Worse Than Madoff: The Bankers' Silver Scam Is Unwinding

In short, Avery Goodman has come to the conclusion that silver is rising because a long term suppression racket has been exposed.

I came to this same conclusion some time ago, and recently restated it: What I Think the Fluctuations in the Comex Silver Inventory Mean.

There are probably quite a few securities attorneys have their eyes set on this one. But one also has to wonder if Obama will challenge Bill Clinton's record in selling pardons at the end of his Presidency.

Seeking Alpha
Short Sellers Now Screaming about a Buy-Side Silver Conspiracy
By Avery Goodman
Tuesday, April 26, 2011

It was only a matter of time. Now the talk of silver price conspiracies has shifted from long buyers to those on the other side of the fence. On April 21st, the historically anti-precious metals editorial staff of the London Financial Times ran an article titled "Silver Surge Prompts Conspiracy Theorists". Meanwhile, order was reestablished among the short side conspirators once the COMEX trading floor opened on Monday morning.

After silver prices had temporarily risen to over $49 per ounce during Asian trading, they were beaten down again to about $47 in a flood of newly opened short positions. From this return to discipline within the bullion bank ranks, we can assume that the Federal Reserve probably will temporarily halt QE-2 at the end of June or before.

At the close of business on Tuesday, April 26, 2011, the COMEX performance bond committee will, yet again, significantly raise silver margin requirements. We believe that this is an attempt to suppress prices and delay the inevitable reckoning. With the end of QE-2, short-sellers hope the exponential rise in the price of silver will also end. But, in our view, artificial price attacks in the futures markets are unlikely to help short sellers in the long run. The nexus of price appreciation is NOT at COMEX, but in the physical market. Physical silver buyers pay cash, and it doesn't matter to them how high or low COMEX committees set performance bonds.

If the performance bond committee is successful, they will manage to reduce the so-called "spot" price. In practical terms, however, the only thing they will have accomplished is to cause a few speculators to lose money while helping well-financed market vigilantes to buy more bars of physical silver for the same money. The bankers will then need to deliver even more physical silver than they would if the committee had done nothing. These futile attempts to fight back illustrate that a market manipulation cannot be effective in a market that is well aware of it.

The massive losses that short sellers have been taken has naturally led to some new urban myths. Some now claim that "evil" long side billionaires are out to "ruin" the market. Yet, even the Financial Times article points out the ridiculously paranoid nature of this theory. The author notes that silver prices were rising even as speculative positions at COMEX were reduced by 8.4%. This illustrates that the COMEX is now just a sideshow. A lot of people are simply buying physical silver.

The silver buyers do include some billionaires, undoubtedly, but most of them are simply folks who watched Jeffrey Christian's testimony at the well publicized CFTC position limits hearing back on March 25, 2010, and came away with the distinct impression that a small group of London banks have been creating alchemic silver. The banks were ostensibly "selling" and then "storing" so-called "unallocated silver bars" for silver investors. In reality, they seem to have been maintaining a fractional banking system in which only one physical ounce is really purchased for every 100 ounces they supposedly sell.

Let's go over that again...because once you understand the particulars, the reaction of the price of silver becomes perfectly understandable.

1) Bank sells silver, a very precious item, for big money;
2) Bank doesn't buy the silver it sells, or, if it does buy it, leases out or sells 99 ounces for every 1 ounce in the vault;
3) Bank gets paid "storage fees" from all its customers, even though their silver is not in the vault;
4) Bank profits are equal to 99 times what it sells initially, and then, the value of the stream of storage fees after that. Nice work if you can get it.

But, then there's the downside.

1) The market might discover your scam and you'll need to deal with investigations;
2) Leverage so high that, if discovered, it is a recipe for disaster;
3) Courts may deem the arrangement a fraud, in spite of disclaimers that say otherwise, and whereby customers waive liability for fraud;
4) The market will inevitably punish you severely with heavy losses after discovery of the scam.

For more information on "unallocated storage" in London, see our previous article.

Had the worldwide silver scam remained a secret, suppression of precious metals prices might have gone on forever. But the genie is now out of the bottle and mortal men, not even those who run casino-banks, cannot hope to put him back in. Once it became clear that the bullion banks were leveraged 100 to 1 in a silver based fractional banking scheme, it was only a matter of time before the market clobbered them. That is what is happening.

