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With five margin increases in ten days, one could suggest that the CME and their do-nothing friends in the CFTC are machine-gunning the lifeboats, and the refugees from the currency wars.
There is no problem with the exchanges and regulators increasing margin requirements per se, and of course restraining leverage is a good thing. I would just like to see it done more transparently and in a 'rule-based' manner, as opposed to the ad hoc, cronyistic way in which it is done today, most often for the benefit of insiders who control the exchanges, and call for help and rule changes when they get in trouble. And they get into trouble through lax regulation and excessive leverage.
There are 'crash' silver calls down to below 30 to 22 abounding. Keep in mind I sold my short term silver trading positions last week, and was short term bearish. I have just started buying back in to gold and silver yesterday and a little before with hedges. Also bear in mind that this decline is accompanied by a sell off in equities as we had suggested it would. Hence our hedging strategy has worked.
People ask, why do not the sovereign silver and gold bulls, the BRICS, fight this? The answer is that they are long term bullion buyers, and this short term paper strategy benefits them greatly.
I think the comparisons to the Hunt Brothers silver bubble might be a bit difficult to sustain, very big picture to the point of meaninglessness. The circumstances between then and now are very different, with the only thing in coincidence being the technical price action. But a concentrated effort by the government and the banks could write history and draw the graphs to suit themselves.
I think there is more to this than meets the eye. It really centers around a major struggle with regard to international currency, and the methods by which countries denominate their trade, and store the liquid reserves portion of their wealth. This is a currency war.
Certainly there are almost no bull calls for the precious metals here, and only a few neutrals. I am changing from short term bearish to neutral, and holding new light positions, most of them revolving around a few 'special situations.' I am neutral, which implies uncertainty. When in doubt, stay out.
I have touched none of my long term positions.
Let's see how the Non-Farm Payrolls number looks, and how it is received. If there is a liquidation panic in the weeks ahead, then all bets are off of course.
This is going to pivot on the stock market and the Fed's short term liquidity actions. The market swings are being triggered by the opaque and irregular management of the markets and the money supply, and the fraud which still taints much of the financial system. Even the staid Economist magazine is questioning US government economic statistics.
The American oligarchs may be having their own Mubarak moment in the not too distant future.
What has been hidden will be revealed, and what has been whispered will be shouted from the rooftops.
But one day at a time, so let's see what happens tomorrow.
Another down day for US equities, although it is very telling that the VIX is still a very modest 18.20. In other words, although there is a fairly good decline in place, it is not accompanied by real fear, or at least, not yet.
Non-farm Payrolls tomorrow. Unemployment claims shocked the markets a bit this morning.
I think this is a cynical traders' market, dominated by bank liquidity and insiders. That does not make it any less dangerous to the ordinary person or the real economy.
Republicans Shelby and McConnell are refusing to confirm anyone for the Consumer Protection Agency created by Dodd-Frank, unless it is gutted first in a redo of the law. Although the Democrats are hardly real reformers, the Republicans are the fawning servants of the corporate oligarchy.
This adds more incentive for Obama to do a recess appointment of Elizabeth Warren.
Here is an interesting theory on the recent silver run up and correction which someone pointed out to me this evening from a chatboard.
I do not know if his theory is valid of course, and the author allows as much, as more data is required. I doubt even the COT report this Friday will be of use. I like to follow Harvey Organ and Dan Norcini on these matters and will look forward to their weekend commentary.
But what this person is saying is essentially the 'gut read' I had while watching the tape, off and on in recent days.
If the market was correcting because longs were selling out and walking away, why did the CME have to do a 4th and 5th margin increase to make it more difficult to hold long positions? If something is burning of its own accord, why keep pouring gasoline on it, over and over?
Well one explanation is that they want people to cut their losses and not be overwhelmed if the prices continue lower. That is legitimate and I would be very grateful if they were to begin doing that. Too bad that US regulators never seem to do this when it really counts, like with equities and home mortgages and banking leverage for example.
But there was no denying that the parabolic increase was just dodgy. As you may recall I expressed wonder at it, and took my trading profits off the table, to much private criticism in the emails I might add.
And then we saw the repeated late night hits that started in conjunction with the CME's actions to increase margins, market actions that were too obvious to be accidental or coincidental.
I really believe that the core of the problem involves the deliverable ounces at CME, a big looming problem. I think the CFTC knows quite a bit more about the dynamics of this market and its associated and opaque derivatives than they admit. And I believe they are desperately concerned.
I did post a link from Ben Davies this evening in which he speculates that the high prices brought a load of scrap into the market, which is what prices do. But that scrap has not been measured, and it would have happened rather quickly, in a matter of weeks. I do not think the refiners can produce new eligible bars quickly enough even from scrap.
But regardless, it has not really shown up where we would like to see it. And as Ben points out, once this initial influx of scrap, low hanging fruit they like to call it, is exhausted, prices will begin to climb again because miners cannot even begin to adjust supply higher quickly enough. And the market action in the miners continues to be heavy handed and manipulative from my vantage point.
I suspect a lot more of what has entered the market is forward hedging by some of the bigger miners and the bullion banks, who were locking in profits, but ON PAPER.
