Comparison of Four Precious Metal Investment Vehicles to Spot Gold

Performance from 2007


Performance from mid 2007


Performance from the beginning of 2008

Silver Price Manipulation through 'Naked Shorting'

The CFTC and the exchanges are protecting the silver short interest for now with smoke and mirrors, obfuscation and delivery limits.

We'd ask a further question. Why were players like AIG, an insurance company, major players in the silver markets on the short side? What does that have to do with hedging? Or is this just another loophole scam like taking out life insurance policies on your employees to obtain claims for tax free death benefits? Was the silver short gimmick that obvious of a feedbag for well-heeled and well-informed insiders?

And how can you justify delivery limits but contend there is no need for any limits on the amount of short position an individual company can hold? Limits on buying the physical product but no limits on selling of the product on paper? Now, is that obvious moral hazard, or what?

It is an absolute disgrace and one of the worst examples of croney capitalism corrupting the public markets that we have seen in some time. All silver producing countries are being cheated by this, and should take action to keep all their products off exchanges that allow this price manipulation. It is a pricing cartel.

At some point it will be a bloodbath for the shorts, although we expect the exchanges and regulators to change the rules to bail them out. The real economy may see painful shortages and higher prices. This type of manipulation provides incentives for commodity countries to break the back of the dollar cartel and monetize their own assets such like silver and gold.

We heard that China is now the second largest gold producing country right after South Africa. They also have a tremendous capacity for producing silver. And they have huge reserves of dollars. What a setup! Our economic vulnerability is astounding.

But at the end of the day, this is just another symptom of our sick economy, with regulation by honest oversight for the public benefit as the cure.

Silver Price Manipulation
David Morgan

This week I must address the latest Commodity and Futures Trading Commission (CTFC) findings that, "The U.S. commodities regulatory body found no evidence that silver prices had been manipulated downward by short sellers after re-examining long-term and recent allegations of misconduct."

I was asked by Dow Jones to comment on the CFTC findings. The first point I stated was: "It is not possible to manipulate the trend in a market, but it is possible to 'manage' the price within silver's uptrend." I went on to state that the price of silver can be managed, within certain boundaries, through short selling. I believe silver would be far higher if not for selling of vast amounts of silver that doesn't exist, or "naked shorts."

Now some I know well in the industry build a case that all or almost all of the silver sold short on the exchange is not sold naked but indeed is true hedging, primarily by base metals mining companies. This at the surface level may appear to be correct, until it is realized that almost all of the real physical silver that is delivered to end users (primarily to industrial consumers) is accomplished by means of over-the-counter (OTC) contracts known as "forwards." This is not accomplished in the futures market!

My point is simple: If the true sale of physical silver is done in an unregulated market based upon private contracts, then what is the purpose of the futures market? Why did the London Bullion Management Association trade nearly 30 billion ounces of silver last year? Why did the futures and options exchanges trade almost 60 billion ounces of silver last year?

Let's get a bit real here. If the total silver supply is roughly one billion ounces and we can measure NINETY times that amount being "traded" on the reporting exchanges, does it not beg the question why?

Further remember, there is a whole vast amount of silver "trading" going on in the OTC market that does not report at all. It could easily be as large as the reporting exchanges.

Let's be conservative here and state only 10 billion ounces of silver is dealt in the OTC market. So when I state naked sales and can prove perhaps ONE HUNDRED TIMES the amount of silver exists on paper than exists in the physical world, you must question the logic of "hedging." The derivatives markets are alive and well in both silver and gold, and there is roughly one hundred ounces "claimed" on paper for every physical ounce of silver.

So, ask a very basic question: How is the price of silver set? As if there is less than half a billion ounces of physical silver? Or is the price acting as if there is a hundred times as much silver? For those who don't know, this is a rhetorical question! Think fractional reserve banking system, which keeps about one percent of the total in reserve, because what depositor is going to cash in on their demand deposits? One percent is what the bank needs to keep the present day scheme going. In the case of banking, more "money" can be created by a computer keystroke. But real silver, well...that will pose a problem.