People have only begun to scratch the surface of the precious metals markets, and few fully understand how undervalued all of them are. Silver has always been worth far more than it had been selling for in the last 30 years. People are starting to see not only this, but also how that corrupt pricing situation came to pass. The whole world now understands that the silver trade has been carried out in a deceitful manner for many years. So, naturally, many people are starting to buy physical silver again, just as they did for 10,000 years before COMEX began trading it. Those people happen to include, in all likelihood, a few billionaires, a few sovereign wealth funds, and a few Asian bankers. Many are politely refusing offers of "unallocated" bullion bank "storage".

The silver market is not rising because of a conspiracy. If so, it would be the most disorganized conspiracy that has ever existed. On the contrary. What we are seeing is the massive unwinding of a silver price control conspiracy that many of us predicted, in public or private for many years. The biggest scam in world history is ending. Sellers are now desperately trying to find metal. A lot of banks that were supposed to be storing silver are really storing air. Converting large amounts of air to large amounts of silver is difficult and bound to be costly. The process, once completed, will permanently increase the price of silver.

Intense upward pressure on silver prices is evident because physical silver is being purchased as never before. It is not stemming from trading on COMEX. In fact, deliveries at COMEX have been relatively small for several months. The process that is now ongoing is one that no performance bond committee can stop. COMEX could declare liquidation-only, as they did in 1980. The only end result would be to catapult the demand for and price of silver even higher. COMEX is now irrelevant except as a way for banks to bankrupt themselves if they continue to try to reduce the price of physical silver by manipulating futures prices there and taking on more short positions to do it. They can crash the paper futures price as much as they wish. It won't stop buyers from demanding physical silver in the real market outside COMEX.

The old prices were a result of a naive market, overwhelming short positions at the futures exchanges, manipulative trading techniques and a deceitful unallocated storage arrangement. The current silver pricing surge may look like a typical short squeeze, but it is nothing of the kind. It represents a permanent change in market perceptions. That is not to say that silver prices cannot fall, but the pressure to buy physical silver will continue to mount. When silver prices finally reach equilibrium, $50 per ounce might be the floor, rather than the ceiling. We don't know how high the price will climb under these circumstances.

One thing is clear. Buyers have discovered that they hold the power to defeat the largest financial firms in the world at their own game. But they still don't recognize the extent of their victory. Silver is the beginning, not the end. It is only one of the precious metals, but not the only one. The same unethical practices have been used for years to suppress the price of gold and platinum, for example. Both metals have been traded in a naive market, with overwhelming short positions at the futures exchanges, manipulative trading techniques and deceitful "unallocated" storage arrangements. There is no fundamental difference except that the metals have different names and appear at different locations on the periodic table.

Central bankers may be able to supply large amounts of the gold, for a while, to assist their minions in the commercial banking sector in the artificial suppression of gold prices. But, with emerging market central banks, the developed world's pension funds and university endowments, hedge funds and sovereign wealth funds all heavily buying gold, that resistance to the market cannot last forever. The most effective way to suppress gold would be to take steps to crash the entire world economy by cutting off most of the current flood of liquidity. However, even that would be only a temporary measure.

With stock prices collapsing, a mega shift from demand for stocks and bonds to demand for gold, silver and platinum would occur. One way or another, the current management of gold prices, which currently includes allowing a slow upward trend to relieve buying pressure without collapsing fiat currencies, will change into an explosion. This will happen with or without the help of market vigilantes.

So what will be the vigilante target after they are finished with normalizing the price of silver? Central banks like low platinum prices almost as much as low gold and silver prices. Manipulating platinum prices up and down helps bank profits. Since it has proven impossible to fully suppress price increases, the next best thing is to orient the manipulation process to create artificial high volatility, and thereby discourage conservative investors from buying the metal. This leaves more for industry at cheaper prices.

Platinum is an important metal in so many industries, not the least of which is the auto industry, that it seems to us that the Orwellian Ministry of Truth (aka, the New York Branch of the Federal Reserve) would strongly prefer a low, or at least, a very volatile price. Platinum, like gold and silver, also has a history of being used as money (in Russia) and possesses sufficient monetary qualities to be a significant threat to central bank emissions of fiat money. But, similar to silver and unlike gold, central bankers have no platinum reserves. Russia has large palladium reserves, but is unlikely to sell much, going forward, unless it is pressed against the wall by a steep drop in oil prices below its budgetary minimum (about $65 per barrel).