So a lot of paper silver may have entered the market, but that is not really what is needed. So the exchange and the regulators and the big dealer who are incredibly short feel the need to dampen demand for near term bullion. And by driving down the price they worsen a bad situation IF systemic shortages exist due to years of market underpricing and undersupply. And if that is the case, the short term fix is a longer term poke in the eye with a sharp stick. But few can accuse American management style of a bias to the long term solutions when a lucrative short term fix that becomes someone else's problem is available.
I am just fascinated by this, and cannot wait to see how it resolves and it develops. I am viewing this as one act in a much larger drama, the reforming of the global governance system that has been in place since the end of World War II.
Let's see what happens, and what comes floating in on the tides of change.
And please try to keep in mind what has happened over the past ten years. I am utterly amazed that the US has just passed through one of the greatest financial scandals and frauds in history, and within two or three years is willing to act as though nothing had happened, that it was just some random act of God, and that everything is back to a 'new normal' again. Few prosecutions and shallow reforms. Remarkable.
Well, things are not normal. There is an abscess in the body politic. And the next collapse and crisis which is coming is going to be monumental. And some surely view it as an opportunity to feed their will to power. And perhaps Ron Paul will prove to have been prescient.
"Believe me, the next step is a currency crisis because there will be a rejection of the dollar, the rejection of the dollar is a big, big event, and then your personal liberties are going to be severely threatened." Ron Paul
Let's see what happens, and wait for some stronger indications of what the situation may be. As noted here many times, these are particularly dangerous markets, and only professionals and highly experienced traders should be actively in them.
But there is no charge for watching...
WSB
CME Margin Hike won't matter, The CRIMEX Clowns got stuffed yesterday
wrs - Wed, May 4, 2011 - 08:48 PM
I think I know what happened. I kept thinking that if OI increased on the kind of price drop we saw yesterday, then longs didn't capitulate because if they did, OI would have shrunk.
Here is what I think happened, the Commercials have been decreasing their net short in this latest run up, in other words, they helped it go up by covering short and going long. I believe they were doing that to accentuate the rise and to be able to liquidate their profits and accentuate the drop and cover short when the spec longs gave up. They wanted silver to look parabolic and then fail in order to scare everyone off.
Well it looks like the large specs have held tight, the COT report on Friday should show that the large long specs increased longs and are more net long while the commercials are more net short. Yesterday it was the commercials selling at a discount to the spec longs who just soaked up all the selling the commercials could do.
So today they raised margins again because I bet that the OI didn't drop much today if they had to raise margins again.
This is setting up for a huge snap back rally if my conjecture is close to correct.
CME Raises Silver Margin Requirements for the 4th Time
I'm trying to remember how many times the Fed raised stock margin requirement during the tech bubble, or mortgage down payment minimums and bank reserve requirements in the last credit bubble.
The spin machine and demand dampening campaigns are well underway in an attempt to rescue the pampered princes of Wall Street and the City of London from yet another overleveraged paper asset scheme gone wrong, wobbling the Anglo-American banking system.
It is the duty of the central banks and the government to preserve and protect the privileged few and their financiers not only from justice, but any pain of loss or minor inconveniences as well, no matter the cost to the public trust.
Now if only they could magically create some substantial new bullion supplies for the Comex to forestall what appears to be an approaching default on delivery, at least based on identifiable inventory and assets represented by paper in customers' hands.
As Daniel Drew once famously observed:
"He who sells what isn't his'n, must buy it back, or go to prison."
This is from Reuters:
"The following are highlights from the U.S. Treasury Department's announcement on Wednesday of its quarterly debt refunding, which will raise $72 billion in new cash.
The Treasury said it would auction $32 billion in three-year notes, $24 billion in 10-year notes and $16 billion in 30-year bonds next week.
When the note and bond sales are settled on May 16, they will exhaust the government's remaining borrowing capacity under the $14.3 trillion statutory debt limit. This will require the government to employ emergency measures to continue borrowing, but these will only be sufficient until Aug. 2, according to Treasury projections. The measures include dipping into two federal employee pension funds.
Treasury officials reiterated their view that they believe Congress will raise the debt limit in time. A Treasury official said that reduced auction sizes or frequencies were options that could be considered to refund maturing debt in case the debt limit increase was delayed."
The Treasury is reportedly asking for a $2 Trillion increase again according to Reuters:
The Treasury has told lawmakers a roughly $2 trillion rise in the legal limit on federal debt would be needed to ensure the government can keep borrowing through the 2012 presidential election, sources with knowledge of the discussions said.
Obama administration officials have repeatedly said that it is up to Congress to decide by how much the $14.3 trillion debt limit should be raised.
But when lawmakers asked how much of an increase would be needed to meet the government's obligations into early 2013, Treasury officials floated the $2 trillion working figure, Senate and administration sources told Reuters.
"A number of high-profile investors remain huge holders of gold and silver, amid continuing concern about inflation and the dollar. Mr. Paulson, known for his lucrative bet against mortgages a few years ago, told investors he still has most of his personal money in gold-denominated funds operated by Paulson & Co. Mr. Paulson told investors Tuesday morning that gold prices could go as high as $4,000 an ounce over the next three to five years, as the U.S. and U.K. flood the money supply." WSJ
"The bankers are waging a paper silver war on paper longs. This is why I urge all of you not to play the crooked Comex. The Comex is nothing but a paper game. Do not use leverage whatsoever. Just go and buy the physical silver from your local dealer or bank. This is what will kill the bankers game." Harvey Organ, 3 May 2011
I told a small group of traders, with whom I speak about the markets and our positions during the day, that I was pulling my big Russell 2000 short position hedges off around 3 PM, and was buying into some deeper long positions in the metals sector. And so I did.
