but something of that magnitude.  A major TBTF tottering on the brink of a derivatives domino collapse? There are rumours out of Switzerland about Italy and France.

Most eyes are on the States, but how quickly we forget that ABN/Amro declared a force majeure and stopped all physical delivery of bullion, forcing settlement in cash.  The soft default of a major bullion bank is no joke, especially when it appears they could not obtain suitable goods at any price. 

This tends to point towards problems in Europe and the LBMA.  And one of the big sources of LBMA 400 oz. qualified gold is the big SPDR Gold ETF, GLD which is stored by HSBC in London.  I have included a chart of who tends to use 400 oz. bars below.  The COMEX does not.

As you may recall, Andrew Maguire reported early on that there were indications of problems on the LBMA with regard to gold inventory.  It is said to be leveraged 100 to 1.

“Entities went to the LBMA and said, ‘We don’t trust anybody anymore. We want our physical metal.’ They were told they would be cash settled instead by a bullion bank. The Western governments have been trying to plug holes, and the reason for it has to do with the default that was taking place at the LBMA.

This is why this smash has been orchestrated because of the run that has been taking place on physical metal. So Western governments had to do this because of an imminent run on the unallocated LBMA system. The LBMA bullion banks had become so mismatched at one point on their trading positions vs real world demand that they had to orchestrate this smash."

The 'entities' in question are again just rumour, but they are most likely to be from the Mideast or Asia.    They could be a central bank, or even an ETF for that matter.  But the size was said to have been substantial, and untenable for withdrawal without a severe market disruption given the leverage on which the LBMA operates.  100 to 1 leverage is no joke when the drawdown is physical and available supplies are tight.

If you have not picked it up, the implication in this theory is that the big price declines allowed some non-allocated repositories, like GLD for example, to disgorge delivery ready bullion to the LBMA for delivery to the entity that had demanded delivery.

And something like this might not be a singular event.  People talk, and if one entity got nervous and took delivery that information cannot be kept from other sizable players in the same circles.  And so others step up and ask, and there is the threat of a run.  And it could be happening in more than one place, ie not just the LBMA.  Hence the decline in inventories at the Comex referenced above.

JP Morgan holds enormous derivatives positions in the precious metals not reported anywhere in detail except occasionally in the OCC report.  If something were to perturb the markets, it would almost certainly affect them. 

And recall that the outrageous excesses of the 'London Whale' were not uncovered by regulators, but rather by market participants who reported JPM to be distorting the market because of the size of their position.  And the OCC is having a bit of recent notoriety from overlooking irregularities (some say crimes) to protect the banks.  So keep that in mind.

Changing the subject, if you wish to get a bit more baroque, gold may have been a necessary misdirection with the real target being silver, which hardly anyone is talking about, even the house economists and spokesmodels for the status quo. 

Keep an eye on stocks and the markets.  The big money always moves first, because they get to know what is happening first.

But I have to remind you, your guess is as good as mine.   It is an opaque market, and it has gotten worse and not better, despite all the show of 'reform.'

When the tide goes out, you not only get to see who is naked, you see who they are naked with.  And so the smokescreens go up.

I suspect that this is going to get ugly.

Related: Update to the Update: The Attack On Gold - Paul Craig Roberts (this gets more into the general government-business-as-usual theory rather than something that was incidentally related, ie a major impending default.  As I pointed out I think those sort of antics tend to be a more elegantly executed and gradual.  The recent gold/silver smack down was sheer brute force.  Could have been shock and awe but it really was over the top and probably called far too much attention to itself to have been a 'policy thing.')

Bear Raid In Gold and Silver After Option Expiration

As I noted yesterday, a large number of options were 'in the money' for the Comex option expiration. As you know, these options become active futures contracts on the following day.

"The metals went out on a quiet expiration, with a decent amount of options closing in the money. They will be converted to active futures contracts tomorrow. I expect some market action on this."

It is not unusual for the market manipulators to deliver a serious 'gut-check' to the holders of those contracts, especially those of the spec variety, to try and shake them out of their positions in a forced selling of stop-loss orders and margin calls.

Just another facet of financial repression, times of general deception, and the ongoing war on the public interest.

Let's see what the rest of the week may bring.

Closer Look at Gold Chart's "Cup and Handle" and the Handle Details - Blitzsilberkrieg

As a reminder there are option expiration in gold and silver on the Comex next week on Tuesday the 27th.

My friend Dave says he sees a bulge around 1800 in the gold option positions that could mark the heart of the resistance. This coincides with my own thinking.