The platinum market is smaller than the silver market. The percentage of above-ground platinum is smaller, compared to consumption, than the percentage of above-ground silver. When the silver price revaluation runs its course, and silver is finally sell for a normalized value based upon its 16 to 1 ratio in the earth's crust, versus gold, we believe that vigilantes are most likely to turn toward platinum. We believe that J.P. Morgan Chase (JPM), accused of being one of the New York Federal Reserve's primary agents in manipulating stock, commodities and precious metals prices, knows this. It is actively buying huge amounts of physical platinum bars. Being 14.7 times rarer than gold, if platinum prices normalize to the metal's abundance, one troy ounce would be worth $22,000 right now, 14.7 times more than the current price of gold.

In a typical London Financial Times fashion, the silver long-side "conspiracy" article ends by saying that:

"History may be informative. After the Hunt brothers’ squeeze in 1980, the price of silver collapsed 80 per cent in four months."

Wishful thinking. We don't know where silver's price explosion will end. However, as more and more people realize that they have been duped into accepting fake prices for silver, bullion banks may need to buy 100 ounces of silver for every one ounce that is withdrawn. How high is that going to drive the price of silver? We'll leave that to you to decide.

Recently, we read an article published by Minyanville, which is usually a good source of information. But this particular Minyanville article advises buying U.S. dollars and selling silver short. The author claims not to be interested in past performance in making his decisions, but, then presents a chart of 1970s era silver prices to support his claim that the white metal is set up for a price collapse. There is great danger in blind adherence to charts. They are rear view mirrors, and cannot be used in the absence of common sense. If the focus of a driver's attention is on the rear view mirror, he will surely crash.

The first part of the Minyanville article recommended trade might work, because the U.S. dollar may rise for a while, if the Fed stops counterfeiting (aka quantitative easing) June. However, the second part of the trade will fail. At best, there will be a few weeks or a few months of fallout from the end of QE-2 if it happens. It is true that during that time the price could fall substantially, especially if helped along by the members of the silver price conspiracy. After that, however, it will be back to the races.

Assets in a collapsing stock market will eventually be shifted into precious metals. Since the silver vigilantes are extremely well capitalized, the main achievement of the price manipulators will simply be to allow them to buy more silver with the same money. In the end, their delivery obligations will simply be larger. Simply put, the old methods of price manipulation will no longer work against an informed market.

The question of where precious metals vigilantes' attention will turn after mopping the floor with the silver short sellers may be a moot point. If they manage to bankrupt the bullion banks (and associated hedge funds, shadow banking system entities, etc.), it will be game over. Free of price management, gold and platinum will join silver in a price explosion to the stratosphere, and they won't need any help from vigilantes. But private profit appears to be only one of the motives for silver market manipulators.

Another motive is to support irredeemable fiat paper money issued by central banks. Therefore, a massive bailout may save them from bankruptcy. After the short-side manipulators finally give up, many contracts for silver delivery will be settled for astronomical sums of fiat money. As schemes and scams continue to unwind, the next few years are going to be very interesting.

---
Avery B. Goodman is a securities lawyer in Colorado.

Eisenbeis: What's A Central Bank To Do Besides Printing Money (And Pursue A Hidden Agenda?)

I thought this was a fairly nice thumbnail sketch of the problem facing the world's central banks vis à vis the US dollar as reserve currency and globalization. I have to add that this current impasse was not unforeseen.

I suggest you take a look at a very brief description of Triffin's Dilemma.

The Triffin dilemma is a theory that when a national currency also serves as an international reserve currency, there could be conflicts of interest between short-term domestic and long-term international economic objectives. This dilemma was first identified by Belgian-American economist Robert Triffin in the 1960s, who pointed out that the country whose currency foreign nations wish to hold (i.e. the global reserve currency) must be willing to supply the world with an extra supply of its currency to fulfil world demand for this 'reserve' currency (foreign exchange reserves) and thus cause a trade deficit.

The use of a national currency as global reserve currency leads to a tension between national monetary policy and global monetary policy. This is reflected in fundamental imbalances in the balance of payments, specifically the current account: some goals require an overall flow of dollars out of the United States, while others require an overall flow of dollars in to the United States. Currency inflows and outflows of equal magnitudes cannot both happen at once.

The Triffin dilemma is usually used to articulate the problems with the US dollar's role as the reserve currency under the Bretton Woods system, or more generally of using any national currency as an international reserve currency.

The problems with any domestic currency operating as the world's reserve currency are well known, and yet the United States decided to pursue this after Nixon closed the gold window. Perhaps that is because the risks to the many were outweighed by the benefits to a few.