Unless this is going to turn into a liquidation event, I believe the consolidation/correction, whatever you wish to call it, is about done, save perhaps for another gut check or two in case the dip buyers get over eager. There was a little profit taking rally back in the last hour, so perhaps I was not the only one who had this idea.
Silver May futures retraced roughly 38.2% of their gains since the last major correction intraday around the low of 40.50, (or 50% from the point of the last breakout), and the major stock indices tested key support levels as well. Gold has done remarkably well, but just eyeballing the chart, it too corrected almost 50% of its recent gains. The gold silver ratio is now back to something a little more familiar around 37.
I was very glad to see this correction in silver because it had gone parabolic. As Jimmy Rogers said, if silver had kept going it would have set itself up for a much greater fall later on. If we can sustain a more reasonable appreciation in the market, I think the upside is much further than most think. It depends on how the banks are able to unwind and hedge their shorts, and the progress silver makes as a store of value and alternative currency, particularly in Asia.
As you know I said I was taking my profits last week. I started buying back in yesterday and today and am now holding PM positions again with some hedges for a stock selloff.
I tend to believe that much of this market action in the States is just the tail wagging the dog, the few managing market prices for their fairly narrow personal benefit. So perhaps this little episode is done for now. The offtake of physical at these lower prices overnight has to be killing the supply lines.
There are rumours that some of the PIGS have been selling their central bank gold under some duress. Too bad they do not have any silver.
I do think there could be a more profound correction in the markets, but not yet. However, something could happen, or I could just be wrong.
Now that Blythe has had her fun, let's see what happens.
Until the banks are restrained and the balance is restored to the economy, markets will not be returning to anything resembling 'normal.'
My friend Pierre Leconte does not agree with my charting of silver, and offers one of his own. I include it here below to show the other side of the discussion.
Obviously I do not believe his chart is probable, but it is possible. I would not measure the retracement from the very bottom
He presents his argument, en français, here at Forum Monétaire de Genève. Here is an 'automatic translation into English.
I would not draw my retracement levels in this way, or a rising wedge in this manner. But that is a matter of taste. His chart does help to explain where some people obtain their forecast of a drop in price to the $27 dollar level. He is using a monthly logarithmic chart.
I will not offer any criticism of his point of view, except to say that I think he does not address the leverage in the market, that is, with the dwindling supplies that have been sold many times, and the persistent buying of bullion that is stressing the 'paper markets.' This is not incidental but critical. The rally in silver is because of a breaking down of a long term scheme to manipulate the price using paper and leverage. And the condition that caused this has not been relieved or corrected. But this is my point of view, my conclusion with which one may or may not agree.
We can discuss these things and remain friendly. This is what makes a market. And the market is the one who will tell us eventually what is correct.
But I think that while Blythe may play the coquette to take our silver, she is really a femme fatale to longer term wealth.
I told the traders I speak with occasionally throughout the day that I thought the correction ended around 3 PM, and so I took off my big Russell 2000 short position.
Unless this is going to turn into some kind of liquidation event, we might get another jog or two down to spank the eager buyers, but unless something happens the trends are back in play.
Let's see what happens. And be prepared to follow whatever the market tells us.
Some instant pundits were citing 'exhaustion' which they had seen in the silver market as a cause for the recent declines.
Only someone talking their book, or in complete ignorance of market dynamics, would cite 'buyer exhaustion' for such a precipitous decline when the exchange continues to raise margins, and the bears hit the price repeatedly in the off hours trade.
As Dave from Golden Truth observed:
"Needless to say, last night's ambush was comically initiated right at the open of electronic trading, which commences in the early evening on Sunday, when the futures markets tend to be at their least liquid. There was an absolute flood of sell orders at the open but the cliff-dive chart was accompanied by a relatively small amount of total volume. This suggests that there were some motivated "sellers" trying to push the market lower and force selling by the MF Global or Ameritrade customers who would be unable to meet the new margin requirements. To be sure, there was also plenty of unloading by longs who were frightened by the volatility and wanted to protect any profits they might have."
This does not look like a market showing anything like classic buyer exhaustion. This is more like a speeding train, running higher in response to a short squeeze on a massive overhang of paper silver obligations that cannot be delivered at current prices. The exchange authorities are throwing everything but the kitchen sink at it to try and slow it down, to break its momentum. I obviously do not have a problem with that per se. But it would be nice to see the regulators and exchanges occasionally intervening on behalf of the broader class of investors, and not so exclusively for the benefit of their insiders.
The reason is fairly obvious. The Comex inventory is down to a new low of 33 million ounces of deliverable silver, at least according to their published records. It is tough to talk your way out of that one, without showing the metal to the market. Stand and deliver.
