Five Reasons for the Recent Surge in Gold

1. Seasonality



2. Continuing Risks in the Financial System



3. Moral Hazard: Tipping Point In Confidence From Over a Decade of Monetary and Regulatory Policy Errors






4. Blowback from Banking Frauds on the Rest of World



5. A Failure in Political Leadership to Deliver Essential Reforms

"Let's Just Whack the Oil"

“The markets used to be about capital formation,” said Mr. Quast, the consultant. “Now 80 percent of trading is driven by some form of statistical arbitrage. We are buying into a statistical house of cards that could unravel very quickly.”

Reading the NY Times article excerpted below, one finds that Optiver is a rather small time operation with a wonkish bent operating out of the Netherlands, with profits that barely match a decent US tradering department's annual bonus.

But the method which they are using is similar to the techniques being used by many of the large 'market makers' who are 'providing liquidity' while reaping large and improbably consistent profits by manipulating markets.

The manipulation itself is nothing new. Large Wall Street banks have been using their size to push the markets around for many years, as in the case of Citigroup which was caught manipulating prices in European bond trading. Citigroup Fined Over 'Dr. Evil Bond Strategy

Then of course there was the manipulation of the energy markets by Enron, which held the state of California hostage.

The difference is that in the past the manipulation was implemented using the size of the trades and the deep pockets backing them. Size mattered, and the techiques were not elegant, more like an old-fashioned smash and grab.

Today the bias is towards stealth and speed, and colocation of your trading daemons with the Exchange to obtain an edge on information and execution. Having key regulators and politicians on your payroll is always a plus in any organized criminal activity.

No wonder China is so angry about the derivatives losses being realized by their State Owned Enterpises. The manipulation around key prices and dates in many US markets has been apparent for some time, with a wink and a nod around option expirations for example.

But now this manipulation is getting so blatant and widespread and regular that it is crippling daily market operation, not to mention robbing the general public of millions of dollars every day in their 401K's, pensions, and investment accounts. It has more of the appearance of organized crime than it does of a financial system.

Optiver was guilty of manipulation it appears, but also of being small and Dutch, and a competitor to the larger gangs of New York and London.

It will be more impressive when the CFTC and the SEC finally does something to clean up the markets by taking on the too big to fail banks that are sucking the life out of the US national economy and destroying the integrity of price discovery and the markets around the world.

To accomplish this, the US must dismantle the partnership in profits between Wall Street and the national government, which is morphing into a kind of velvet coup d'etat.

Yes, the markets used to be about capital formation. And capitalism used to involve risk management, with the consequence of profit and loss. But when Robert Rubin, then Treasury Secretary for Bill Clinton decided it was less expensive and more convenient to artificially buy the SP futures market through the Working Group on Markets, and manipulate prices rather than to suffer a messy stock market decline and clean up afterwards, moral hazard was unleashed. And so here we are today

We hope but do not believe that the impetus for reform will come from the US government, or financial industry, or even the voting public which the elites are now ignoring. After all, they don't pay the bills. It will come from the other governments and regulators of the world, who it appears have finally had enough interference and disruption of their economies and markets from US dollar colonialism.


NY Times
Inquiry Stokes Unease Over Trading Firms That Shape Markets
By Landon Thomas Jr.
Published: September 3, 2009

LONDON — Its superfast, supersecret oil trading software was called the Hammer.

And if the Commodity Futures Trading Commission is right, the name fit well with an intricate scheme that allowed commodity traders in Chicago working for Optiver, a little-known company based in Amsterdam, to put their orders first in line and subtly manipulate the price of oil to the company’s advantage.

Transcripts and taped conversations of actions that took place in 2007, included in the commission’s case, reveal the secretive workings of high-frequency trading, a fast-growing Wall Street business that is suddenly drawing scrutiny in Washington. Critics say this high-speed form of computerized trading, which is used in a wide range of financial markets, enables its practitioners to profit at other investors’ expense.

Traders in the Chicago office of Optiver openly talked among themselves of “whacking” and “bullying up” the price of oil. But when called to account by officials of the New York Mercantile Exchange, they described their actions as just “providing liquidity....”

