SP 500 December Futures and US Long Bond Daily Charts

Benny and the Fed delivered a 600 Billion dollar in new monetization program today, not including rollover purchasing which should take the total purchasing for 2011 a bit closer to a trillion.

The program will be for 8 months, rather than the expected 6, and will not include MBS or the 30 year Bond, which was particularly hard on Big Daddy today which you can see from the second chart below of the 30 year bond.

As a side note, coming into today's FOMC meeting, Bloomberg says that Goldman Sachs was advising traders to 'buy the long end of the curve.' Surprise, surprise, surprise. LOL.

New COMEX Related Silver Manipulation Lawsuit Includes Charges of 'Racketeering'

Self-regulation and efficient markets hypothesis. Feh!

It will be interesting to see if this makes it into the discovery process and if any government officials will assist in the investigation process. This looks like a job for hairy knuckled prosecutors armed with subpoenas and wiretaps.

The mainstream media will most likely ignore this and the usual suspects from the demimonde of the financial media will dismiss it as nonsense.

One has to wonder if this is what CFTC commissioner Bart Chilton was alluding to in his recent statement.

NEW YORK, Nov. 3, 2010 /PRNewswire/ -- JP Morgan Chase & Co. (NYSE: JPM) and HSBC Securities Inc. (NYSE: HBC) face charges of manipulating the market for silver futures and options in violation of federal commodities and racketeering laws, according to a new lawsuit filed Tuesday in the U.S. District Court for the Southern District of New York

The suit – which alleges violation of the Commmodity Exchange Act and the Racketeering Influenced and Corrupt Organizations (RICO) Act – alleges that the two banks colluded to manipulate thhe market for silver futures starting in the first half of 2008 by amassing huge short positions in silver futures contracts they had no intent to fill, but did so to force silver prices down to their benefit.

The suit was filed on behalf of Carl Loeb, an independent investor in silver futures and options, by Seattle-based Hagens Berman Sobol Shapiro LLP, a class-action and complex litigation firm. "The practice of naked short selling has long been a serious issue on Wall Street," said Steve Berman, co-counsel and managing partner at Hagens Berman. "What we know about the scope and intent of JP Morgan and HSBC's actions in this short-selling scheme dwarfs any other similar attempt to manipulate a commodities market."

According to the complaint, JP Morgan amassed a sizeable short position in silver futures and options in part through its March 2008 acquisition of investment bank Bear Stearns. By August 2008, JP Morgan and London-based HSBC controlled more than 85 percent of the commercial net short position in silver futures contracts.

The suit alleges that, starting in early 2008, the two banks began manipulating the silver futures market by accumulating unusually large "short" positions and then secretly coordinating enormous sales of silver futures contracts on the Commodity Exchange, which is known as "COMEX" and is part of the New York Mercantile Exchange.

According to the lawsuit, JP Morgan and HSBC used a variety of methods to coordinate their manipulation of the market for silver futures contracts, signaling when to flood the COMEX market with short positions, which caused the price of silver futures and options contracts to crash.

The suit describes two "crash" events that were set in motion by JP Morgan and HSBC, one in March 2008, and the other in February 2010, after defendants had amassed large short positions. In the wake of both events, the suit alleges, COMEX silver futures prices collapsed.

"We believe that JP Morgan and HSBC's scheme was carefully conceived and coordinated to maximize their profits at the expense of innocent investors who believed that they were trading in a market free from manipulation," Berman said.

The complaint also contains allegations that in September 2008, the U.S. Commodity Futures Trading Commission launched an investigation that would eventually consider allegations made by a London-based independent metals trader named Andrew Maguire that the silver futures market was being manipulated.

The complaint alleges that Maguire disclosed to the CFTC on Feb. 3, 2010 that he received a signal from the two banks of their intent to drive down the prices of silver futures two days later, on Feb. 5, 2010. Maguire's information was correct and the price of silver dropped dramatically between Feb. 3, 2010 and Feb. 5, 2010.

In addition, the lawsuit states that both JP Morgan and HSBC still maintain highly concentrated holdings in short positions in silver futures and options, giving both banks the ability to continue manipulating the price of silver.

Plaintiffs' attorneys have asked the court to certify the case as a class action and enjoin JP Morgan and HSBC from continuing their alleged conspiracy and manipulation of the silver futures and options contracts market.

Attorneys also ask the court to award damages and attorneys' fees to the class.

Just remember that Blythe said Don't Panic. She's got your backs. Or is busy cutting a deal. You will have to decide which is more likely.

I also hear that high flyer Steve Black, who was promoted up at the beginning of the year, will be leaving JP Morgan.

Net Asset Value of Precious Metals Trusts and Funds: Sprott Silver Trust Cash Position

With the addition of 7.5 million units, presumably from the allotments to the underwriters, the cash position of the Sprott Physical Silver Trust has risen to over 180 million US dollars according to their data and our calculations.

According to the terms of this trust, the monies must be applied to the purchase of silver bullion. Sprott may have already arranged for the delivery and price of the bullion, but has not yet booked it. Or perhaps they must still secure supply.

Gold and silver received some fairly stiff and obvious bear raids this morning, at least by recent standards, no doubt in anticipation of the FOMC announcement of Quantitative Easing II this afternoon. Market manipulation will continue until public confidence is restored. lol.

Today I am still running light positions in a well balanced pair of long bullion and short stocks, particularly in the financial sector. I expect I might make some changes around 2:45 New York time this afternoon.

The Working Class

Gold and SP 500 December Futures Daily Charts

Net Asset Value of Certain Precious Metal Trusts and Funds

We had some very unexpected news today.

One tries to prepare for anything, hope for the best and prepare for the worst, but sometimes when we least expect it, are completely surprised by joy.

Thanks be to God and thank you for your good encouragement and especially your prayers.