Another question that has always bothered me is, Why does the CFTC set a limit of 7.5 million ounces of silver as the most that can be taken off the exchange in a given delivery month? If you look back and see the Comex inventory level change when Warren Buffett made his purchase, you will notice a huge off take of physical silver from the Comex. This cannot happen again; the rules state there is a limit on the amount of physical silver that can be taken off the exchange.

So, for the umpteenth time, I will answer the following question: "Why doesn't some big investor come along and just buy up the remaining silver?" Answer: It cannot be done. There are delivery limits now! Let me repeat!! It cannot be done, there are delivery limits NOW!!

Oh, you might ask, "Is there any limit to the amount of silver that can be sold on paper?" Well, the main purpose of this missive is to prove that there is no limit to the amount of paper silver that can be created!


DAVID MORGAN, the founder of the Silver Investor, has studied the silver market for over thirty years. To learn more about Mr. Morgan and to become a subscriber to his free newsletter, http://www.silver-investor.com/

U.S. Congress could ban speculators from commodities
Bloomberg News
Wednesday, May 21, 2008

WASHINGTON: The chairman of a Senate oversight committee has said he is considering legislation to place limits on large institutional investors in commodities markets, which have posted record prices this year in agricultural products and oil. (Hey how about some limits on those institutional silver shorts Joe? - Jesse)

The legislation would be aimed at speculators and other investors who use commodities as a way to hedge against swings in other investment instruments like stocks and the dollar, said Joseph Lieberman, chairman of the Senate Homeland Security and Government Affairs Committee, at a hearing Tuesday.

Crude oil reached $132.25 a barrel Wednesday, the highest price ever, and it has almost doubled in the past 12 months. Wheat, corn, soybeans and rice have all set record highs this year on the Chicago Board of Trade, spurring food inflation. The Reuters/Jefferies CRB index of 19 commodities surged 31 percent in the year that ended April 30.

"We may need to limit the opportunity people have to maximize their profits because a lot of the rest of us are paying through the nose, including some who can't afford it," said Lieberman, Independent of Connecticut.

The plunging value of the dollar, the U.S. housing crisis and widespread problems in the banking sector have led investors away from traditional instruments and toward commodities, witnesses said. (Oh, do you just want to limit the PUBLIC'S ability to diversity? Please explain Jose - Jesse)

Jeffrey Harris, chief economist for the Commodity Futures Trading Commission, told the committee it was clear that there were more institutional investors in commodities. He said they have not systematically driven up prices. (His friends call him "Mr. Fibs" - Jesse)

Prices "are being driven by powerful fundamental market forces and the laws of supply and demand," Harris said.

Michael Masters, a portfolio manager for Masters Capital Management, told the lawmakers that investors were buying up commodities and holding their positions, creating an artificial premium. Assets allocated to commodity index trading strategies rose to $260 billion as of March, from $13 billion at the end of 2003, he said.

Senator Claire McCaskill, Democrat of Missouri, said the CFTC might be failing to adequately regulate this speculative investing and tighter regulations might be needed.

"The people of America are about to pick up pitchforks" as rising food costs pinch consumer budgets, she said.

The U.S. Department of Agriculture said Monday that it expected food prices to rise as much as 5.5 percent this year, up from an earlier forecast of 5 percent and the fastest increase since 1989.

Harris of the CFTC cautioned against a hasty reaction to recent volatility in commodity markets. "Diminishing the ability of futures markets to serve their hedging and price-discovery functions would likely have negative consequences for commerce in commodities and ultimately for the nation's economy," he said.

But Masters, of Masters Capital Management, said the CFTC was turning a blind eye toward market-distorting speculation.

"Institutional investors are one of, if not the primary, factors affecting commodities today," he told the committee. "As money pours into the markets, two things happen concurrently: the markets expand and prices rise." (too much hot money with no place to go we guess - how about increasing margin requirements? Naw, Greenie said that won't work - Jesse)

A report released Wednesday by Greenwich Associates argued that surging commodity prices reflect rising involvement of speculative investors. (like the 10,000 hedge funds and the big wall street 'banks' - Jesse)

Greenwich, a research firm, said a third of those investors had been in the markets for less than three years. Goldman Sachs Group and Morgan Stanley top the rankings of derivatives dealers, followed by Barclays Capital Group and JPMorgan Chase.