Optiver describes itself as one of the world’s leading liquidity providers, a trading firm that uses its own capital to make markets. It seeks to profit on razor-thin price differences — which can be as small as half a penny — by buying and selling stocks, bonds, futures, options and derivatives. (Derivatives represent about 65 percent of its business, equities 25 percent, and commodities and others make up the remaining 10 percent.)

But the extent to which market making (providing liquidity to markets that need it) and proprietary trading (the pursuit of pure profit with a firm’s own money) can properly coexist has become a thorny question for regulators. They are grappling with an exploding business that makes up as much as half the overall trading in the United States and a growing share in Europe as well...

“These are proprietary trading shops that are masquerading as market makers,” said Tim Quast of Modern IR, a consulting firm that advises corporations on market structure issues.

The Securities and Exchange Commission has opened up an investigation into high-speed-trading practices, in particular the ability of some of the most powerful computers to jump to the head of the trading queue and — in a fraction of a millisecond — capture the evanescent trading spread before the rest of the market does...

Called low-latency trading, this blend of speed and opportunism is the essence of Optiver’s business model.

It deploys a sophisticated software system called F1 that can process information and make a trade in 0.5 milliseconds — using complex algorithms that let its computers think like a trader. And the company is so careful about preserving its secrets that when some traders and engineers left for a rival operation recently, Optiver hired private investigators and subsequently sued the former employees on charges of making off with intellectual property...

Mr. Dowson acknowledges that Optiver was so aggressive in conducting its proprietary trades in some smaller stocks that their activities “were as big as the volume traded on the day.”

It is precisely this — high-powered computers and the swagger of those who operate them — that is causing worries over high-frequency trading’s increasing sway. (No one can touch 'the-bank-that-must-not-be-named' for swagger - Jesse)

“The markets used to be about capital formation,” said Mr. Quast, the consultant. “Now 80 percent of trading is driven by some form of statistical arbitrage. We are buying into a statistical house of cards that could unravel very quickly.”

Hong Kong Bringing Its Gold Home From London

"There is precious treasure and oil in the house of the wise, but a fool consumes all that he has and saves none."
Proverbs 21:20

The People's Republic of China has been urging its citizens to convert some part of their savings into gold and silver, having recently liberalized the procedures by which individuals can obtain it.

Hong Kong has built a new world class bullion vault, and is repatriating its gold reserves from the London Bullion Market Association (LBMA), where some speculate it had been committed for sale many times over. Hong Kong wishes to become its own regional Asia market maker for bullion metals.

The rest of the world will rein in the Wall Street financial establishment, because the bankers have demonstrated an inability to manage their financial affairs honestly, and those of the world.

Strange times indeed, when the hard money capitalists are in Asia, and the fiat money oligarchs and statists are in the Anglo-American West.

Marketwatch
Hong Kong recalls gold reserves, touts high-security vault
By Chris Oliver
Sep 3, 2009, 6:22 a.m. EST

In a challenge to London, Asian states invited to store bullion closer to home

HONG KONG (MarketWatch) -- Hong Kong is pulling all its physical gold holdings from depositories in London, transferring them to a high-security depository newly built at the city's airport, in a move that won praise from local traders Thursday.

The facility, industry professionals said, would support Hong Kong's emergence as a Swiss-style trading hub for bullion and would lessen London's status as a key settlement-and-storage center.

"Having a central government-sponsored vault would create a situation where you could conceivably look at Hong Kong as being a hub, where metal could be traded for the region," said Sunil Kashyap, managing director at Scotia Capital in Hong Kong, adding that the facility was the first with official government backing in the region...

CFTC to Begin Releasing New Commitments of Traders Reports on US Futures Markets

A step in the right direction for sure.

A much needed enhancement would be to report the five largest position holders in key markets, on the long and short side over a certain size limit on a weekly basis.

Release: 5710-09
For Release: September 2, 2009

CFTC Implements New Transparency Efforts to Promote Market Integrity

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it will begin implementing new transparency efforts outlined in a July 7, 2009, statement by CFTC Chairman Gary Gensler. Starting Friday, September 4, 2009, the CFTC will begin disaggregating the data in its weekly Commitments of Traders (COT) reports and begin releasing, on a quarterly basis, data collected from an ongoing special call on swap dealers and index traders in the futures markets.