Gold Daily and Silver Weekly Charts

SP Daily Chart: US Equity Rally Reverses on SEC Probe of JPM and Magnetar CDO Issuance

The US equity market reversed its rally with the better than expected ISM number on news that JPM is under SEC investigation as reported by Bloomberg.

It appears as though JPM put together a CDO with Magnetar, which helped to select some of the components. While Magnetar bought some of the CDO, it also invested a significant amount in CDS that bet on the failure of the CDO.

The implication is that JPM and Magnetar did some of the same things that Goldman and Paulson had done.

This reversed the rally and took the financials down.

Personally I think US equities are still in their trading range with 1168 as a lower bound and 1194 as the upper bound. The wiseguys are doing a daily wash and rinse on the specs. Volumes are thin and positions are almost without any substantial foundation with the average holding time of most positions under a minute. This is a market that seems primed and ready for a flash crash, but it requires some 'trigger event' to materialize. So timing a trading decline is a bit of a fool's game in the short time.

There are three events that could affect US equities this week.

First is the national midterm election tomorrow, in which the Republicans are widely expected to take control of the House of Representatives. The Senate is a much less certain outcome. Most likely there will be 'gridlock' in the US for the next two years with power more evenly balanced between Republicans and Democrats. Any divergence from expectations in the elections results could provide some momentum out of this trading range.

The next event will be the FOMC decision on Wednesday with wide expectations of a $500 billion commitment to quantitative easing. A significant deviations from this number could provoke a market reaction.

And finally back to the real economy there will be a Non-Farm Payrolls report on Friday that will be closely watched. Consensus is for 60,000 jobs to be added.

In the background there is the 'cargo cult' of new terrorist threats permeating the news with the revelation of disguised bomb packages originating in Yemen.

This market is so artificial that it is difficult to forecast just what it will do that is out of trend.

Chart added at 4:20 PM NY Time

Sprott Physical Silver Trust

Here is a link for the Sprott Physical Silver Trust

I will be tracking the progress of their silver accumulation and will be working them into my Net Asset Valuation calculations as time permits this week.

I do own some shares which I bought in the IPO. I may add later if the markets indicate this. I would like to build a long term position but will  'make haste slowly' as the Romans said (Festina lente).

This is a busy week for me in a non-market related matter. For those of you who have offered their prayerful support and encouragement I thank you from the bottom of my heart.

Things can be replaced. People can't.

Gold Daily and Silver Weekly Charts

The charts seem to be fairly obvious. Gold hit the pivot point for a 'significant decline' and rallied sharply. Silver is just a juggernaut, using the top of the old trend channel now as support.

Unless and until US equities crash, I would expect both gold and silver to continue to rally. The reasons are obvious to anyone who is following the markets and has even a basic understanding of money and economics. These are not charts so much as economic IQ tests.

People who lost money trading silver futures or options on the New York Commodity Exchange since 2008 are eligible to join the class-action price-manipulation lawsuit brought this week against J.P. Morgan Chase & Co. and HSBC Bank in U.S. District Court for the Southern District of New York. To express interest in becoming a member of the class of plaintiffs, contact:

Kellie Lerner
Labaton Sucharow LLP
140 Broadway
New York, NY 10005
Telephone: 212-907-0700
Fax: 212-818-0477
KLerner@labaton.com

SP 500 December Futures Daily Chart

If a close look at this chart suggests to you that someone is inflating US financial asset prices you might very well be right.

Except for hedges and scalps I would not even consider shorting this market until it breaks the obvious trendline. I'd be willing to miss the first 10 percent of a down move to catch the meat of it, and not exhaust myself trying to anticipate a correction. Only amateurs make calls and chase 'bragging rights.'

At the same time the 200 week moving average has proven to be formidable resistance in the last rally, and so I would not feel comfortable taking determined longs here either. The average holding time of a position in this market is literally less than a minute, so the potential for another 'flash crash' seems rather high.

Sprott Physical Silver Trust: PSLV To Debut at 500 Million Dollars

Keep an eye on the Sprott Physical Silver Trust which will begin trading this week as symbol PSLV.

Reuters
Sprott silver trust IPO to raise $500 million
Fri Oct 29, 2010 8:34am EDT

TORONTO Oct 29 (Reuters) - Sprott Inc, the Canadian fund manager specializing in resource investments, said on Friday that it planned to raise $500 million in the initial public offering of the Sprott Physical Silver Trust.

The offering will consist of 50 million units priced at $10 each.

The trust, which will be managed by Sprott Asset Management, will invest and hold nearly all its assets in silver bullion.

It will be listed on the NYSE Arca and the Toronto Stock Exchange under the symbols "PSLV" and "PHS.U," respectively.

The offering was made simultaneously in the United States and Canada through a syndicate of underwriters led by Morgan Stanley (MS.N) and RBC Capital Markets (RY.TO).

As part of the offering, the underwriters have been granted an overallotment option to purchase up to an additional 7,500,000 units at $10 each.

The Canadian syndicate includes TD Securities Inc (TD.TO), Canaccord Genuity Corp, National Bank Financial Inc (NA.TO), BMO Capital Markets (BMO.TO), HSBC Securities (Canada) Inc, GMP Securities LP, Wellington West Capital Markets Inc, and Mackie Research Capital Corp.

Sprott did an initial public offering of the Sprott Physical Gold Trust in March, which raised $400 million. The value of that trust crossed the $1 billion mark at the end of last month as gold prices soared.

JPM and HSBC Sued for Silver Market Manipulation

As I recall when Blanchard sued Barrick and JPM for manipulating the gold market one of the first motions to dismiss came from Barrick who claimed that they were acting at the behest of the government and the central banks.

I believe the law firm representing this was the one who was successful in the Sumitomo copper litigation.