Masters proposed that the government prohibit commodity index investing as a vehicle for pension funds, curtail swaps trading and reclassify some positions to distinguish between legitimate physical hedgers and speculators.

UBS Sells Shares at 31% Discount to the Market 'to Improve Appearances'

Think the retail investor is pricing these bank stocks efficiently? This reminds us quite a bit of the tech bubble startups with their various tiers of venture funding. The last man in was able to carve out the value that remained, and the earlier funding common shareholders could wait for hell to freeze over before seeing any return on capital.

UBS to Sell Shares at 31% Discount in Rights Offer
By Elena Logutenkova and Warren Giles

May 22 (Bloomberg) -- UBS AG, the bank with the biggest net losses from the subprime crisis, plans to sell new shares at a 31 percent discount to yesterday's closing price to raise 15.5 billion Swiss francs ($15.1 billion) in new capital.

The shares will be sold at 21 francs each and investors are entitled to 7 new shares for each 20 held, the Zurich-based bank said today in a statement. The discount compares with a 46 percent markdown offered by Royal Bank of Scotland Group Plc in April and a 48 percent discount in Bradford & Bingley Plc's capital increase this month.

UBS, which already got a 13 billion-franc capital injection this year, aims to repair the balance sheet after about $38 billion in subprime-related writedowns and 25.4 billion francs in net losses since July. Banks worldwide have raised about $270 billion to shore up capital.

``The amount raised is slightly higher than the 15 billion francs originally indicated,'' said Peter Thorne, a London-based analyst at Helvea with an ``accumulate'' rating on the stock. ``Lots of UBS investors are in it because they thought it was a safe financial growth stock and in the last few months it's become a recovery basket case, so a lot of them won't take up the offer.''

UBS fell 18 centimes, or 0.6 percent, to 30.46 francs at 11:31 a.m. in Swiss trading, giving it a market value of 66.3 billion francs. The bank has gained 11 percent since the rights issue was announced on April 1. It's still down 59 percent over the past 12 months....

Urged to Split

Credit Agricole SA, France's third-biggest bank, said last week it plans to raise 5.9 billion euros ($9.3 billion) in a rights offer to replenish capital after first-quarter profit fell 66 percent.

UBS got shareholder approval for its rights offering at the April 23 annual meeting, which also saw Chairman Marcel Ospel step down and his replacement, Peter Kurer, elected to the board. Switzerland's biggest bank is resisting proposals from shareholders, including former UBS president Luqman Arnold, to split off the investment-banking unit and sell divisions such as asset management and Brazil's Pactual to raise capital.

The offer is fully underwritten by JPMorgan, Morgan Stanley, BNP Paribas SA and Goldman Sachs Group Inc., UBS said. The banks will get an underwriting fee of 1.65 percent of gross proceeds, which UBS expects at about 16 billion francs.

``We expect to upgrade'' UBS's earnings per share estimate because the issue price is higher than the minimum 12 francs approved, wrote JPMorgan Chase & Co. analysts including Kian Abouhossein in a note to investors today. JPMorgan has an ``overweight'' recommendation on the stock.

UBS said earlier this month it expects the core Tier 1 capital ratio to increase to 11.8 percent from 6.9 percent at the end of March, after the rights offer and the bank's April sale of 1.6 billion francs in hybrid bonds.

UBS plans to publish a prospectus for the share sale on May 23. It will be selling 760.3 million new shares in the rights offer, which are due to start trading on June 13.

To contact the reporters on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net; Warren Giles in Geneva at wgiles@bloomberg.net

May 23, 2008
UBS Moves to Raise $15 Billion
By DAVID JOLLY

PARIS — The Swiss banking giant, UBS, said Thursday that it would raise more than $15 billion by issuing sharply discounted shares as it tried to restore capital depleted by losses on mortgage securities.

The capital increase marks the second time that UBS has had to raise funds since the credit markets tightened last year with the collapse of the American subprime housing market. In February, the bank raised 13 billion Swiss francs, or $12.6 billion, in capital from the Government of Singapore Investment Corporation and an unidentified Middle Eastern investor.