And there are no Hunt brothers for the exchange officials to lean on to break the bulls. The buying is dispersed and world wide. They can raise the Comex margins to 100% and it will not affect the buying of bullion. But it may open up a yawning chasm between the paper markets and the physical markets that will be harder and harder to ignore. And that is unfortunate for those who seek to be the masters of the world, at least on paper.
As Harvey Organ notes in his commentary tonight:
"...another startling announcement from the CME, tonight, a third straight raise in the silver margin requirements. This shows how severe the bankers are into the silver glue..they are massively short of ounces and there is no available resources on the planet."
The silver market will keep going until the market clears, wherever that price may be. This may have to involve a few Banks, or their rumoured 'secret customers,' taking a substantial loss on their massive short positions, something that they are loathe to do. It's not so much the money, as the public will almost certainly absorb their losses through the Fed. It will be the admissions of failure, and potential exposure, and the need to construct yet another cover and diversion for a fraud based failure in the Anglo-American banking system.
What does not kill this rally makes it stronger.
Fighting the paper price is becoming counter-productive, because it opens the door to additional buying of physical bullion from Asia. It is starting to look like a feedback loop, in which the struggle of the shorts to extricate themselves merely tightens their bonds.
Tens of thousands of buyers, both big and small, taking on the banking giants, draining them of silver, bouncing back again and again, and finally leaving them exposed, high and dry, and nakedly short, for all to see. The many, seeking to string the bankers on a rope of silver, and bring them down.
"Can you catch Leviathan on a fishhook, or tie it down with a rope?"
Those dreamers. Those crazy dharma bums.
And the shorts are trapped in their pride, and their tangled web of lies. Karma? Ain't it a bitch.
"Our battered suitcases were piled on the sidewalk again; we had longer ways to go. But no matter, the road is life...Whither goest thou America, in your shiny car in the night." Jack Kerouac
CME Margin Increase for Silver
These are wild, triple black diamond markets. These are big changes occurring, understood by very few, and emotions will be running high.
If you are not a very experienced trader, better to stay off the slopes and as far away from leverage as you can get.
One cannot help but notice that the bear raids in the precious metals sector are coming in thin trading and are notable for their lighter volumes as compared to buying. They are also coordinated across a variety of related products including mining stocks etc. which are likely used to hedge losses on the futures contracts.
One possible explanation for this unusual volatility is here: Portrait of Desperation, and I suggest that you take a minute to look at it.
I think the Comex dealer inventory chart is telling, and while it might be resolved through procurement of a large, unallocated inflow of silver, I am at a loss to find out where that might originate, unless it is from the market itself, which would seem to demand higher, not lower prices, despite all the jawboning and spin from the Wall Street demimonde. The western governments, central banks, and IMF have long ago exhausted their strategic supplies of silver, so the bullion banks cannot effectively turn to them for direct relief as they have done over the past ten years in the case of gold.
Obviously there are other explanations. But a short squeeze being conducted not by one or two big players who can be dealt with by the exchange, but by a global market acting independently and almost en masse seems to satisfy Occam's Razor, at least in my mind.
In this case the market corner by a few traders has been on the short side, which is what went parabolic first, in both the futures and the derivatives markets. And it appears to be largely held by two big banks.
The big players are eating that short position in stages while they scramble to hold the markets under some measure of control. I agree with those who say that this will end badly.
As someone who watches the markets daily, and for many years, I cannot help but feel that after all this, after the financial collapse and all the related frauds and deceptions in mortgages and CDS, that we have ultimately learned nothing.
Could the precious metals market and the Comex be placed at risk by a few large financial institutions that in their hubris engaged in over-leveraged but highly profitable trades that placed them at excessive risk, and by extension risked the financial system?
How many times can one be surprised by the disclosure of an outrageous and pervasive fraud before they might wish to start questioning their basic assumptions about how things really work?
But at the end of the day in the short term silver had gotten ahead of itself, and it is now correcting and consolidating its gains as I had mentioned it would. And the new holders of futures contracts from the option expiration will be tried, and after this silver will be held in strong hands.
And in the background, gold grinds steadily higher to our objective of 1590.
The early day rally proved to be a good fade, and a nice hedge for new precious metals positions.
Nothing was broken to the downside, and the Street crawlers are pumping stocks in a big way. A little unusual for the market to end in the red on a 'merger Monday' but this is a strange market overall.
Notice that the US dollar rally failed again.
I would be embarrassed to tell you the prices that were paid for some new positions this morning as the wiseguys 'ran the stops' for another dose of shock and awe. To run the stops means to take the price down quickly with wanton selling to trigger stop loss orders which have been preplaced, creating further selling 'at market.' The exchanges and market makers can see where they are concentrated beforehand.
Over the weekend a reader showed me anecdotal evidence of naked short selling and tape painting by the major financials on some of the Canadian exchanges that was fairly shocking, but required further investigation. He has been sending this to their regulatory authority and been ignored.
For a country with such a sound banking system, the equity markets in Canada are quite exceptional. The Canadian exchanges sometimes appear to be like a carney sideshow, at times making even the Comex look good by comparison. Why they tolerate that sort of thing in such a normally sensible country makes one wonder, as it seems all out of character.
By the way, today is federal election day in Canada. Does anyone south of the border have the vaguest idea of what the issues are for one of their largest trading partners and neighbors? Judging by the mainstream media I think not.