Reuters
JPM and HSBC Sued for Alleged Silver Market Manipulation
By Jonathan Stempel

NEW YORK, Oct 27 (Reuters) - JPMorgan Chase & Co (JPM.N) and HSBC Holdings Plc (HSBA.L) were hit with two lawsuits on Wednesday by investors who accused them of conspiring to drive down silver prices, and reaping an estimated hundreds of millions of dollars of illegal profits.

The banks, among the world's largest, were accused of manipulating the market for COMEX silver futures and options contracts from the first half of 2008 by amassing huge short positions in silver futures contracts that are designed to profit when prices fall.

"Defendants reaped hundreds of millions of dollars, if not billions of dollars in profits" from the conspiracy, one of the complaints said.

The respective plaintiffs, Brian Beatty and Peter Laskaris, each said they traded COMEX silver futures and options and contracts, and lost money because of the alleged manipulation.

Beatty lives in Connecticut and Laskaris in New York, court records showed. The lawsuits seek class-action status, damages that may be tripled and other remedies. The defendant banks are major participants in the silver market.

JPMorgan declined to comment. An HSBC spokeswoman had no immediate comment.

The lawsuits were filed one day after the Commodity Futures Trading Commission proposed regulations to give it greater power to thwart traders who try to manipulate prices.

The CFTC began probing allegations of silver price manipulation in September 2008.

"Going back to the early 1980s, silver has been an extremely volatile market," said Bill O'Neill, managing partner at Logic Advisors, an Upper Saddle River, New Jersey investment firm specializing in commodities. "I often describe it as a speculative playground. You have to be a big boy to play."

FRAUD, DEVIOUSNESS ALLEGED

Only once in its 36-year history has the CFTC successfully concluded a manipulation prosecution, in a 1998 proceeding concerning prices for electricity futures.

Speaking on Tuesday, Chairman Gary Gensler said the proposed regulations would give the regulator greater power to police "fraud-based manipulation."

Commissioner Bart Chilton added that there had been "fraudulent efforts to persuade and deviously control" silver prices.

A CFTC spokesman said the regulator does not comment on investigations, and would not discuss the investor lawsuits.

Earlier this year, the CFTC began looking into allegations by a London trader that JPMorgan was involved in manipulative silver trading, the Wall Street Journal said on Wednesday, citing a person close to the situation.

Silver prices have faced regulatory scrutiny in the past, perhaps most prominently after the Hunt brothers in Texas in 1980 attempted to corner the market, driving prices above $50 an ounce. The price later plunged.

Since the CFTC began its probe, spot silver prices XAG= have ranged between $8.42 and $24.90 an ounce, Reuters data show. They traded Wednesday at roughly $23.53. Silver futures prices SIc1 are up 39.1 percent this year.

Gold Daily Chart

SP 500 December Futures Daily Chart

The US stock market is like velveeta cheese: full of artificial content and favored by rats.

Gold and Silver Options Expiration

Those who hold in-the-money options receive long and short positions in the futures today. Sometimes they like to run the stops to test the new hands on board.

Just in case you were wondering.

The Sprott Silver Trust is pricing tonight as well I believe.

Full Text of CFTC Commissioner Bart Chilton's Statement on Market Manipulation

Has the US financial media mentioned or even discussed this? Today the Bloomberg television news people are busy discussing the World Wrestling Federation, a caricature of sport analagous to the Comex and NYSE as financial markets.

Statement of Commissioner Bart Chilton
U.S. Commodity Futures Trading Commission
Public Hearing on Anti-Manipulation and Disruptive Trading Practices
Washington, D.C.
Tuesday, October 26, 2010

I take this opportunity to comment on the precious metals markets and in particular the silver markets.

More than two years ago the agency began an investigation into silver markets. I have been urging the agency to say something on the matter for months. The public deserves some answers to their concerns that silver markets are being, and have been, manipulated.

The legal definition of manipulation under the law is a high bar to prove. It is a much different test than what the average person might consider as manipulation. Under existing law, to prove manipulation, the government is required to demonstrate not only specific intent; we also need to prove that as a result of the intent and market control, that activity caused an artificial price -- a point that can certainly be debated by economists.

Attempted manipulation is less difficult to prove -- requiring an intent to manipulate and some overt act in furtherance of that intent. There are also other violations of law that could contort markets and distort prices.

I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.

In saying this, I am fully aware of the prohibition from divulging trader names or information about their positions I am extremely careful not to violate the law in this, or any, regard. I also cannot pre-judge anything the agency may do with regard to our silver investigation, or any other matter.

The Wall Street Reform and Consumer Protection Act, which I strongly supported, contains new manipulation provisions as well as anti-disruptive trading rules. These new authorities, along with the implementation of thoughtful position limits in metals, will go a long way toward ensuring more efficient and effective metals markets devoid of fraud, abuse, and manipulation.

Thoughtful investigations take time. The CFTC staff has worked extremely hard on the silver investigation. That said, there is a point at which it is our responsibility to say something. Within the law, I have done so. I am hopeful that the agency will speak publicly about the investigation in the very near future and when they do so that it will be in a more granular fashion than I am permitted from doing at this time.

CFTC Probes JP Morgan's Silver Trading

The spectacular silver rally and current price is no bubble. HSBC and JPM stopped shorting the market so vigorously and began to actually cover some of their positions as a result of CFTC investigations.

Since the CFTC had previously investigated the market and done nothing, one might speculate that the publicity had provoked some behind the scenes discussions. JPM recently shut down its proprietary trading unit under Blythe Masters.

I will be absolutely stunned if anything except for a wristslap with no admission of wrongdoing is the result. However behind the scenes we might see a less oppressive domination of the silver market by these TBTF banks. But the profiteering will continue here and elsewhere. This is no reform administration and the Republicans were the primary authors of much of the crony capitalism so there is little relief to be found there.

