James Turk On Silver, and A Possible Twist of My Own

James Turk is extremely knowledgeable on the precious metals markets, and I always pay attention to what he says. He is sometimes a little more aggressive in his forecasts than I am, being of a more timid sort about dates and that sort of thing. He serves as a good counsel to me when I wish to test my own theories and knowledge of certain aspects of the metals markets, and am grateful to him as well as several others for this.

And so here is something which he just put forward that struck my eye, and I thought you would like to see.   The timeframes on this chart are a bit intimidating.  I think that if and when silver breaks out you can toss timeframes out the window.  This market is like a compressed spring with a long and heavy weight on it.

"This chart shows a massive accumulation pattern, marked by the green lines. This pattern is a story of strong hands and weak hands, specifically, of silver moving to the former from the latter.

From its $50 high in January 1980 to its $3.50 low in February 1991, the weak hands were shaken out. At that point, the accumulation by strong hands – who were buying because the recognized that silver was an exceptional bargain – became the dominant force. Their buying power was stronger than the selling pressure of the weak hands, and the price of silver responded by starting to climb. It was classic stage one action, but here’s the important point.

Silver is still in stage one. It won’t advance into stage two until $50 is exceeded, just like gold did not enter stage two until its previous high of $850 was hurdled.

I expect that silver will exceed $50 this year, which is a point of view I first mentioned in my outlook for 2010

Admittedly, I was a little early with my forecast about when gold would enter stage two. So perhaps I will again be early by forecasting that silver will enter stage two of its bull market this year. Regardless of the accuracy of my timing, one thing is clear. Because it is still in stage one, silver remains good value."

James Turk
February 14th, 2011

Here is a slight expansion and twist on James' chart of my own. I suspect his thoughts are along the same lines.

The potential cup and handle formation is not valid until there is an active and confirmed breakout as we saw in the big cup and handle formation from last year that served on the breakout through 20.  Cup and handle formations are generally accumlation patterns, with a subsequent breakout that confirms and defines them.

Since there is a monetary element to silver, I am not so confident in this scenario.  And if the dollar does lose its place in the world and start dropping harder, then this chart may look like a wiggle in what is to come, if there is a panic to grab dwindling supply.  But one cannot plan on that sort of thing happening.  And it is certainly not a constructive or desirable outcome, as most insurance policies are generally not harbingers of constructive and desirable outcomes when they pay off.   Unless you are engaging in an insurance fraud, that is, with the underwriter being AIG.

Please keep in mind that this is a logarithmic chart, and distorted in the part which I added below.  Also bear in mind that gold has already broken out and over its previous nominal highs from that same time period.  So those who say it is not possible are not considering what is already occurring in other related markets.

There is little doubt in my own mind that the silver market has been manipulated, and that we probably know who has done it, and the ways they have done it, and why.  Only the eventual outcome and settlement seem to be in question.  And to say that this contains some great mothering exogenous variables is to barely capture the fullest extent of it.



Illustration of a Classic Cup and Handle Formation



Modern Monetary Theory: The Emperor Rampant, and Barking

I do not mean to pick on Warren Mosler and the proponents of Modern Monetary Theory. For they are merely saying what many more are thinking, whether they admit it or not.

I think their contributions have been useful, because they plainly state what is going on behind the curtain at the Federal Reserve, under the guise of sensible and neccessary policy wrapped in deceptively opaque explanations.

The MMT crowd are really only taking the dollar regime and US financial system to its logical conclusion, and the necessary increase of arbitrariness as it deteriorates, the impulse to expand one's power to enforce valuations. And fiat money, corrupted, compels the necessity of empire.

Do not trouble yourself if you do not feel 'smart enough' to understand this. It is a more a belief system than a rational monetary system, and the confusion and complexity of these systems is always part of the cult. It is Bernanke as Mad Hatter.