As you know, I have anticipated this inverse H&S targeting that outer perimeter from 1790 to 1810 of the bears' Maginot line at 2000-2100.

Let's see if gold can be broken out by a distracting run from silver that shocks the bullion banks in a blitzsilberkrieg, a quick advance from out of this trading range to to upper limits of resistance at 40.

The terrain is easily marked as in the last chart below, and the potential for it is in the market positioning of bullion demand and the big paper shorts.

Comex Options Calendar For the Remainder of 2012

Nov. 27 Comex December gold options expiry
Nov. 27 Comex December silver options expiry
Nov. 27 Comex December copper options expiry
Nov. 28 Comex December miNY gold futures last trading day
Nov. 28 Comex November copper futures last trading day
Nov. 28 Comex December E-mini copper futures last trading day
Nov. 28 Comex December miNY silver futures last trading day
Nov. 30 Comex December gold futures first notice day
Nov. 30 Comex December silver futures first notice day
Nov. 30 Comex December copper futures first notice day
Nov. 30 Nymex December palladium futures first notice day
Dec. 21 Nymex January 2013 platinum options expiry
Dec. 26 Comex January 2013 copper options expiry
Dec. 27 Comex December gold futures last trading day
Dec. 27 Comex December silver futures last trading day
Dec. 27 Comex December copper futures last trading day
Dec. 27 Comex December E-micro gold futures last trading day
Dec. 27 Comex January 2013 E-mini copper futures last trading day
Dec. 28 Nymex December palladium futures last trading day
Dec. 30 Nymex January 2013 platinum futures first notice day
Dec. 31 Comex January 2013 silver futures first notice day
Dec. 31 Comex January 2013 copper futures first notice day

CME Loosens Margin Requirements On Gold and Silver and other Contracts

The CME has reduced margin requirements on quite a few of their traded instruments.

In the case of gold and silver futures contracts, the reductions seem designed to bring the margins paid by specs more in line with those required of 'the professionals.'

Volume on the CME is lagging. Perhaps they are starting to feel the pinch.

Lower prices are no substitute for meaningful reform.

Full clearing memo from the CME 15 Nov 2012

Gold Daily and Silver Weekly Charts - Up to the Trendline In Options Expiry - Summoning the Bernank

Gold and silver caught a pretty decent pop higher today as the markets turned their eyes from the awful earnings reports given by the real economy stocks, and looked in a candlelit mirror chanting, "Ben Bernanke, Ben Bernanke, Ben Benanke."

Once again we are in the shadow of Comex Options expiration, last trading and first notice days.

July 26 Comex August gold options expiry
July 26 Comex August copper options expiry
July 27 Comex August miNY gold futures last trading day
July 27 Comex July gold futures last trading day
July 27 Comex July silver futures last trading day
July 27 Comex July copper futures last trading day
July 27 Comex August miNY gold futures last trading day
July 27 Comex August E-mini copper futures last trading day
July 31 Comex August gold futures first notice day
July 31 Comex August copper futures first notice day

Far be it from me to tell anyone what to do. But I will say that I have stopped trading all options, both in stocks and commodities.

The rigging that characterizes the markets overall, through the manipulation of price and the mispricing of risk, is most pronounced in the paper derivatives such as options and artificial constructs like some of the ETFs which are designed to lose almost without regard to what the market does.

Gold and silver could go either way here. I do not have enough visibility into where the suckers are placing their bets, and where the wiseguys are placing theirs, at least for the short term.

I do believe that one of these days a major player is going to pop these markets, and rip the faces off some of the funds and specs who are leaning nakedly on the short side in a particularly painful and protracted rally from hell. I just do not know if we are there yet. The more I look at the structure of the Comex and their position and delivery policies the more it looks like a paper Ponzi scheme that could be tough to beat on its own turf.

Despite some of their identifiable predilictions, the Banks and big machers of the Street are very open minded about screwing anybody and everybody. They have no abiding loyalties or allegiances except to themselves.

I see where the House has passed the Ron Paul Bill to Audit the Fed. While that sort of thing may be gratifying I think the Senate also has to pass their own version of it, and then reconcile the two. And that prospect does not seem likely.

Gold Daily and Silver Weekly Charts - Brother, You Ain't Seen Nothing Yet

"In a society built largely on confidence, with real wealth expressed more or less inaccurately by pieces of paper, the entire fabric of economic stability threatened to come toppling down."

New York World, October 25, 1929


"In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could."