What the masters of the universe seem to have not quite figured out yet is that you cannot keep skimming about 8 percent of M1 off each year as Wall Street bonuses, gimmicking and distorting the financial system to enable their control frauds, and maintain robust real economic activity. There were quiet coup d'etats in the UK and US, but the people do not yet realize it. At some point they will see the necessity of reform, and then we might have a sustained recovery. Until then, welcome to Zombieland.

CFTC scans JP Morgan's silver trading business
By Sakthi Prasad in Bangalore
Wed Oct 27, 2010 2:13am EDT

(Reuters) - The U.S. commodity futures regulator is looking into claims by a trader in London that JPMorgan Chase & Co (JPM.N) was involved in manipulative silver trading, the Wall Street Journal reported, citing a person close to the situation.

In recent months, U.S. Commodity Futures Trading Commission (CFTC) lawyers have interviewed employees of JPMorgan in its metals trading business, the newspaper said, citing a person familiar with the situation.

Along with JPMorgan, CFTC lawyers have also interviewed industry traders, commodity executives, experts and employees of other metals trading firms, WSJ said.

JPMorgan declined to comment to the Wall Street Journal on any aspect of the investigation. The firm could not immediately be reached for comment by Reuters outside regular U.S. business hours.

On Tuesday, Bart Chilton, a commissioner at the U.S. CFTC said there had been repeated attempts to influence prices in silver markets.

The Journal said JPMorgan and HSBC Holdings PLC (HSBA.L) have usually been the big players in the silver market.

However, in recent months the banks with large futures positions have sharply reduced the size of their holdings, the paper said.

(Reporting by Sakthi Prasad in Bangalore; Editing by Clarence Fernandez)

Here Is What A Significant Selloff In Gold Might Look Like With Our Active Chart Formations

If there is a severe correction in stocks a selloff in gold could ensue that would be a more severe than a simple retracement and consolidation. I am showing this not because I now think it is more likely, but rather because people write in and have asked for this type of more pessimistic scenario.

Here is what the correction might look like as a retest of the breakout trendline. From a timing standpoint the US November election looks likely as a pivotal event and a decision point in the November 2-9 timeframe.

On a nominal basis, the depth of this selloff would be approximately the same as that which happened in July and August of this year following the initial breakout in the cup and handle formation.

If there is not a severe correction in stocks, gold is more likely to stay within the short term trendlines in blue until it regains the upward momentum and follows the intermediate green trendlines higher.

Gold and SP 500 December Futures Daily Charts; SP Cash Weekly Chart

Advance Q3 GDP is out on Friday of this week.

Net Asset Values of Certain Precious Metal Trusts and Funds

The premiums are very modest indeed.

CFTC Commissioner Raises Alarm Over Silver Market Manipulation

The manipulation in the silver market with two or three banks holding enormous undeliverable short positions was obvious, for years.

The CFTC was complicit in turning a blind eye to this, stonewalling and whitewashing the corruption, as were many market commentators and participants. Ted Butler and GATA did a wonderful job of highlighting this enormous fraud but were ignored and even vilified for the past twelve years in the same vein as whistle blower Harry Markopolos was in raising concerns about Madoff's investment scheme.

Bart Chilton is speaking out as he said a few weeks ago he would if the CFTC was not making progress in correct this travesty. This is the sort of reform that the people were seeking when they swept the Democrats into office, a reform which they never received.

This obviously should be investigated by an independent body, given the regulatory capture held by the banks who manipulated the market to the detriment of the world in suppressing prices and creating an artificial shortage that will be painful to unwind.

This is not a partisan issue, but involves politicians of both parties going back twenty years or more, in both London and New York. And the corruption is pervasive and ongoing in multiple US finanical and commodity markets.  The regulators and ratings agencies have not been doing their jobs.

Some will attempt to dismiss what Mr. Chilton is saying here as inconclusive. Keep in mind that he is a high profile CFTC official, and what he says comes through a 50,000 watt megaphone, so he must choose his words with great care. But this is almost unprecedented for an official to speak out against his own administration.

The response to these sorts of revelations seem to be a blanket of media silence and whispered character assassination, which is the mark in trade of those who have no sense of duty, honor, and country. Their crime is betrayal of the public trust, and the public's fault is apathetic complicity.  'Silver did not rally on the news, it must not be significant. I did not hear about this on television, so it must not be true.'

But the dominos are starting to fall, and more revelations are to come. 

CFTC's Chilton raises alarm about silver market
WASHINGTON
Tue Oct 26, 2010 9:30am EDT

Oct 26 (Reuters) - There have been repeated attempts to influence prices in silver markets, Bart Chilton, a commissioner at the U.S. futures regulator, said on Tuesday.

"There have been fraudulent efforts to persuade and deviously control that price," Chilton said in prepared remarks before a Commodity Futures Trading Commission meeting.

Chilton said he could not pre-judge the outcome of the CFTC's ongoing investigation of the silver markets, but said public deserves some answers to their concerns.

Gold and silver are no bubbles. It is a reverse Ponzi scheme that goes back for decades, that has sold many more ounces of metal than can possibly be delivered at today's artificially low prices, that was tolerated and even promoted by those who were running a monetary control fraud, quite probably the greatest in history. The banks and insiders are trapped and desperate, trying to bluff and buy themselves out of another fraud yet again. They will never give up, but will have to be rooted out. It is unlikely that reform can come from within, since the righteous anger of the people and the will to change will be co-opted by those very forces that have manipulated the system and perpetrated the fraud.

Fortunes will be made and lost, and careers ruined, as the revelations of manipulation and corruption are made over the next ten years. And this will make for dangerous times, as an empire of deceit collapses not at once, but in stages. There will be new threats and more bailouts for the banks to be paid by 'austerity' for the common person who is caught up in their own web of petty diversions, apathetic cynicism and denial. There is little better example of this than Britain but America is not far behind.