I rarely discuss specific mining stocks and will not do so here. But there are some interesting divergences in the precious metal funds this morning as can be seen in the chart below.
Later...
And near the end of day...
The Comex is facing a default, and the powers that be are very nervous since it involves at least one of the TBTF monstrosities.
That does not mean it is going to happen, but with less than 12,000 contracts of silver left in the dealer category, it remains a distinct possibility unless prices go much higher to free up the inventory held by stronger hands.
Nine out of ten Americans might realize that dwindling supply coupled with growing demand tends to result in higher prices, or rationing and other methods of dampening demand, or all of the above. Well, maybe not that high a percentage of the people would notice, given these days of truthiness in thinking and the power of spin.
Perhaps there is some 'Plan B' to handle this growing scarcity of inventory. The only plans I am aware of from the exchange are forced settlements in cash or SLV.
Shock and awe in the thin Sunday night trade, running the stops of the new futures holders whose options were filled. Even more heavy handed and blatant than usual.
Run it up, and then smack it back down.
Take a letter, Ted...
Oh, and by the way Blythe, skip the histrionics. Stand and Deliver.
From Harvey Organ's Saturday commentary:
"The total open interest on the silver comex fell steeply by 6,132 contracts from 135,763 to 129,712. There is no doubt that the leverage for the longs suffered a bit but so did those shorts that have to pay margin requirements. This created much volatility on the silver price yesterday.
All eyes are on the front delivery month of May were the open interest stands at 2166 contracts or 10.83 million oz. The options that were exercised were given future contracts on Friday night and will be reflected in the numbers on Monday.
I believe that Blythe will be some busy lady this weekend.
The next battleground front month for silver is July and the OI rose from 76,365 to 78,060. We still have a long way off until we hit this trading month. The estimated volume at the silver comex was good at 77,167. The confirmed volume on Thursday, the day before first day notice was 226,267 where we witnessed most of the silver longs rolling to July and September."
Here is some background on Comex Inventory and the Eligible vs. Registered categories.
The much higher margin requirements serve to dampen demand due to speculation. But it also has the effect of making sure that the demand that continues to exist is held by some relatively stronger hands, not as susceptible to margin calls and other price antics.
Paper good, metal bad. Paper good, metal bad.
Ted Butler raises an interesting point about the large short interest in SLV.
I think his faith in the custodians, the ETF, and in the past, the CFTC and SEC, to do the right thing is probably misplaced. So far they have done nothing but extend and pretend.
The shorts are impaled, and their schemes are unraveling across a broad set of dollar denominated assets. This is not the time when I would expect honest disclosures, but even more coverups, deceptions, market manipulation, propaganda, distractions, intervention, and misdirection.
The highly leveraged scheme that is the US financial system is going down in a spiral like manner, slowly but surely. It will find its level, but where that is, no one can say. It's downfall will come not with disclosure and reform, but with hysteria and disbelief, and denial to the very end.
And then the difficult task of rebuilding can begin.
April 28, 2011
Mr. Laurence D. Fink
Chairman and CEO
BlackRock
55 East 52nd Street
New York, NY 10055
Dear Mr. Fink,
I am writing to alert you to a possible circumstance of fraud and manipulation in your popular ETF, SLV, due to the excessive short-selling of its shares. Current reports indicate the most recent level of total short sales now exceed 36 million shares. This is an increase of more than 14 million shares from the previous reported amount. ShortSqueeze.com
Each share of SLV requires that one ounce of silver be held at the Trust's custodian (minus accumulated ed management fees), according to the prospectus. Since short sellers of SLV shares do not deposit metal with the Trust's custodian, this means that the buyers of the more than 36 million shorted shares of SLV do not have metal backing, as required by the prospectus. It is my belief that many of the shares shorted have been shorted precisely because no physical silver was available to deposit. If I am correct, this may constitute fraud and manipulation, possibly on the part of Authorized Participants (APAs) who make deposits and redemptions of metal in the Trust.
I am a silver analyst and a fan of SLV. I had raised this issue with the previous owner and sponsor of the trust, Barclays Global Investors (BGI). I never did receive a satisfactory answer from BGI about the shorted shares issue, although they did agree to list and publish the bar serial number and weights held in the Trust after I publicly urged them to do so. I am hopeful that BlackRock might be more responsive to this issue.
Publicly-traded ETFs that have specific metal backing are highly unique securities. Perhaps a small short position may be overlooked on a temporary basis until the metal is deposited in the Trust due to logistical considerations. But a short position that represents more than 10% of the outstanding shares issued means that many buyers of the shares have no metal backing. This is clearly not in keeping with the spirit of the prospectus that each share issued be backed by one ounce of silver on deposit with the custodian.
I trust you will look into and rectify this circumstance.
Sincerely,
Ted Butler
Butler Research, LLC
www.butlerresearch.com
Gold was the lead today and in style.
Why?
Because the dollar was thrown under the bus by Bernanke yesterday, and gold is still the primary alternative currency.
Silver had a bit of a cheap pullback at end of day, but after the huge turnaround this week there should be few complaints.
The shorts are impaled.
Divergence between the SP and Tech continues unresolved.
I think this is the point of make or break for this rally in stocks.
The US economy is faltering from the ground up. The dollar continues to slide.