But when things get much worse, watch for a savior to arise, who will have all the answers and give the people hope, even if they do not understand it. And the only price will be to allow this person or group to decide what is value and what is not, and by distributing that value, who can buy and who cannot.  And finally at the end, who is human, and who is not.

This is the man behind the mask, the plain face of the oligarchy. It is the same old thing, the will to power, to create out of nothing. But what the ungodly create is ashes.

"'When I use a word,' Humpty Dumpty said, in rather a scornful tone, `it means just what I choose it to mean -- neither more nor less.'

`The question is,' said Alice, `whether you can make words mean so many different things.'

`The question is,' said Humpty Dumpty, `to be master -- that's all.'"

Lewis Carroll


"Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one."

Charles Mackay

The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery. Until then all plans, from austerity to stimulation, will be turned to no good by the influence of corruption.

When logic and proportion
Have fallen sloppy dead
And the White Knight is talking backwards
And the Red Queen's "off with her head!"
Remember what the dormouse said;
Feed your head.

Silver in Backwardation and the Emperor, Once Again, Nearly Naked

Growing panic in Paperville. The central banks have no silver, and the Comex is being depleted. Interesting that the SLV ETF inventories are experiencing large outflows. The patriotic miners are being called upon to hedge their deep storage inventories, that is, unrefined metal in the ground, to provide more paper.

This manipulation of silver and gold could be a John Law class debacle when it is exposed and collapses, depending on how high the leverage in paper has gone. And of course how deeply down the rabbit hole the people are willing to go in the discovery of real value and the truth.  Given what has recently transpired, I suspect not too far.

The mailbag this morning has the usual dose of overly kind words for which I am always grateful, useful information and notification of alas, typos. But also of hysteria, from those who fear the government is going to come and take their money, or who think that people like me are going to spoil their good thing by warning people about it. Thank God for spam settings.

I don't think most people realize how little their opinion matters anymore. At some point the truth is simply what it is, without regard to what we think about it, or whether we like it. Their good thing is over. It's in the end game now, and we are all in God's hands.

John Law (baptised 21 April 1671 – died 21 March 1729) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade. He was appointed Controller General of Finances of France under King Louis XV.

In 1716 Law established the Banque Générale in France, a private bank, but three-quarters of the capital consisted of government bills and government-accepted notes, effectively making it the first central bank of the nation. He was responsible for the Mississippi Bubble and a chaotic economic collapse in France."

I believe that "modern monetary theory" owes much to John Law, and Money and Trade Considered, with a Proposal for Supplying the Nation with Money (1st ed., 1705; 2nd ed., 1720).

“An abundance of money which would lower the interest rate to two per cent would, in reducing the financing costs of the debts and public offices etc., relieve the King.”

John Law

Here is a brief discussion of John Law and the parallels for today's crisis from Buttonwood at The Economist.

I think there is a bit of disinformation going about. The implication from some corners is that those who sell silver as a hedge borrow it from existing physical supply, drawing down physical stocks. What they do not realize, or admit, is that borrowed silver is not held as allocated and discrete collateral in any system with which I am familiar, but is at best resold again into the bullion markets, if it ever experiences any movement at all beyond some multiple ledger entries.

The dirty little story of the metal markets is leverage and fractional ownership, not always disclosed, which some say is as high as 100 to 1. And this is in the so called physical bullion markets like the LBMA. I could not even imagine how badly mispriced the counter party risk is in the hedges. But when the music stops and the tide goes out, we may see who is naked, and there will most likely be a surfeit of some rather ugly bums.

Reuters
US silver term structure inverts as supply tightens
By Frank Tang
February 11, 2011

NEW YORK, Feb 11 (Reuters) - The tightest physical silver supplies in four years have tipped the U.S. silver futures market into backwardation this week, making near-term prices more expensive than more distant months.

Market watchers said that it has been more than 10 years since silver futures were last in backwardation, an unusual term structure, associated with shortage of physical supply. Warehouse stocks of the white metal have dropped to a four-year low on surging demand, while miners have hedged their future production.