“A core mission of the CFTC is to promote market transparency,” CFTC Chairman Gary Gensler said. “Last September, the CFTC recommended disaggregating our weekly Commitments of Traders reports. In July, I announced that we would also periodically release data on index investors’ participation in the commodity futures markets. I am pleased that as of Friday, September 4, we will be able to take these steps toward increased transparency. For the first time, we will break out managed money and swaps in our COT reports and release information on index investment to give the public a better of view of trading activity in the futures markets.”

Commitments of Traders (COT) Reports

For decades, the CFTC has provided the futures industry with COT reports consisting of aggregated large-trader position data to shed light on the changing composition of the markets. The reports are based on a request by Congress for an annual report, upon passage of original enabling legislation in the 1920’s, and have been intensified over time into weekly reports in several formats and a weekly Commodity Index Supplement for 12 agricultural markets, begun in January 2007.

Beginning Friday, September 4, 2009 (for data as of September 1, the CFTC will publish additional COT data for 22 contract markets, including major agriculture, energy and metals markets. The COT reports currently break traders into two broad categories: commercial and noncommercial. The new reports will improve upon the existing reports by breaking the data into four categories of traders: Producer/Merchant/Processor/User; Swap Dealers; Managed Money; and Other Reportables.

The CFTC intends to produce the same disaggregated data on all of the remaining physical commodity markets for which we currently publish COT data. The agency will continue to also release the traditional COT reports for a transition period until at least the end of 2009. This will allow the public to become familiar with the new reports as well as comment to the CFTC as to any further possible enhancements (Comments should be submitted via email to secretary@cftc.gov by October 1, 2009). The CFTC also plans to soon release three years of historical data for the new report.

The CFTC also is working to create a new COT for all of the financial markets in a form that will improve the transparency of those markets. The categories of this new financial COT may be different from those being applied to the physical markets, described above.

The CFTC is concurrently working on improvements to the agency’s Form 40 and other methodologies to improve the accuracy of trader classifications.

See Disaggregated COT Explanatory Notes under Related Documents for additional information.

Index Investment Data

In addition to disaggregating the CFTC’s COT reports, the agency will begin periodically releasing data on index investment in the commodity futures markets. In September, 2008, the CFTC published a Report on Swap Dealers and Index Traders that was based on data received from our special call authority. The CFTC continued this special call and enhanced the information disseminated in the September report. Starting Friday, September 4, the agency will begin releasing the data on a quarterly basis with a goal of eventually releasing this data monthly.

The new data will include both gross long and gross short positions and will update data in the previously released report to include some additional data.

Martin Hennecke: Protecting Your Wealth in Volatile Markets

"Hennecke stressed that investors should go for physical forms of gold and other
precious metals rather than "paper gold investment scheme where there isn't full
backing, where the metal might be leased out or used for derivatives. That's
crucial because there is 80 times more paper gold in the market than actual
physical metal in existence in the planet."

For the most part alternative currency trades remain 'highly specialized' investments, not often seen in the 401k, IRA, or the average brokerage account.

If gold and silver go mainstream, which they often will do in times of crisis of confidence, the rally may be rather impressive on short covering alone. Expect the exchanges to invoke special rules to allow for settlement of delivery obligation in cash or kind rather than bullion, and at artificially low, albeit significantly higher, prices.

But this may not help those who are holding gold in 'custodial accounts' where the same gold has been lent out to the market and sold, or is loosely mingled with multiples of uncertain ownership.

Can't happen? Who would have thought that one of the largest retail commodity brokerages, Refco, could roll over? Counter party risk is always an issue when you are 'off-exchange.'

“The desire of gold is not for gold. It is for the means of freedom."
Ralph Waldo Emerson

Go for Gold and Silver: Strategist
By CNBC
Wednesday, 2 Sep 2009 2:44 AM ET

China's key stock index recovered its poise on Tuesday, rising nearly 0.5 percent after diving 6.7 percent the day amid liquidity concerns and worries that lending growth may slow in the country. In August alone, the Shanghai Composite lost nearly 22 percent, snapping a seven-month winning streak.