I am not so constructive on the valuations of bonds and equities here for the short term, but will try not to underestimate the power of the bubble-onians.
The dollar, along with the middle class, is being sacrificed for the benefit of the few, the monied interests and the governing elite. And of course their pliant followers and those most easily led.
Gold and silver offer a refuge because they withstand the test of time.
I took risk and profits off the table in the early morning trade, and then watched the action for the rest of the day, adding some broad index shorts into the close to balance out the remaining longs on the metals.
There is a divergence between the SP 500 and the tech sector. There is also a strong indication that the US economy is sluggish, not only in terms of GDP, but also in median wage and consumer spending.
RIMM lowered guidance after the bell, and P&G lowered expectations.
I shifted quite a bit of risk off the table this morning, and went into the close with new short positions on US broad equities, to offset some longs and bring my portfolio to a more neutral to bearish stance. I will probably lose the short positions if the techs can rally tomorrow and hold it into the weekend.
Where are Canada, the UK, and Australia?
Chart:
The Economist
Yesterday was options expiration and the precious metals were clubbed mercilessly and clumsily, with little attempt to hide it.
Today the metals markets rebounded strongly after a somewhat weak start and some late Comex headfakes.
As I had mentioned I had come out of cash and bought the dip in the precious metals sector yesterday, rather heavily, running cash levels to effectively zero. There was even some picking from the fallen stocks among those wild tigers, the silver miners, and in some size at end of day. Their beta is pretty impressive, and nice when it runs your way.
The buys in the stocks that had fallen to long term support were big fat targets. And they bounced with a vicious flourish today, going up even faster than they had fallen, gaining momentum steadily after the FOMC announcement.
I flipped the hedges early, and just let the metals run into the afternoon, trimming back into the close to raise some cash back again for more opportunistic buys. I like to get my money off the table and let the profits run.
So what next? The formation on the gold chart looks good, and the support on the correction helped to draw the cup of the inverse head and shoulders a little more firmly. Yes there will be draw downs and corrections along the way, but gold looks headed for 1590 and probably beyond, but one leg at a time.
Silver is a juggernaut. I had to force myself to buy beta heavily in that rugby scrum of a market yesterday and it paid off extraordinarily well.
If they want to be really Machiavellian they'll hit the metals tonight and tomorrow again, but its getting so old it might not work, and they'll have to retreat to try and defend another level higher.
And thanks Blythe. You're the best, baby.
Zicke zacke zicke zacke hoi hoi hoi
Ben and the Fed did almost exactly what I thought that they would do, especially given the statements that I highlighted yesterday in the piece from Eisenbeis.
The Fed is not going to do anything at all to roil the markets unless their back is absolutely against the wall.
It will be interesting to see if we get confirmed breakouts from the potentential inverse head and shoulders formations in the stock indices.
Highlights
Gold’s long-term supply and demand dynamics and several macro-economic factors ensured gold remained a sought-after asset in Q1 2011. Following a consolidation in January, gold ended the quarter on a firm footing.
The gold price rose by 2.4% during Q1 to US$1,439.00/oz by 31 March 2011, on the London PM fix, a more modest rise relative to average gains of 6.2% per quarter over the past two years.
By the end of Q1, ETFs held a total of 2,110.3 tonnes of gold worth US$97.6 billion, compared with the high of 2,167.4 tonnes at 31 December 2010, or US$97 billion – a modest net outflow in the quarter.
Central banks continued to be net buyers of gold in Q1 2011 with emerging market countries, including Russia and Bolivia, being among the key net buyers. As a group, the official sector holds 18% of all above ground stocks of gold.
Investor activity in the gold market during Q1 2011 differed by region. ETFs in the US and the UK experienced net redemptions on the back of year-end rebalancing and some profit-taking, while continental European and Indian investors increased allocations. Recent data shows a resumption of net inflows in the latter half of March and early part of April. Coin and bar purchases remained high, while activity in the futures and OTC markets was buoyant.
You may download the entire report here: Gold Investment Digest - World Gold Council
In short, Avery Goodman has come to the conclusion that silver is rising because a long term suppression racket has been exposed.
I came to this same conclusion some time ago, and recently restated it: What I Think the Fluctuations in the Comex Silver Inventory Mean.
There are probably quite a few securities attorneys have their eyes set on this one. But one also has to wonder if Obama will challenge Bill Clinton's record in selling pardons at the end of his Presidency.
Seeking Alpha
Short Sellers Now Screaming about a Buy-Side Silver Conspiracy
By Avery Goodman
Tuesday, April 26, 2011
It was only a matter of time. Now the talk of silver price conspiracies has shifted from long buyers to those on the other side of the fence. On April 21st, the historically anti-precious metals editorial staff of the London Financial Times ran an article titled "Silver Surge Prompts Conspiracy Theorists". Meanwhile, order was reestablished among the short side conspirators once the COMEX trading floor opened on Monday morning.
After silver prices had temporarily risen to over $49 per ounce during Asian trading, they were beaten down again to about $47 in a flood of newly opened short positions. From this return to discipline within the bullion bank ranks, we can assume that the Federal Reserve probably will temporarily halt QE-2 at the end of June or before.