But the tide has turned and change is in the wind.

Banks short 20,000 tonnes of gold.

Embry: Commercial Signal Failure in the Metals May Be Imminent

"A single breaker may recede; but the tide is evidently coming in."
Thomas B. Macaulay

W. E. Pollock: Pondering An Economic Dirt Nap

Gold and SP 500 December Futures Daily Charts

SP 500 and NDX December Futures Daily Charts: SP 500 Weekly Chart

I do not know where they are going with this market propping but today it was unusually obvious in the SP 500 futures almost all day.

On the weekly chart the SP 500 is approaching its 200 week moving average at around 1196 which capped the last rally.

Gold Daily and Silver Weekly Chart

Net Asset Value of Certain Precious Metal Trusts and Funds

Ben Davies: On Trading and the Markets

I made several attempts to edit this piece down a bit, but Davies' command of language, anecdote and illustrative reference is so strong that in the end I resisted all but the most cursory deletion.

Listen well to what he says about the markets and how to trade them. I have said this myself many times in different ways, but rarely so concisely and so well.

Remarks by Ben Davies,
CEO, Hinde Capital, London

Committee for Monetary Research and Education
Fall Dinner Meeting
Union League Club, New York
Thursday, October 21, 2010

Good evening, ladies and gentlemen. My name is Ben Davies and I co-founded Hinde Capital, a UK-based investment manager, with a gentleman called Mark Mahaffey...

The Federal Reserve chairman has said: "The economic outlook remains unusually uncertain." But economic predictions are not uncertain; they portend serious woes.

For once I agree with my namesake Ben -- the outlook remains unusually uncertain. A quite stunning observation, no less. But I would not just agree with the assertion that economic predictions are not uncertain. Note the double negative there.

Economics has sought to blend epistemology, physics, mathematics, and behavioral science to try to measure uncertainty. They aim to try to predict when we might have an economic collapse, but no model has been created that manages this with much confidence, if any at all. How do you measure a risk that is unmeasurable?

No, there is nothing certain about economic predictions. Donald Rumsfeld, the former U.S. defense secretary, unwittingly declared it so at a NATO press conference in 2002, when he responded to a question on intelligence gathering:

"It's not the certainties that make life interesting; it's the uncertainties. There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things we know we don't know. But there are also unknown unknowns -- the things we don't know we don't know."

"Unknown unknowns" -- at the time this was ridiculed as a piece of deliberate and meaningless obfuscation. Rumsfeld even won an award from the British Plain English Campaign for the most nonsensical remark made by a public figure. I would add that he narrowly pipped California Gov. Arnold Schwarzenegger, who commented, "I think that gay marriage is something that should be between a man and a woman."

Another stunning revelation. It's OK; we are clearly in safe hands with illustrious leaders like this.

Ridicule aside, I do think it was brilliant piece of polemic, irrespective of one's political persuasion. Without knowing it, Rumsfeld could actually be the poster child for a new line of economic thought that tries to draw parallels from physics -- the Heisenberg Uncertainty Principle.

In quantum physics this principle states that certain pairs of physical properties, such as position and momentum, cannot be simultaneously known to arbitrarily high accuracy.

The physical example Heisenberg used was the following. The more precisely you try to determine an electron's position, the less likely can you determine its momentum. A forecast of the electron's trajectory is therefore subject to unavoidable inaccuracy. And herein lies the issue with macroeconomics. One cannot be deterministic. Events are not causally determined by previous events alone. A known event does not predict a known outcome.

Although much can be learned from this theory, this is where the analogy ends. The act of experimenting with the electron and measuring position did not alter the outcome. In a human system the very act of forecasting or predicting an outcome actually influences that very outcome. This we call the feedback mechanism. It is encompassed in a theory many will know as "reflexivity."

Reflexivity refers to the circular relationships between cause and effect, what the philosopher Karl Popper referred to as the Oedipal effect (mothers, beware) -- an act of self-reference where examination or action bends back on itself.

Take the interaction between beliefs and observations in a marketplace. If traders believe that prices will fall, they will sell, thus driving down prices, whereas if they believe prices will rise, they will buy, thereby driving prices up. "Self-fulfilling prophecy" is another term you could ascribe this to.

If only markets were so simple.

Karl Popper believed that even scientific knowledge does not qualify as the ultimate truth. Rather, scientific theories should be accepted as provisionally true as no amount of corroborating evidence can rule out the possibility that some contradictory evidence will turn up in the future.

We are all capable of acquiring knowledge but we can never have enough knowledge to allow us to base all our decisions on knowledge. It follows that if a piece of knowledge has proved useful, we are liable to overexploit it and extend it to areas where it no longer applies so that it becomes a fallacy. One known fact today is that even in the age of information technology no society can have perfect information. No one person can likely understand everything. And even if they could, it would influence their interaction inside and outside the marketplace.

Maybe there is a predictive market model but we just don't know it. After all, we have imperfect knowledge.

I believe that George Soros -- him again -- coined the phrase a 'fertile fallacy' -- meaning that imperfect knowledge creates first a self-reinforcing cycle and then a self-defeating cycle. It is how bubbles are believed to manifest.

Market prices always distort the underlying fundamentals; mistakes can become "fertile fallacies" and change reality in a feedback loop, causing bubbles.

Cyclical behavior of boom-bust is understood by most now. Rational behavior becomes irrational in the thickening of the maddening crowd until the crash wakes us from the insanity. We understand it but we still can't predict when the cycle collapses. The very reality that we get it alters our fertile fallacy. It invalidates it.

Now if I haven't lost you all, I would like to say I believe that markets move in and out of balance on varying temporal horizons naturally. They overshoot and undershoot but become excessive in nature in a systemic way only when they are deliberately distorted.