If those stock gyrations are hard to stomach, there are other investment options to help ride out the wild swings in China, according to Martin Hennecke, associate director at Tyche.

For one, Hennecke liked convertible bonds in China, saying he is bullish on the Chinese economy given its fundamental strength, compared to Europe and the U.S. (No thank you for now, its a bubble and a bit less than free market environment, even given its bawdy good time with capitalism over the past ten years. - Jesse)

"Valuation is not as cheap anymore compared to the beginning of the year. Hong Kong-listed China companies are slightly cheaper than (those in) Shanghai," Hennecke said on CNBC Asia's "Protect Your Wealth". " One who plays more cautiously -- convertible bonds in China are an option."

Gold and silver ranked among Hennecke's top recommendations, as China, the world's largest gold buyer this year, is likely to buy more of the yellow metal going forward.

"Whether we see a further crisis or a recovery globally, with inflation coming back up again...gold should do quite well and it hasn't risen much this year yet," said Hennecke.

Hennecke stressed that investors should go for physical forms of gold and other precious metals rather than "paper gold investment scheme where there isn't full backing, where the metal might be leased out or used for derivatives. That's crucial because there is 80 times more paper gold in the market than actual physical metal in existence in the planet."

Hennecke also preferred exposure to direct agricultural commodities, as opposed to investing in commodities through equities, where markets have already rallied sharply.

"Agricultural commodity prices are similar to precious metals. (Prices) across board are mostly dropping, apart from sugar and a few items. So direct commodities are quite undervalued and quite cheap now," he explained. "Agricultural prices are likely to rise quite substantially."

Hennecke expected the investment environment to be volatile, as the U.S. will be saddled with a massive debt load over the next ten years.

"It's tricky to see where stock markets are heading, it depends on how fast inflation feeds through as a result of the debt problems." (Precisely correct, except for those who prefer to see what they have already decided *should* happen. They are often wrong, but rarely uncertain. - Jesse)

Russian Professor Panarin Sees US Following the Russian Collapse Model

Forecasts based on social outcomes are an 'iffy' thing because of the enormous amount of exogenous variables.

This particular forecast made some time ago is important, not because this professor may be more right or wrong than any other 'soft forecaster,' but because a signficant portion of America's major creditors, those outside the US, hear this and find it to be credible.

Professor Igor Panarin, whose book The Crash of America is just out, now claims that by November the book will be yesterdays news because the events described in it will have alrady come to pass.

We are not so gloomy or certain in our own outlook, and tend to discount the statements made by authors on book tours. But we do find ourselves drawn to the example of the financial decline of the Soviet Union as more probable for the US than other possible outcomes, such as the lingering malaise of Japan. It would be ironic and instructive if both Cold War behemoths eventually foundered after their many years of epic effort and wasted spending on their military complexes and regional wars.

It has never been more apparent that Obama must show leadership, or like his predecessor Mr. Bush, must find a galvanizing event to bring a badly needed focus to his presidency. One can see his Administration reaching for that one issue to distract from the awful financial problems: health care reform, swine flu preparations, whatever might bring some focus on action to a majority party in disarray with a rookie at the helm.

They had their opportunity with the financial crisis, but were hopelessly put off track by hidden scandal, conflicts of interest, a corrupt campaign contributions process, and of course, too many chiefs of inadequate stature who tended to pull down and smother the seasoned leaders able to have a vision and implement it such as Paul Volcker.

Robert Reich presented a nice apologia for the Democrats on Health Care Reform the other day, and it was credible. He is one of the few members of the Clinton Administration for whom we have enduring respect for his intelligence and integrity. Why he has no position in the current Administration is puzzling indeed.

The problem is that such internal diffusion absolutely cries out for a leader like a Franklin Roosevelt to bring some energy and action to the diversity of ideas.

A scary thought perhaps, given the weighting of alumni of the Clintons and Wall Street in this Administration, absolutely marked by a lack of 'outsiders.'

Obama is approaching his administration like a community organizer, trying to build consensus and look for 'local' leaders to take up the challenge when he leaves. But this is not how a leader functions in moments of crisis.