Booming industrial demand for silver and record U.S. coin sales, combined with a surge in demand from mining companies to borrow the metal for their hedge programs have led to a squeeze in the physical silver market.

"The problem is that there is great industrial demand for a specific grade of silver, and there is not enough coming fresh from the mines," said Miguel Perez-Santalla, vice president of Heraeus Precious Metals Management.

"The stocks are being pulled for all the high grade and better materials, and that essentially put a squeeze on the physical market," he said.

Perez-Santalla said that silver futures have not been in backwardation since billionaire Warren Buffett bought 130 million ounces of silver between 1997 and 1998.

Backwardation is a condition where cash or nearby delivery prices are higher than the price for delivery dates further in the future. Usually, forward prices are higher than cash prices to reflect the costs of storage and insurance for stocks deliverable at a later date.

"The extent of the backwardation in silver is unprecedented. It suggests that retail investment and industrial demand internationally is very robust and the small silver bullion market cannot cater to the level of demand for refined coin and bar product," bullion dealer GoldCore said in a note on Friday.

Warehouse data from COMEX showed that silver stocks fell to a four-year low at 102.5 million ounces (3,188 tonnes) on Feb. 5, about 30 percent below a peak at over 141 million ounces (4,395 tonnes) in June 2007.

Strong silver coin sales have more than offset outflow from the world's largest silver-backed exchange traded fund iShares Silver Trust (SLV), which notched its biggest one-month drop in its silver holdings in January...

Modern Monetary Theory Part II: Money and The Limits of Empire

The limit of the Fed's and Treasury's ability to create money is the value and acceptance of the dollar and the bond in market transactions.

The Weimar government never 'ran out of money.' Zimbabwe never 'ran out of money.' And if interest is paid 'in your currency money' you can never fail to service your debt either.

What they did run out of were people willing to take their paper at its intended value, from the outside in. Outside means those who are exterior to their compulsion of legal tender.

This is why a fiat monetary system breaks down unless you can extend an ever greater circle of coercion of paper valuation. Without the complicity of a few well placed allies like the Saudis, the dollar would already be done.

It really is that simple. That is what makes it a sophistry. "I can print money, therefore I can never go broke."

There is nothing modern about it. It is a just a ponzi scheme with a sovereign backstory. It is just the same old song with slightly different words of imperial hubris and overreach, back to the days when King Canute disproved the limits of the will to power to his advisors.

There are much more elegant defenses of this scheme, coming out of the friends of the Fed. But they generally obfuscate the tag lines more elaborately. Or they just skip the story and try to appeal to the authority of ridicule.

So again I thank Cullen for stating the case so simply and so straightforwardly.

The US dollar, which started out well, has become a ponzi scheme. There are those who can be forced to participate by the laws of legal tender, and their authoritarian regimes who are its allies. Value is what the Federal Reserve says it is, and however it chooses to distribute it.

A sound currency is both a medium of exchange and a store of value. It is not clear to me that the dollar has passed the point of no return. But it is obviously unstable, as much now a wealth transferral mechanism as a store of value, being the principle medium and bulwark of a corrupted system. And therefore it is making its holders understandably nervous. Without a serious reform of the financial system and the economy, the dollar will continue to decline and eventual reissue.

This is not to say that the Fed is evil. It is to say that it is merely human, requiring the restraint of law and oversight, audits and constraints. In their wisdom the framers of the Constitution required checks and balances, knowing full well the hard lessons of history and human nature. And in their error, some men have placed themselves above the law and such constraints, ironically in the name of 'independence.'

In general, the impulse to liberate the natural goodness of markets and institutions by dispensing with regulation and oversight merely knocks down the fences, giving free range for the rapacious wolves to do their worst. And this has been their objective from the first.

Every thing secret degenerates, even the administration of justice; nothing is safe that does not show how it can bear discussion and publicity...The danger is not that a particular class is unfit to govern. Every class is unfit to govern.”

Lord Acton