Intervention in or manipulation of markets by the state is such a distortion. Its acts postpone the day of reckoning for years or even decades. It creates false sense of equilibrium that ultimately gives way to disequilibrium and heightened instability. We have not experienced free markets -- that is, the invisible hand -- for decades. The recent failure of markets to predict uncertainty was not a failure of free markets but a failure of fiat money and socialism. (and I would add 'crony capitalism' which is historically prominent.  Wherever there are markets there are insiders who are seeking to corrupt them for their personal advantage. - Jesse)

Niall Ferguson, the monetary historian, eloquently wrote: "Financial markets are like the mirror of mankind, revealing every hour of every working day, the way we value ourselves and the resources of the world around us."

What he should have said is that financial markets are the mirror of state intervention, revealing our every hour of labor confiscated, our lack of personal ownership for our decisions, and the resources the state absolves us of.

I sound disillusioned. Well, I am. I still love the marketplace but one has to understand the beast. I would like to share with you some of the facets that I think make a great trader.

By the way, I am not there yet, and maybe it's inappropriate of me to muse on this topic, but I think it could be provide you with a useful insight into market behavior.

The most profound comment I ever read about markets was this: "Everyone ultimately gets what he wants from the market." This absolutely leapt out at me. I will repeat this: "Everyone ultimately gets what he wants from the market."

Ed Seykota was the name of the trader who made that comment in a famous trading book called "Market Wizards."

Ask any trader what he wants out of the market and the resounding answer would be "money," materialist heathens that we are. It's the product of our trade, so success is measured by how much money we make. It shouldn't be; it should be the return adjusted for least volatility. But Seykota was spot-on.

At a subconscious level every trader gets his just wants, and it usually isn't money. I have sat next to traders who love to trade feverishly. They like the excitement. They make lots of money really quickly, and then become inured to the rush of making it and then they lose it. I would say they lose it deliberately, but at a subconscious level. They need the thrill and angst of making it back. Others like to make it and lose it and then wallow in pity because they receive more attention. Then they repeat the process. What they crave is excitement and attention, not the money. 

(One of the most prominent errors I see amongst the non-professionals is what I call 'trading your ego,' that is, being seduced by the pride one gets by making a public market call and being right, whether it was justified intellectually or more likely dumb luck. I have seen people follow their theories and systems over a Niagara Falls of ruin because they could not admit their own fallibility and, in the end, humanity - Jesse)

My Achilles' heel, among many, is that I am ambivalent about money. I know that for me nature, friends, and family are ultimately worth more. I constantly juggle this conflict. But if I didn't enjoy it I would stop.

To be a great trader, at a generic level, the truth is: Do what works for you and not what anyone else does and thinks. Take responsibility for all your actions, good and bad.

Specifically, four points that work for me:

-- Patience. Patience to wait for the right trade and then stay in the trend.

-- Impatience. Cut your losers early. 

-- Intuition. Know if you have it (listen to your inner self) and trust it.

-- Flexibility.

(The old Street saying that captures most of this is 'cut your losses but let your profits run.' Jesse)

I helped develop a system model we employ at Hinde, and, if truth be told, it's not perfect for me as it's not my model alone, but what it has done is help generate good money management. Survive to live another day is the key.

I believe that trading takes a peculiar mixture of conviction and flexibility. Conviction to know you are right and flexibility to say no, I am wrong. Bear in mind most traders' win-loss ratios are 55-45. That is a lot of wrongs you have to deal with. It illustrates how risk management is key. 

Like all human endeavours it taps into the creative element, which is why I want to mention Michael Steinhardt. I have never met him but he is considered a legendary investor, again immortalised in the book "Market Wizards."

He returned more than 24 percent annualised over some three decades, with, I assume, low volatility of returns. He developed the concept of "variant perception." I want to share his concept of "variant perception" and his ability to challenge the status quo.

The theory of variant perception is best explained when I recount Steinhardt's own words. He said:

"A summer intern reminded me years later of the advice I had given him on his first day at work. I told him that ideally he should be able to tell me, in two minutes, four things:

1. The idea.

2. The consensus view.

3. His variant perception (a well-rounded view that is meaningfully different from consensus view).

4. A trigger event. 

(I introduced this concept and particular name into my writings in 2001.  I cannot say if it was the first, but it was original to me and came from the notion of catalyst in physical science and so it is hardly phenomenal. Personally I would distinguish this to instances of 'trend change.' Being a contrarian against an established trend for the sake of eccentric individualism or stubbornness is a sure path to poverty. And what's worse, if a fellow is lucky and right at this once, they will sometimes chase that thrill to ruin and seek to bring down others with them for the rest of their lives. The 'variant view' can play strongly into the trap of 'trading your ego' or confusing your self worth with a variant belief which can be a fatal addiction indeed - Jesse)

No mean feat. In those instances where there was no variant perception I generally had no interest and would discourage investing."

Financial markets are truly beguiling and as I have mentioned they have an equally beguiling end product -- money, which affects us all. It shapes our lives, for many of us our every waking thought. If asked, most people will always say, "I want more money." Even popular music today captures the wishes of the masses. Travie McCoy's opening line to his song "Billionaire" says it all:

I wanna be a billionaire so fricking bad,
Buy all of the things I never had.
Uh, I wanna be on the cover of Forbes magazine,
Smiling next to Oprah and the Queen.

Twenty years ago, according to the Forbes Rich List, there were 140 billionaires. Three years ago there were almost 500. This year there are close to 800, each with an average net worth of $3.3 billion. Why the surge? The "invisible hand"? No. Animal spirits? I doubt it. Did the world just get eight times more get-up-and-go? Hardly. So what then?

Money -- that's what.