The crisis has hit UBS harder than any other European financial institution. It posted a net loss of $10.9 billion in the first quarter. It also wrote down $19 billion of asset-backed securities in the quarter, bringing its total write-downs to about $38 billion since the credit markets began to tighten last summer.

Banks globally have written off more than $330 billion in losses since last summer and regulators have strongly encouraged them to shore up their capital.

UBS said it expected the rights issue to raise 15.97 billion francs, or $15.5 billion. It is issuing 760 million new shares at 21 francs each, 31 percent below the Wednesday closing price of 30.64 francs.

The discount percent was broadly in line with market expectations, though the capital increase was about $1 billion larger than analysts had predicted. The capital increases have become necessary as UBS's shareholders equity fell to 16.4 billion francs at the end of March from 51.3 billion francs a year earlier.

UBS has been moving aggressively to shore up its balance sheet. On Wednesday, it said it had moved a portfolio of $15 billion in distressed assets to a new structured investment vehicle to be run by BlackRock, an asset management company. The bank loaned BlackRock more than $11 billion to take on those debts, and remains on the hook if losses exceed $3.75 billion, but it was able to move some of that debt off its balance sheet.

“Appearances are very important in financial stocks,” said Peter Thorne, a banking analyst at Helvea in London. “And if that gives the market and investors and regulators confidence, then it's got to be done.” ("It is better to LOOK good than to BE good." Fernando Lamas School of Financial Management - Jesse)

UBS also said this month that it would eliminate 5,500 jobs to cut costs and further reduce risk exposure in the United States, but it was also trying to restore investor confidence in its asset- and wealth-management businesses.

UBS said the rights issue had been fully underwritten by a syndicate of banks led by JPMorgan, Morgan Stanley, BNP Paribas and Goldman Sachs.

Shareholders will have the right to purchase 7 new shares for each 20 they already own.

Moody's Stock Craters on Revelations it Marked Dodgy Debt Aaa for Sale to Europe - Blames a Computer

Depending on the details and nature of the documents which Financial Times has received, this looks pretty bad for Moody's. It has all the appearance of a collusion to defraud European investors. "The firm adjusted some assumptions to avoid having to assign lower grades, the paper said." "But the triple-A ratings assigned by Moody's and Standard & Poor's generated controversy, with both Fitch Ratings and DBRS saying they could not justify assigning such high ratings." And for whom was Moody's marking these, what Wall Street bank?

Or, is Moody's the victim of a 'rogue computer' that cleverly bypassed all compliance and common sense as it came up with answers that were supported by no one and nothing else, resulting in millions of fees for Moody's, billions in debt sales for their banking clients, but huge losses for naive European investors?

Dramatization of what went wrong with Moody's trading computer.




Moody's Begins Probe on Report 'Bug' Caused Aaa Grades
By John Glover and Abigail Moses

May 21 (Bloomberg) -- Moody's Investors Service said it's conducting ``a thorough review'' after the Financial Times reported that a computer error was responsible for Aaa ratings being assigned to complex debt securities that slumped in value.

Banks obtained the highest grades in 2006 and 2007 for constant proportion debt obligations, funds sold in Europe that used borrowed money to speculate on an improvement in credit quality. The subprime crisis caused banks including UBS AG and ABN Amro Holding NV to unwind their CPDOs, triggering losses of as much as 90 percent for investors.

Some senior staff at Moody's were aware in early 2007 that CPDOs rated Aaa the previous year should have been ranked as many as four levels lower, the FT reported today, citing internal Moody's documents. The firm adjusted some assumptions to avoid having to assign lower grades, the paper said.

``If it is true, does that mean other products haven't been rated correctly?'' said Puneet Sharma, Barclays Capital's head of investment-grade credit strategy in London. ``Will they be downgraded? It could lead to turmoil.''

Banks created at least $4 billion of CPDOs, promising annual interest of as much as 2 percentage points above money- market rates combined with the highest credit ratings -- described a ``holy grail'' for investors by Bear Stearns Cos. strategist Victor Consoli in a November conference call.