"A leader is one who knows the way, goes the way, and shows the way."
John C. Maxwell

Perhaps when the autumn television shows begin their debuts, the chief American idol may find his task a little less onerous as distraction and forgetfulness sets in once again at the United States of Amnesia. Wall Street is counting on it, and as only Benmosche has dared to articulate, yearns to tell the Congress, the regulators, and the public to 'shove it.' After all, its a well-established principle on the Street that you get to 'eat what you kill,' and the would be oligarchs are hungry.

Rumour du Jour - a Large US Bank Is In Trouble

As they say on the financial infomercial channels, "US equities appear to be out of favor today."

There are rumours swirling the trading desks that a large US bank is in trouble, and will need some help getting itself re-organized.

The name Wells Fargo has been mentioned, and there is an associated six percent drop in the stock, with a groundswell of put option activity. It does seem like a 'setup' to us. There are also rumours that Cerberus is in trouble (and there is plenty of smoke on that one.)

There is a contrary view that this is a 'setup' to suck in the shorts and help to trigger a massive rally when the Jobs numbers are reported on Friday.

There is a flight to safety into the dollar and treasuries, but interestingly enough also gold and silver, as 'investors' exit US stocks.

So far we are holding a key support level around 995 on the SP futures, and we tend to discount most rumours that make it to bubblevision rather heavily. If there is any real news it should come out in the evening.

Let's see what happens. We're hedged to the short side which is where we have been coming into the day, anticipating a pullback to key support. We're there now.

There was 'good news' today, and the market ignored it and went sharply lower. That may be significant but it is too soon to tell for sure. A breakdown in equities from here would be more significant to our minds.

In sum, this is a highly manipulated market, full of speculation and hot money. The Obama Administration is failing badly to reform the US financial system, and so here we are, trading on hot money and rumours.

Hedge Funds Betting on a Deflationary Market Collapse

The observations herein regarding the nature of this stock market rally are quite in parallel with our own.

Buying the dollar to play the debt deflation trade may also be a good one in the short run, especially if leveraged foreign punters have to quickly raise cash to cover bad bets made in the US markets.

However we would have to add that this scenario assumes no black swans with regards to the heavy overhang of US dollars being held by overseas central banks.

If we were in such a position, we would be selling the rallies, given the huge amount dollars on the books.

Bloomberg
Goldman Sachs Wrong on Economic Recovery, Macro Hedge Funds Say
By Cristina Alesci

Sept. 1 (Bloomberg) -- Paul Tudor Jones, the billionaire hedge-fund manager who outperformed peers last year, is wagering that Goldman Sachs Group Inc. and Morgan Stanley got it wrong in declaring the start of an economic recovery.

Jones’s Tudor Investment Corp., Clarium Capital Management LLC and Horseman Capital Management Ltd. are taking a bearish stand as U.S. stock and bond prices rise, saying that record government spending may be forestalling another slowdown and market selloff. The firms oversee a combined $15 billion in so- called macro funds, which seek to profit from economic trends by trading stocks, bonds, currencies and commodities.

“If we have a recovery at all, it isn’t sustainable,” Kevin Harrington, managing director at Clarium, said in an interview at the firm’s New York offices. “This is more likely a ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.”

Equity and credit markets have rallied on hopes that government intervention is pulling the U.S. out of the deepest economic slump since the Great Depression. The Standard & Poor’s 500 Index jumped 51 percent from its 12-year low in March through yesterday.

The economy will expand at an annualized rate of 2 percent or more in four straight quarters through June 2010, the first such streak in more than four years, according to the median estimate of at least 53 forecasters in a Bloomberg survey.

Tudor, the Greenwich, Connecticut-based firm started by Jones in the early 1980s, told clients in an Aug. 3 letter that the stock market’s climb was a “bear-market rally.” Weak growth in household income was among the reasons to be dubious about the rebound’s chances of survival, Tudor said.... (aka the growth in the median wage that we have been harping about - Jesse)


A focus on misleading indicators is driving markets, macro managers say. (Are there any other kind coming out of Washigton or Wall Street these days? - Jesse)

Clarium watches the unemployment rate that accounts for discouraged job applicants and those working part-time because they can’t find full-time positions, Harrington said. July joblessness with those adjustments was 16 percent, according to the Department of Labor, rather than the more widely reported 9.4 percent.