Globally, living standards and wealth have been on the rise even for the poor, primarily based on "cheap" or "easy" money. Debt has been offered at low interest rates. All this debt is money -- money that has funded an illusion. No wonder people are buying gold.  (In the US the median wage has been stagnant for twenty years - Jesse)

And what should you make of the recent stampede to own gold? A detached observer might be puzzled by the obsession to own the yellow, shiny stuff. Warren Buffett once wryly observed, "It gets dug out of the ground in Africa or someplace. Then we melt it down, dig another hole, bury it again, and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

Buffett's response is too smart by half. A Martian would be equally puzzled to see humans cut down a hundred-dollar tree in order to pulp it, turn it into paper, print numbers on the paper, and pass it off as bills worth $1 billion.

Gold's antagonists claim that gold is a Ponzi scheme. Its value continuing to rise, they say, depends on people willing to buy it at higher prices from previous buyers.

This is to misunderstand the nature of gold. It is not just another commodity. Gold was once money and no doubt will be again. The last four decades are the blip in time when money has not been backed by gold.

All this you know, but now you know I know. We're back to those "unknown knowns," aren't we now?

People always say to me gold has gone up a lot and so it's too high. I always reply that gold has a price and a value. These two constructs are not interchangeable. Price is a level at which you make an exchange, and value is whether it is worth it. Right now gold is at a high price, but when examined in the context of other assets, it remains undervalued -- primarily against paper money.

As gold's value rises -- or, more accurately -- as paper money's value falls, what we are seeing is an incremental return of gold to a monetary asset. The fact remains that the subtle confiscation of your day's labor by issuing printed money has only begun to dawn on the populace. They are only just waking up to gold as money.

Governments today are struggling with thumping budget deficits and unfunded liabilities, so the risk of further money printing looms large. With gold already undervalued, its outperformance will only accelerate.

A German banker once said that gold normally trades like a commodity. But he also said that when investors lose confidence in currencies, because the pool of gold is so much smaller than the pool of currencies, demand for gold can effectively become unlimited.

He is spot-on. When individuals obsess about the validity of money, they lose faith in government. Their discarding of money in such a situation is akin to an increase in the money supply, which is an inflationary event. Hyperinflations such as these are thus a political event, not only as government will be deficit-financing but because people have made a statement about government. After all, fiat money is by decree of government, not free markets.

I am also often asked how high I think gold will go -- as if I had answered the riddle to the uncertainty model. My prediction is: How low can money go? How many zeros can you put on a piece of paper -- that is how high gold can go. In Hungary the pengo was denominated in 100 quintillion. That's a lot of noughts per ounce of gold.

My personal framework is that we are experiencing the invisible signs of inflation, which manifests from the issuance of global sovereign debt. Professional pundits like to polarize the world between deflationists and inflationists Richard Cantillon noted that the supply of credit and money does not work its way uniformly into the economy. Government cannot control where the money flows. 

I predict with uncertainty that encumbered asset classes such as housing will in real terms go nowhere. In nominal terms they may even rise. But areas with a small float of stock -- certain commodities -- such as silver, gold, small-cap emerging-market stocks -- will rise in nominal terms tremendously. My only concern is that the market is embracing this concept, but far from me taking a contrarian position here, I believe that the feedback loop will self-fulfill this eventuality.

On that note: On the way over I read a great little book by Gustav Le Bon called "The Crowd" where he observes the behavior of the masses. He introduced the Law of Mass Action or Mentality: When it comes to the effect of social behaviour on the intelligence of individuals, 1 + 1 is often less than 2 and sometimes considerably less than zero. People are unpredictable.

Nonetheless I want to give you my variant themes:

-- Japanese stocks are the most unloved in the world. Small-cap stocks in Japan will skyrocket in years to come, but then they would, as I see hyperinflation there in the next five years. Question: What was the best-performing stock market in 2008? It was the Zim Industrials in Zimbabwe -- up more than 30,000 percent in nominal terms, initially far outstripping inflation.

-- The Swiss Franc as a bastion of safety is a fallacy. They too are debasing their currency.

-- Turkey: the Ottoman Empire will return. Great enduring demographics and entrepreneurial spirit.

-- Mongolia will surpass Japan in GDP on a PPP basis. (Purchasing Power Parity is one way to compare things denominated in different currencies. - Jesse)

Not since the arrival of the Gutenberg printing press has humanity been so challenged by the printing of notes. Oh, the irony -- Gutenberg was himself a goldsmith by training. I am sure that he could never have envisaged the abuse the financial printing presses would have on mankind's development.

Ex scientia pecuniae libertas. "Out of knowledge of money comes freedom." I echo these sentiments but it is the duty of all of us to create more awareness of monetary theory and with it of markets. The CMRE and GATA are wonderful forums for truth and action, but they both will need to broaden their audience. I hope I can help.

Remember: Just because the sun rises in the east and sets in the west doesn't mean it always will. That, I know, is unknown.

Years ago a professor named Paul Ello impressed upon his classes the crucial difference between possibility and probability in the context of conducting international relations, a principle too often conveniently forgotten by governments as in the recent case of weapons of mass destruction.

I have often suggested that this same distinction is applicable to many other non-scientific areas, especially in the volatile area of economics which is really a social science despite its pretensions. Indeed as Walter Bagehot once said, "Life is a school of probability." This is also the recurrent theme of Nassim Taleb, and of the late Benoit Mandelbrot in his book about the mispricing of risk The Misbehaviour of Markets.

Why didn't more US economists, politicians, the media, regulators and financiers seem concerned about the obvious mistakes they were making and the eventual consequences? Because their objective was not price discovery, the public welfare, or the appropriate allocation of capital; expediency ruled the day under the canard of efficient markets and self-regulation, and the objective was enrichment through any and all means including the corruption of institutions, influence peddling, soft bribery, and fraud.