At the close of business on Tuesday, April 26, 2011, the COMEX performance bond committee will, yet again, significantly raise silver margin requirements. We believe that this is an attempt to suppress prices and delay the inevitable reckoning. With the end of QE-2, short-sellers hope the exponential rise in the price of silver will also end. But, in our view, artificial price attacks in the futures markets are unlikely to help short sellers in the long run. The nexus of price appreciation is NOT at COMEX, but in the physical market. Physical silver buyers pay cash, and it doesn't matter to them how high or low COMEX committees set performance bonds.
If the performance bond committee is successful, they will manage to reduce the so-called "spot" price. In practical terms, however, the only thing they will have accomplished is to cause a few speculators to lose money while helping well-financed market vigilantes to buy more bars of physical silver for the same money. The bankers will then need to deliver even more physical silver than they would if the committee had done nothing. These futile attempts to fight back illustrate that a market manipulation cannot be effective in a market that is well aware of it.
The massive losses that short sellers have been taken has naturally led to some new urban myths. Some now claim that "evil" long side billionaires are out to "ruin" the market. Yet, even the Financial Times article points out the ridiculously paranoid nature of this theory. The author notes that silver prices were rising even as speculative positions at COMEX were reduced by 8.4%. This illustrates that the COMEX is now just a sideshow. A lot of people are simply buying physical silver.
The silver buyers do include some billionaires, undoubtedly, but most of them are simply folks who watched Jeffrey Christian's testimony at the well publicized CFTC position limits hearing back on March 25, 2010, and came away with the distinct impression that a small group of London banks have been creating alchemic silver. The banks were ostensibly "selling" and then "storing" so-called "unallocated silver bars" for silver investors. In reality, they seem to have been maintaining a fractional banking system in which only one physical ounce is really purchased for every 100 ounces they supposedly sell.
Let's go over that again...because once you understand the particulars, the reaction of the price of silver becomes perfectly understandable.
1) Bank sells silver, a very precious item, for big money;
2) Bank doesn't buy the silver it sells, or, if it does buy it, leases out or sells 99 ounces for every 1 ounce in the vault;
3) Bank gets paid "storage fees" from all its customers, even though their silver is not in the vault;
4) Bank profits are equal to 99 times what it sells initially, and then, the value of the stream of storage fees after that. Nice work if you can get it.
But, then there's the downside.
1) The market might discover your scam and you'll need to deal with investigations;
2) Leverage so high that, if discovered, it is a recipe for disaster;
3) Courts may deem the arrangement a fraud, in spite of disclaimers that say otherwise, and whereby customers waive liability for fraud;
4) The market will inevitably punish you severely with heavy losses after discovery of the scam.
For more information on "unallocated storage" in London, see our previous article.
Had the worldwide silver scam remained a secret, suppression of precious metals prices might have gone on forever. But the genie is now out of the bottle and mortal men, not even those who run casino-banks, cannot hope to put him back in. Once it became clear that the bullion banks were leveraged 100 to 1 in a silver based fractional banking scheme, it was only a matter of time before the market clobbered them. That is what is happening.
People have only begun to scratch the surface of the precious metals markets, and few fully understand how undervalued all of them are. Silver has always been worth far more than it had been selling for in the last 30 years. People are starting to see not only this, but also how that corrupt pricing situation came to pass. The whole world now understands that the silver trade has been carried out in a deceitful manner for many years. So, naturally, many people are starting to buy physical silver again, just as they did for 10,000 years before COMEX began trading it. Those people happen to include, in all likelihood, a few billionaires, a few sovereign wealth funds, and a few Asian bankers. Many are politely refusing offers of "unallocated" bullion bank "storage".
The silver market is not rising because of a conspiracy. If so, it would be the most disorganized conspiracy that has ever existed. On the contrary. What we are seeing is the massive unwinding of a silver price control conspiracy that many of us predicted, in public or private for many years. The biggest scam in world history is ending. Sellers are now desperately trying to find metal. A lot of banks that were supposed to be storing silver are really storing air. Converting large amounts of air to large amounts of silver is difficult and bound to be costly. The process, once completed, will permanently increase the price of silver.
Intense upward pressure on silver prices is evident because physical silver is being purchased as never before. It is not stemming from trading on COMEX. In fact, deliveries at COMEX have been relatively small for several months. The process that is now ongoing is one that no performance bond committee can stop. COMEX could declare liquidation-only, as they did in 1980. The only end result would be to catapult the demand for and price of silver even higher. COMEX is now irrelevant except as a way for banks to bankrupt themselves if they continue to try to reduce the price of physical silver by manipulating futures prices there and taking on more short positions to do it. They can crash the paper futures price as much as they wish. It won't stop buyers from demanding physical silver in the real market outside COMEX.
The old prices were a result of a naive market, overwhelming short positions at the futures exchanges, manipulative trading techniques and a deceitful unallocated storage arrangement. The current silver pricing surge may look like a typical short squeeze, but it is nothing of the kind. It represents a permanent change in market perceptions. That is not to say that silver prices cannot fall, but the pressure to buy physical silver will continue to mount. When silver prices finally reach equilibrium, $50 per ounce might be the floor, rather than the ceiling. We don't know how high the price will climb under these circumstances.