The housing data isn’t as rosy as some see it, Harrington said. As existing U.S. home sales rose 7.2 percent in July from the previous month, distressed deals including foreclosures accounted for 31 percent of transactions, according to the National Association of Realtors, a Chicago-based trade group.

A report by the Mortgage Bankers Association, based in Washington, showed the share of home loans with one or more payments overdue rose to a seasonally adjusted 9.24 percent in the second quarter, an all-time high.

Clarium, which oversees about $2 billion, is positioned for an equity bear market through investments in the U.S. dollar, Harrington said. Falling stock prices will strengthen the currency by forcing leveraged investors to sell equities to pay down the dollar-denominated debt they used to finance those trades, he said.... (That's one way to play it, conventionally, if the swans stay white - Jesse)

The Financial Accounting Standards Board voted in April to relax fair-value accounting rules. The change to mark-to-market accounting allowed companies to use “significant” judgment in gauging prices of some investments on their books, including mortgage-backed securities that plunged with the housing market.

Banks are reporting better earnings because they haven’t been forced to account for their losses yet, Clarium’s Harrington said.

“We haven’t fixed the problem,” he said. “We’ve just slowed down the official recognition of it...”

“Despite every effort by government in North America and Europe to avoid deflation,” Horseman wrote, “the current numbers suggest they are losing the battle.”

Chinese State-Owned Companies Object to Face-Rippings, Wall Street Indignant

After one too many face-rippings by the merry Pranksters of Wall Street, China's state-owned companies have run to their government to complain about the fraudulent nature of their derivatives contracts.

The hearty capitalists of Wall Street wouldn't run to their government and whine and complain if the market went against them.

Except of course if they needed several trillion dollars because they lost all their money gambling. Then they would just threaten to hold their breath and wreck the economy until the Great Reformer gave them all the change the country could spare, and then some.

If the US will not put its house in order, the rest of the world will increasingly start to rein in the the US financial institutions.

Reuters
Beijing's derivative default stance rattles banks
Mon Aug 31, 2009 7:42am EDT

For banks that are hoping to sell more derivatives hedges in China, the world's fastest-expanding major economy and top commodities consumer, the danger goes beyond the immediate risk to existing contracts to the longer-term precedent that suggests Chinese companies can simply renege on deals when they like.

The report follows an order from SASAC in July that required all central government-controlled state companies engaged in trading derivatives to make quarterly reports about their investments, including details of holdings and performance.

But the reported letter opened several important questions that could not immediately be answered.

"If we were among the banks receiving that letter, we would be very angry. But now the key is to find out more details on the letter: In whose name the letter was issued, the government or the corporate's? And under what was the reason for defaulting?" said a Singapore-based marketing executive with a foreign bank.

The source, whose bank did not receive a letter, said that Air China, China Eastern and shipping giant COSCO -- among the Chinese companies that have reported huge derivatives losses since last year -- had issued almost identical notices to banks.

"If it's in the name of the government, the impact will be very negative," said the source, who declined to be named.

Beijing-based derivatives lawyers said the so-called "legal letter" has no legal standing -- SASAC as a shareholder has no business relationship with international banks.

"It's like the father suddenly told the creditors of his debt-ridden son that his son won't pay any of his debt," said a lawyer from the derivatives risks committee of the Beijing Lawyers Association. (or perhaps its more like a son who has been cheated by unscrupulous businessmen going to his father who is a Mafia don with big guns, instead of complaining to the Better Business Bureau - Jesse)

It's also unclear why Chinese state firms, which have complained that their foreign banks sometimes did not disclose full information of potential risks when selling them complicated products, did not seek redress through the courts. (or binding arbitration lol. - Jesse

"If that is the case, these firms should seek through legal measures to safeguard their rights, instead of turning to the authorities for political interference," said a different lawyer. (LOL - Jesse)

SASAC took over the job of overseeing SOEs' derivatives trading from the securities regulator in February after several Chinese firms reported huge losses from derivatives....