SP 500 and NDX December Futures Daily Chart

Gold Daily and Miners and Silver Weekly Charts

Gold Daily Chart

SP 500 and NDX December Futures Daily Charts

The market is acting like there is a 'Bernanke Put' underneath it in the form of a handsome QE II to be unveiled at the FOMC in early November.

Meanwhile the financial sector is imploding because of the continual revelations of pervasive mortgage fraud.

It will be interesting to see if the PPT can hold things together until the November elections in the States.

Gold Daily and Silver and Miners Weekly Charts

Commentary on gold and silver action was posted here intraday.

Remember the caution that was sounded about the trends being extended? We are now in the process of correcting that.

SP 500 and NDX December Futures

Earnings are coming in on the 'spotty' side with signs of weakness despite the ardent cheerleading from the talking heads and the financial 'journalists.'

The big tickle today was the 25 bp increase in interest rates by the Bank of China which the market was shrugging off. But in the afternoon Bloomberg disclosed a suit by some financial heavyweights including the Fed against Bank of America for dodgy loans originated by Countrywide Financial which BofA had acquired. There is some speculation that the relative outsider BofA will be 'Lehmanized.' Personally I would like to know who is holding their Credit Default Swaps and if the Goon Squad (GS) is among them.

Notice that no significant support was broken today in the stock indices so tomorrow will be quite important in setting the trend and tone.

NY Fed, BlackRock and PIMCO Pressure Bank of America to Buy Back $47 Billion in Bad Mortgages

The news had a significant impact on the market because of the parties involved in 'pressuring' Bank of America. The loans were originated by CountryWide, which had been acquired by BofA. It is ironic that Countrywide CEO Angelo Mozilo just settled with the SEC admitting no wrongdoing and merely paid a fine which was a small percentage of his financial gains.

It is nothing new for bondholders and the common people to sue some of the big Wall Street Banks for fraud.

But when the plaintiffs include some of the most important financial institutions in the country the market has to sit up and take notice.

It's nice to see some outrage being expressed, even if it is among the privileged few. Watching Bloomberg television was particularly difficult today as the apologetics and cheerleading for the financial sector among its guests and newspeople is almost shameless.

And the band played on...

Bloomberg
Pimco, NY Fed Said to Seek BofA Repurchase of Mortgages
By Jody Shenn
Oct 19, 2010 2:53 PM ET

Pacific Investment Management Co., BlackRock Inc. and the Federal Reserve Bank of New York are seeking to force Bank of America Corp. to repurchase soured mortgages packaged into $47 billion of bonds by its Countrywide Financial Corp. unit, people familiar with the matter said.

A group of bondholders wrote a letter to Bank of America and Bank of New York Mellon Corp., the debt’s trustee, citing alleged failures by Countrywide to service loans properly, their lawyer said yesterday in a statement that didn’t name the firms. The New York Fed acquired mortgage debt through its 2008 rescues of Bear Stearns Cos. and American International Group Inc.

Investors are stepping up efforts to recoup losses on mortgage bonds, which plummeted in value amid the worst slump in home prices since the 1930s. Last month, BNY Mellon declined to investigate mortgage files in response to a demand from the bondholder group, which has since expanded. Countrywide’s servicing failures, including insufficient record keeping, may open the door for investors to seek repurchases by bypassing the trustee, said Kathy Patrick, their lawyer at Gibbs & Bruns LLP.

“We now are in a position where we have to start a clock ticking,” Patrick, who is based in Houston, said today in a telephone interview. Recoveries for her clients, who own at least 25 percent of so-called voting rights in the deals, may reach “many billions of dollars,” she said....

Gold Daily Chart - Intraday - The Retracement

If you are a patron of this cafe, you cannot say that the breakout and rally to 1375, and the retracement currently underway, were not prominently placed on the menu for some time.

So now what? Gold will retrace back to a more sustainable trend, consolidate, and then resume its bull market rally to the minimum measuring objective of 1455 and probably higher.

If there is a general liquidity panic gold will overshoot to the downside, perhaps considerably, and then gather itself and rally sharply back to the trend. I doubt that it would break the 1280 level except for an intra-week plunge, but that is always possible.

There will be the usual displays of human emotion, but this is a natural and healthy correction in a bull market. I was becoming very concerned that gold might continue on this new, more aggressive trajectory all the way to 1455. This would have resulted in a more damaging correction. The green trendlines are the 'safest path' for a sustained bull market.

This rally in gold and silver is an artifact of the crumbling of the post WW II US dollar reserve currency regime and its replacement with something else. Gold and other commodities were influenced, if not controlled outright, by an Anglo-American financial cartel for their own advantage, and far too often the personal advantage of a few powerful men. This is changing. What comes next, no one can say for sure.

As some have suggested in their bitterness there is the possibility that an authoritarian new world order can dictate prices of gold or anything else for that matter. This is not probable. But if that happens the price of gold may be the least of our problems. The propensity of people to say and do stupid things rather than admit their own errors and mistaken beliefs is sometimes remarkable. This is one of the themes in the movie classic Bridge Over the River Kwai. Some say that art imitates life. I would say that life on the internet imitates high school.

The trend will remain in place until the global currency regime evolves into something sustainable that supports balanced economic trade and activity. Once that level of systemic repair is reached, gold will stabilize at whatever level it 'fits' within the global scheme.

Gold Daily Charts

SP 500 and NDX December Futures Daily Charts

The tech futures NDX were selling off hard after hours as AAPL and IBM failed to delight investors with their earnings reports, after having gone to new parabolic highs during regular trading hours. This could be an instance of Buy the Rumour and Sell the News.

However the pattern seems to be a sell off at night, with a steady short squeeze starting in the first hour of trade lasting all day. Let's see if the pattern of market manipulation is finally broken tomorrow.