`Integrity'

Moody's and Standard & Poor's stripped CPDOs of their Aaa grades this year as rising defaults in the U.S. housing market increased the cost of credit-default swaps referenced by the funds by as much as 670 percent in the past year.

``The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs,'' New York-based Moody's said in an e-mailed statement. ``We are therefore conducting a thorough review of this matter.''

Moody's has ``adjusted its analytical models on the infrequent occasions that errors have been detected,'' the statement said. ``It would be inconsistent with Moody's analytical standards and company policies to change methodologies in an effort to mask errors.'' (yes it would. as a matter of fact it might even be criminal fraud - Jesse)

Credit rating firms have come under scrutiny from lawmakers and regulators for assigning their top grades to securities tied to loans to people with poor or limited credit.

``As far as CPDOs are concerned there shouldn't be a material impact'' because the securities have already been downgraded, said Andrea Cicione, a credit strategist at BNP Paribas SA in London. ``Of course there could be a reputational impact for Moody's.''

To contact the reporter on this story: John Glover in London at johnglover@bloomberg.net


Moody's shares slide on report of rating errors
Wed May 21, 2008 10:57am EDT

LONDON, May 21 (Reuters) - Shares in Moody's Corp (MCO.N) fell almost 13 percent on Wednesday after the Financial Times said a computer coding error led Moody's Investors Service to assign incorrect triple-A ratings to a complex debt product.

Moody's said in a statement it was conducting a "thorough review of this matter." A Moody's spokesman would not comment on the report beyond the statement.

Shares in Moody's Corp were down over 12.9 percent at $38.23 at 1554 GMT.

Ratings agencies are under scrutiny by regulators and politicians over the role they have played in the U.S. subprime mortgage crisis, and they face allegations that they assigned ratings that were too high to bonds backed by poor-quality mortgages.

The FT said internal Moody's documents it had seen showed that ratings on so-called constant proportion debt obligations (CPDOs) should have been up to four notches lower, and that the agency had discovered the error in its models early in 2007.

Moody's corrected the coding glitch at that time and instituted changes to its methodology, the FT said. The products remained triple-A until January 2008, when market turmoil led to hefty downgrades.

Moody's said in an emailed statement: "Moody's regularly changes its analytical models and enhances its methodologies for a variety of reasons, including to reflect changing credit conditions and outlooks. In addition, Moody's has adjusted its analytical models on the infrequent occasions that errors have been detected.

"However, it would be inconsistent with Moody's analytical standards and company policies to change methodologies in an effort to mask errors. The integrity of our ratings and rating methodologies is extremely important to us, and we take seriously the questions raised about European CPDOs. We are therefore conducting a thorough review of this matter." (But they didn't seem to care before they were caught and publicly exposed. - Jesse)

CPDO CONTROVERSY

CPDOs take leveraged bets on credit derivatives indexes such as the iTraxx Europe. They were designed to pay investors very high coupons -- around 200 basis points over Libor -- and yet gain very high ratings.

Dutch bank ABN AMRO pioneered the structure in 2006, calling it "the most exciting development in the credit market for several years." (Sounds like the 'watered stock' approach to selling financial assets which old Daniel Drew was doing in the 19th Century - Jesse)

But the triple-A ratings assigned by Moody's and Standard & Poor's generated controversy, with both Fitch Ratings and DBRS saying they could not justify assigning such high ratings.

Credit market participants too questioned whether the structures were too good to be true. Critics said the performance of the instrument relied more on market risk than on default risk, the traditional area of expertise for the agencies.

Many marveled at the ingenious nature of the structure. "The joke we've been making is CPDOs take a lot of single-A assets, by which we mean ordinary corporate bonds, lever them up 15 times, and -- ta-dah! -- it's triple-A," said Matt King, credit strategist at Citigroup, in November 2006. (Yeah that's a real knee slapper all right. Citi is a real standup comedian. - Jesse)

The extreme market volatility early this year caused very sharp falls in the values of the instruments, and led Moody's and S&P to cut their ratings on the instruments as fears built that investors would end up losing money on them. (after they had already lost it - Jesse)

(Reporting by Richard Barley; Editing by Andrew Callus)