I enjoyed the author's flat out statement that "it is undeniable that the world's central banks collectively have flooded world financial markets with liquidity by printing money."

If someone tells you that central banks, in a fiat regime, cannot create money out of nothing, then they simply do not know what they are talking about, no matter how many rhetorical flourishes and convoluted rationales they may produce. They can do it, they are doing it, and they will keep doing it until they reach what they consider to be a sustainable equilibrium, or they exhaust their ability to print based on the limits I have previously described.

The problem is that none of the equilibria they have produced in the last twenty years have been sustainable, except for a few years, and the half life of the monetary bubbles appears to be contracting.

The US dollar is at the end of its rope as the reserve currency for the world. Nothing could be more clear.   What will be done about this is another matter.  The Anglo-American banking cartel will enter the next phase of the evolution of money resisting change every step of the way.  What they most desire is to maintain and extend their control of a worldwide fiat currency, not even in the interests of their own people, but for the benefit of a few.

Institutional Risk Analyst
What's a Central Bank to Do?
By Bob Eisenbeis, Cumberland Advisors
April 25, 2011

Faced with largely the same set of facts when it comes to their inflation outlook, some of the world's major central banks have come to markedly different conclusions about the appropriate policy.

The ECB began to exit from its accommodative policy by increasing its policy rate by 25 basis points to 1.25% on April 7. The ECB noted that growth was improving moderately, but inflation had increased to 2.6% and was up from 2.45% the previous month. The rise was largely due to increases in energy, food, and commodity prices. The concern was the potential second round effects and that these increases could become embedded in inflation expectations.

The same day, the Bank of England kept its policy rate at 0.5%, despite the fact that inflation had been running well above its target rate of 2% for more than a year and was likely to remain so through 2011. Again, the Committee noted that the near term path for inflation was higher due to energy, imported commodities and other goods. Concern was also expressed about inflation expectations having risen in the UK, the US and the euro area relative to what they had been before the financial crisis. Finally the UK real economy was softer than that of the EU generally with output having declined by 0.5% in the fourth quarter of 2010.

While the FOMC will meet this week, Fed Chairman Ben Bernanke and Vice-Chair Janet Yellen have already signaled that they view the recent increases in commodity, energy and food prices as transitory. Governor Yellen in particular provided an extremely thorough and detailed dissection of the inflation data and her views on the real economy and employment in her April 11th speech in New York. She indicated clearly that the causes of the run-up in food, energy and commodity prices were rooted in increases in global demand, combined with energy supply shocks and uncertainty about oil flow from the Middle East. Like the Chairman, she expressed the view that the increases were transitory.

Most notably she attempted to debunk the widely discussed view that accommodative policies in the US were the cause of the increase in global prices. She was very clear that the main concern was for the US expansion and employment situation, that the current stance of policy was appropriate, and that QE II would be completed as scheduled. So we don't expect any notable news coming from this week's FOMC meeting.

These three views on the appropriate stance of policy and how individual-country central banks may think about policy shows a growing disconnect between traditional approaches to monetary policy and globalization. For example, the US economy historically has been largely isolated from the rest of the world. International markets were not particularly significant (exports and imports were roughly balanced and accounted for less than 13% of GDP). Inflation was largely a domestic issue and could be directly affected by changes in US policy rates. From the 50s through 70s, the main channel for monetary policy was through housing: when interest rates exceeded the Reg Q ceilings that banks and thrifts could pay for funds, the supply of funding to housing was cut off. Then construction declined and the effects rippled through the rest of the economy. Most of the economic models have that structure and international isolation embedded within them. Yet this is not the world that policy makers are now dealing with, as the above descriptions of the causes of the current inflation aptly illustrate.

If the major causes of inflation are external to an economy, and policy makers have domestic tools and targets for inflation and local employment, either explicitly or implicitly, then how should they respond to externally generated causes of inflation? What is the link between the central bank's domestic policy interest rate tool and the external causes of price increases? These key questions are not currently addressed within contemporary policy frameworks employed by the FOMC, the ECB, or the Bank of England, as best one can determine.

In the current inflation environment, one can justify any one of three alternatives, and some of these are clearly being adopted. Furthermore, all can be mostly right or mostly wrong.

First, a policy maker could attempt, as the US did during the 1970s oil crisis, to insulate the real domestic economy from the contraction supply shock by keeping rates low. This policy seemed appropriate and was politically acceptable, especially since the price increases were viewed as temporary. But it clearly failed, and we paid the cost with higher inflation.