Rudy Dornbusch

Next week is a Thanksgiving Holiday week in the states, as the markets will be closed on Thursday and a light session on Friday.

Metals Option Expiration is next Tuesday. December is a big delivery month.

Several people have mentioned that the bankruptcy of MF Global takes a lot of large specs out of play for this delivery, with their positions trashed and funds frozen in both gold and silver.   And the failure of MF Global was a 'hit' or some ploy by the Wall Street wiseguys to break the speculative longs in the metals and take down the biggest retail futures firm that arranges physical delivery.  Talk about going the extra mile.

I don't know about that one, but wait until a major exchange defaults on some commodity like silver, and then forces cash settlements on the position holders at a price the big exchange members dictate.  And maybe not even in cash, but some kind of paper markers. If you don't think this can happen then you have not been reading enough about US market history.

That should set a few more minds free of their illusions about fair and efficient markets..

The Super-Committee has its deadline next week and a good resolution seems unlikely, which is what most expect. Obama helped to set this impasse up by extending the Bush tax cuts at the beginning of 2011, which are now a major sticking point.

I have an open mind to the theory that this is a bit of chess, with Defense Department cuts being set up by default if no resolution is reached, although they will only start in 2013. 

Most politicians are loathe to put military spending cuts on the table and take responsibility for them. A failure by the Super-Comm makes the cuts 'automatic.'

Headline risk in European sovereign debt remains very elevated.

I remain in a paired trade of short stocks and long bullion.

Have a pleasant weekend.

Gold Daily and Silver Weekly Charts - Night Bombing Raid - Silver +4.50 from Low - LBMA

Gold December futures fell to 1535 and Silver to 26.15 in the overnight session as a determined night bombing raid took them down in the least liquid period of the 24 hour trading day, with the low being reached around 2 AM New York time.

Silver Dec futures are now at 30.78 in New York, virtually unchanged from their open at 30.85, or up over $4.50 from the low.

Gold is at 1623 now, or up $88 from its overnight low.

The December SP 500 Futures had bottomed at 1116 around the same early morning hours, and are now at 1158 or about 42 point from the overnight lows.

Gold has NOT yet broken the short term downtrend, marked with a sharply declining blue line on the chart.

Tomorrow is option expiration on the Comex as we might have expected. I would hope that long term investors would take advantage of these price drops by locking in physical bullion purchases when they can.

However, it is hard to do this with the leverage and margin requirements on Comex especially on the overnight globex trading session. How can an average trader hope to maintain a position? And that is the basis of their schemes.

"It is not immediately clear at this juncture who was selling or why - but in placing such a huge order into the market when the least number of market participants were active tells you that they were out for dramatic effect.

Anyone looking to offload significant amounts of metal at the best possible price would have done so when both London and New York were both open - this would have ensured they would have hit the market when it was most liquid and ensured they got the best price for their sale.

Clearly finessing gold into the market was not their motive - they wanted a statement."

Ross Norman, Sharps Fixley

The interplay between the LBMA 'physical market' and the New York 'futures markets' is fairly obvious. The leverage on the LBMA physical market for gold and silver, as opposed to the London Metals Exchange which trades base metals, is reputed to be around 100 - 1. So any 'run' on the metals will stress the system.

According to their website the LBMA market markers are some of the largest Too Big to Fail banks including UBS, Société Générale, Merrill Lynch (BoA), Credit Suisse, Barclays, Goldman Sachs, JPM, HSBC, The Bank of Nova Scotia ScotiaMocatta, Deutsche Bank.

Gold Daily and Silver Weekly Charts - Liquidation Panic - Martian Gold - Comex Hikes Margins

"Yesterday, the textbook was thrown out the window. All asset classes saw sudden and sharp moves far in excess of normal volatility patterns. To an old timer, that points to one conclusion. Liquidation. Wide-spread liquidation across asset classes. Currencies, bonds, commodities and stocks all moved swiftly and sharply in a direction that screamed - Seek safety! Raise cash! Get liquid...

All of that had a quick and discernible negative impact on markets. But, the selling was far more pervasive and dramatic than simply a conscious adjustment of positions based upon new data. Thursday’s action screamed liquidation - and not all of it voluntary."

Art Cashin, 22 September 2011


"That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."

Paul Volcker, Nikkei Weekly 2004

There was a major sell off in gold and silver today that was due in part to the liquidation of assets coming out of Europe. That is the basis of the quotation from Art Cashin, and he is right in what he says.

But while stocks and the dollar all paused today, gold and silver were hammered, and the selling looked to be more calculated than incidental as it has been throughout the week.