One thing is clear. Buyers have discovered that they hold the power to defeat the largest financial firms in the world at their own game. But they still don't recognize the extent of their victory. Silver is the beginning, not the end. It is only one of the precious metals, but not the only one. The same unethical practices have been used for years to suppress the price of gold and platinum, for example. Both metals have been traded in a naive market, with overwhelming short positions at the futures exchanges, manipulative trading techniques and deceitful "unallocated" storage arrangements. There is no fundamental difference except that the metals have different names and appear at different locations on the periodic table.
Central bankers may be able to supply large amounts of the gold, for a while, to assist their minions in the commercial banking sector in the artificial suppression of gold prices. But, with emerging market central banks, the developed world's pension funds and university endowments, hedge funds and sovereign wealth funds all heavily buying gold, that resistance to the market cannot last forever. The most effective way to suppress gold would be to take steps to crash the entire world economy by cutting off most of the current flood of liquidity. However, even that would be only a temporary measure.
With stock prices collapsing, a mega shift from demand for stocks and bonds to demand for gold, silver and platinum would occur. One way or another, the current management of gold prices, which currently includes allowing a slow upward trend to relieve buying pressure without collapsing fiat currencies, will change into an explosion. This will happen with or without the help of market vigilantes.
So what will be the vigilante target after they are finished with normalizing the price of silver? Central banks like low platinum prices almost as much as low gold and silver prices. Manipulating platinum prices up and down helps bank profits. Since it has proven impossible to fully suppress price increases, the next best thing is to orient the manipulation process to create artificial high volatility, and thereby discourage conservative investors from buying the metal. This leaves more for industry at cheaper prices.
Platinum is an important metal in so many industries, not the least of which is the auto industry, that it seems to us that the Orwellian Ministry of Truth (aka, the New York Branch of the Federal Reserve) would strongly prefer a low, or at least, a very volatile price. Platinum, like gold and silver, also has a history of being used as money (in Russia) and possesses sufficient monetary qualities to be a significant threat to central bank emissions of fiat money. But, similar to silver and unlike gold, central bankers have no platinum reserves. Russia has large palladium reserves, but is unlikely to sell much, going forward, unless it is pressed against the wall by a steep drop in oil prices below its budgetary minimum (about $65 per barrel).
The platinum market is smaller than the silver market. The percentage of above-ground platinum is smaller, compared to consumption, than the percentage of above-ground silver. When the silver price revaluation runs its course, and silver is finally sell for a normalized value based upon its 16 to 1 ratio in the earth's crust, versus gold, we believe that vigilantes are most likely to turn toward platinum. We believe that J.P. Morgan Chase (JPM), accused of being one of the New York Federal Reserve's primary agents in manipulating stock, commodities and precious metals prices, knows this. It is actively buying huge amounts of physical platinum bars. Being 14.7 times rarer than gold, if platinum prices normalize to the metal's abundance, one troy ounce would be worth $22,000 right now, 14.7 times more than the current price of gold.
In a typical London Financial Times fashion, the silver long-side "conspiracy" article ends by saying that:
"History may be informative. After the Hunt brothers’ squeeze in 1980, the price of silver collapsed 80 per cent in four months."
Wishful thinking. We don't know where silver's price explosion will end. However, as more and more people realize that they have been duped into accepting fake prices for silver, bullion banks may need to buy 100 ounces of silver for every one ounce that is withdrawn. How high is that going to drive the price of silver? We'll leave that to you to decide.
Recently, we read an article published by Minyanville, which is usually a good source of information. But this particular Minyanville article advises buying U.S. dollars and selling silver short. The author claims not to be interested in past performance in making his decisions, but, then presents a chart of 1970s era silver prices to support his claim that the white metal is set up for a price collapse. There is great danger in blind adherence to charts. They are rear view mirrors, and cannot be used in the absence of common sense. If the focus of a driver's attention is on the rear view mirror, he will surely crash.
The first part of the Minyanville article recommended trade might work, because the U.S. dollar may rise for a while, if the Fed stops counterfeiting (aka quantitative easing) June. However, the second part of the trade will fail. At best, there will be a few weeks or a few months of fallout from the end of QE-2 if it happens. It is true that during that time the price could fall substantially, especially if helped along by the members of the silver price conspiracy. After that, however, it will be back to the races.
Assets in a collapsing stock market will eventually be shifted into precious metals. Since the silver vigilantes are extremely well capitalized, the main achievement of the price manipulators will simply be to allow them to buy more silver with the same money. In the end, their delivery obligations will simply be larger. Simply put, the old methods of price manipulation will no longer work against an informed market.
The question of where precious metals vigilantes' attention will turn after mopping the floor with the silver short sellers may be a moot point. If they manage to bankrupt the bullion banks (and associated hedge funds, shadow banking system entities, etc.), it will be game over. Free of price management, gold and platinum will join silver in a price explosion to the stratosphere, and they won't need any help from vigilantes. But private profit appears to be only one of the motives for silver market manipulators.
Another motive is to support irredeemable fiat paper money issued by central banks. Therefore, a massive bailout may save them from bankruptcy. After the short-side manipulators finally give up, many contracts for silver delivery will be settled for astronomical sums of fiat money. As schemes and scams continue to unwind, the next few years are going to be very interesting.
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Avery B. Goodman is a securities lawyer in Colorado.