Second, if one believes that the energy, food and commodities price increases are transitory, then no response is called for; and this can justify focusing on domestic employment, as is currently being done in both the US and UK. Even if the increases are permanent, doing nothing may be the appropriate policy. Permanent increases in energy, commodity, and food prices will shift these prices relative to other goods and services and generate substitution and accommodative responses by business and consumers. We may, for example, drive less and adopt more hybrid transportation alternatives -- moves that are already beginning to take place -- than we would if the energy price increases were viewed as being temporary.

But doing nothing also has its own risks. Maintaining an accommodative policy too long risk overheating an economy and fueling both an increase in domestically-produced goods and services prices and passing along the increased prices of external goods and energy prices as second round effects. As always, timing is everything when it comes to exiting from an accommodative policy.

Third, a central bank can move to increase its policy rate to choke off inflation, as the ECB has begun to do. But this policy has certain risks associated with it. If the causes of the inflation are external to the economy, then one would not expect those prices to be responsive to a policy move by a domestic central bank. But the increase in rates will clearly impact those domestic and non-international activities that are affected by rising interest rates. Economic activity in those areas will contract, including production, employment, and prices. So the impact of responding to an external inflation source is to force a decline in an aggregate price index by contracting domestic economic activity. This seems a risky path indeed. Right now it may appear less so because policy, as ECB President Trichet stated, is still viewed as being extremely accommodative.

So what is a central bank to do, especially when policy is overly accommodative? While Vice-Chair Yellen may argue that the increase in world prices is not our fault, it is undeniable that the world's central banks collectively have flooded world financial markets with liquidity by printing money.

This situation is likely to become even worse in the near term if Japan resorts to inflation as a means to finance the cleanup and rebuilding necessitated by the recent earthquake, tsunami, and nuclear disasters. When domestic economies are no longer insulated from international markets and forces, individual central banks can no longer go-it-alone with their policy decisions. In such a world, perhaps the best policy is to remove the distortions cause by current policies, and then attempt to avoid extremes. Unfortunately, how to get from here to there in a non-disruptive way is not at all obvious, as the ECB may soon find out..

What this means for investors is that market uncertainty is likely to remain high for some time to come, and attempting to play in international markets carries with it huge foreign-exchange and real risks that need to be hedged.

Although I may say uncomplimentary things occasionally about Messrs. Bernanke and Greenspan and their colleagues on Wall Street and in government, I most definitely do not think they are fools, or naive, or uncomprehending of what they are doing. Therefore I find their actions difficult to square with a sincere fulfillment of their stated objectives, and the oaths of their offices, unless there is another dimension to their plans which has not been disclosed, and which I do not yet understand.

"And some of us who have already begun to break the silence of the night have found that the calling to speak is often a vocation of agony, but we must speak. We must speak with all the humility that is appropriate to our limited vision, but we must speak...Perhaps a new spirit is rising among us. If it is, let us trace its movements and pray that our own inner being may be sensitive to its guidance, for we are deeply in need of a new way beyond the darkness that seems so close around us."

Martin Luther King

Gold Daily and Silver Weekly Charts - Just Another Day in the 'Hood with the Hoods

The very obvious bear raid does not surprise me so much as the worthlessness of most commentary I have seen about it. 

Silver has support down to about 42, maybe even 41, and still maintain its long term trend.  I don't think it will go that far unless stocks sell off hard, or the JPMorganites pull out the stops.  More likely is a snap back rally after the short term market rigging is done.

Who exactly would trade options on the Comex these days anyway?  They are the distillation of all that is wrong in the futures markets.

Gold held like a champ today in the 1500-1520 range.   I'll be curious to see if it can continue to hold 1500.  If it does I consider that extremely bullish, setting up a move to 1590 unless there is a liquidity panic. 

The FOMC is meeting and will announce their decision tomorrow.  If they signal an end to QE it will likely be a red herring, but an excuse for more trading shenanigans.

The dollar continued to slump.    It has not yet broken down in its steady decline, so I do not see the waterfall drop that so many have been predicting.  It is possible but not probable unless something happens.

This metals action was market manipulation pure and simple, and a black mark on the regulators. See the intraday commentary here, especially the video from James Cramer about how trading desks manipulate markets.

On the other hand we have a flash of insight from Avery Goodman here, who suggests that silver (and gold) are rising because the suppression racket is falling apart.