There is little doubt that some of this is the association with usual gaming of the Comex option expiration next week, and the potential delivery situation on that exchange with their unusually thin supplies and concentrated short positions held by a few of the banks. Comex Hikes Gold, Silver, Copper Margins After the Bell.

But today in particular seems to be even a little more than that.

Every time the central banks and their affiliates get desperate, some economic essayist trots out an outlandish argument about why gold is a 'barbarous relic.'   Here is one that tops even the almost petulant argument of Willem Buiter in 2009. 

The Price of Gold in 2160 - Statsguy and James Kwak

I had to read this essay twice to make sure it just was not satire. I can summarize my reaction by saying that finding gold in outer space with assumed technologies speaks to supply, but the author does not present any assumptions about population, economics structures, and of course future demand.

The method by which gold is formed in relatively rare supernova events is fairly well known, and its distribution relative to other elements and compounds is not completely eccentric, at least not as random and eccentric as pseudo-scientific economic theories might become these days.

The author's premise of the discovery of new bullion supplies in outer space is analogous to the discovery of the New World by Europeans, and the remarkable finds of gold and silver on those two vast continents.

And yet here we are today.

Some might say that the author was merely saying in a cute way that commodity based currencies always fail, with an example being salt or Yap stones as Mr. Buiter had argued to greater effect.

And I would say that all currencies do go in and out of favor in their time, since there is an element of relativism in value that can be enforced by ruling authorities, who themselves tend to come and go, even if in their time these authorities might seem invincible, their empires intended to last for a thousand years.

But some stores of value, not based on passing utilitarian criteria or force, do tend to be resilient, and come back again and again, and retain an element of value from generation to generation. Or as some might with a more profound understanding of money might say, they maintain the confidence of their steadfastness that is a pre-requisite of sound money that is difficult to maintain by mere force of will.

As some historians of money have pointed out, the Federal Reserve was initially set up to emulate this type of external immutability of value in what later became a purely fiat currency. As men like Andrew Jackson would have predicted, they failed in exactly the same ways and for the same reasons that every other attempt at this has failed throughout history.

All systems are prone to corruption and decay, but none so much as those that rely exclusively on the goodness and wisdom of small groups of powerful men, especially when acting in secret.

It does seems quite cheeky for a modern economist to criticize a natural store of value with a 5000 year history, while standing on the platform of a purely fiat currency, given the short half life of every fiat currency throughout history. They may be recreated and devalued, but they never retain much of their value and character, with the only remnant their name.

I hear the sounds of printing presses over the horizon. Get ready for Quantitative Easing European style, and massive European bailouts, and increasingly absurd arguments from the econo-sphere as they avoid the subject of justice for the sake of expediency.

I have some limited sympathy for the dilemma facing the increasingly desperate western central banks, and understand their rationalizations.  But they are doing something that is the very epitome of moral hazard, and abuse of power, in their attempts to stabilize the unsustainable, without allowing for meaningful change and reform.

The heart of the issue is that the existing monetary and financial system is becoming increasingly arbitrary and corrupt. A relatively small group of interconnected crony capitalists wishes to create a digital money out of nothing, and distribute it increasingly as they will, to whom they will.

And this is the basis of my resentment with this policy abuse, and the irritation with the assault on reason by those in the financial demimonde engaging in what might be politely called perception management.

This self-serving arbitrariness, even if done for 'good motives,' is the very reason why all fiat currencies fail. No matter how you want to rationalize it they are going to create money out of nothing, and give it to whom they will, while corrupting the political system in the process.

And the cumulative results of this abuse of power are corrosive to society. Lawless example by a ruthless few brings out the worst in all the people, always. And that is a shame.

"Our government teaches the whole people by its example. If the government becomes the lawbreaker, it breeds contempt for law; it invites every man to become a law unto himself; it invites anarchy.”

Louis D. Brandeis

I am reading The Garden of Beasts by Erik Larson, and it is diverting as well as instructive, full of personal vignettes of Berlin in the 1930s told from the standpoint of the US Ambassador and his family.  It is perhaps not surprising that most cruelty is based in casual disregard for others, and a pre-occupation with the self.  And of course, that evil flourishes when the good do and say nothing.

As a preparation for this I read The Long Night by Steve Wick. Perhaps this is responsible for my gloomy frame of mind this week. But these things do not happen overnight, but by measures, until one is firmly in the crude grip of the banality of evil.  And then of course it is too late to escape from the maw of the abyss. 

So don't go there.

Have a pleasant weekend.