Monday, December 6, 2010
From The Nation newspaper:
What times we live in! Gold has been set aside as a commodity and the banknote has become a monetary instrument instead. This is the opposite of what it has been for thousands of years.
From my discussion about the monetary history of gold in the previous article, "Timeless Passion of Gold, Part 1", gold had been considered as 'real' money throughout the history of monetary instruments. Although civilisations have switched to using fiat (paper) money as an official medium of exchange instead of gold; gold is still a material with full qualities of exchange. As time passes, gold has become a commodity that can be bought by money instead of a monetary instrument that is used for purchases of other commodities.
As a commodity, gold is viewed as an asset for investment like stocks, bonds, options etc. The purpose of which is for speculation (betting on capital gain). Nevertheless, investing in gold might not be as exciting as investing in other investment vehicles according to the general notion of investment strategies. Gold only gives out capital gain (or loss) when you sell it; it does not give out cash flows like bonds or stocks; and the price moves relatively slow. Therefore, the realisation of gain (or loss) could take a long time and possibly lead to opportunity loss. Moreover, gold is not an asset that is appropriate for daily trading because of its illiquidity, with one exception for Gold Futures, GF.
So if gold is not deemed as a good investment choice, should it still be worth gaining our attention?
The answer is yes, especially when governments around the world are struggling to secure their fragile economies by injecting massive amounts of money into their economies at the speed of light through Quantitative Easing and other economic stimulus packages. This can raise the inflation expectation and eventually deteriorate the real value of currency. As currencies lose their values, more people are turning their interests to gold; for example, emerging markets like China and India are investing more in gold and pushing the demand for gold up even further; hence, gold prices skyrocketed. The nominal price of gold reaches "All Time High" again and again, outstripping the gain in all other major currencies. The higher price does not mean that gold is becoming more expensive; instead, currencies are becoming relatively cheaper. Do not forget that the background of gold is real money; it has retained its real value as it always has since the gold supply has neither increased nor shrunk much. Looking at it this way, the gold price only reflects what is going on in the economy or the reaction to monetary policies, not the other way around. Therefore, whenever there is a crisis followed by excessive liquidity, the nominal gold price will rise with inflation as opposed to banknotes that will easily be impaired during high inflation. This is why gold is one solution for inflation hedging, to be more precise, a crisis hedging.
The inherent value of gold is the reason why gold is an appropriate tool to hedge against inflation. Since its value does not get diluted with inflation, its demand increases every time there is inflation. To elaborate on that point, imagine an 80-year-old granny digging up her treasure she buried in her backyard when she was twenty, if that treasure were a one-dollar banknote, the banknote would worth nothing compared to its value 60 years ago; on the other hand, if the treasure were a gold bar, it would be worth a fortune comparing to when she buried it. Amidst the uncertainties of economic outcomes, which significantly affect the value of currencies, the store value of gold is one certainty that people can rest upon. Thereby, given the current situation of a weakening dollar, gold has once again regained its popularity.
All being said, I want to summarise that gold should rather be viewed as an object that can naturally maintain its value and used as a store of value than being viewed as an investment alternative that yields returns. Gold has inherent value that can't be controlled, at least not as much as with paper money. So buying gold would be a wise decision if you were to believe that 600 billion dollars from QE2 is just an appetizer and needs protection for the upcoming bitter main course. All in all, gold could never be overshadowed by the storms of financial catastrophe. Gold still holds its major role in the world economy from generation to generation.
People still desire gold as they ever have; this is truly … the "Timeless Passion of Gold".
By Sarun Lerdhirunwong, Risk Management Officer, Financial Risk Management and Operations Department, Bank of Thailand. The views expressed are the author's own.
First a little background to set the stage....
Computer Commodity Trading
Beginning in the early 1970's, computers were introduced to control the order flow in financial markets. Order processing was drastically changed with the New York Stock Exchange's "designated order turnaround" system (DOT, and later SuperDOT) which routed orders electronically to the proper trading post to be executed manually, and the "opening automated reporting system" (OARS) which aided the specialist in determining the market clearing opening price (SOR; Smart Order Routing).
Today we have algorithmic trading, auto trading, algo trading, black-box trading, robo trading...and the list goes on. Algorithmic Trading is widely used by pension funds, mutual funds, and other buy side institutional traders, to divide large trades into several smaller trades in order to manage market impact, and risk. Sell side traders, such as market makers and hedge funds, claim to provide "liquidity to the market", generating and executing orders automatically. In "high frequency trading" (HFT) computers make the decision to initiate orders based on information that is received electronically, before human traders are even aware of the information.
Over the years computers have played an increasingly important role in everything related to our "free and open market system" such that today's financial markets CANNOT function without computers. The Federal Reserve, US Treasury, Wall Street insiders and the Exchanges were all instrumental in the integration of computers but they also gained access to secret trading information before the order hit the open market. This information coupled with the fastest computers on earth made market manipulation easy.
This power, the power to control markets, was too much for anyone to resist. Over time those who were given the official key to the back office operations have used and abused their position to its manipulative fullest. Although some of the time they used this power in an official capacity (for the good of the country), more often than not it was used in an unofficial capacity... for the good of themselves.
Bernie Madoff, the ex-head of the NASAQ, was a great example of this public to private transition as his private trading firm was all computer algorithm based market rigging operations. There are many other ex-Exchange/Wall Street officers that went on to open computer trading operations. Many continue to thrive such as EWT, LLC which became a dominant trading/market making firm using "state-of-the-art technology and algorithmic models". EWT was founded by Vincent Viola (ex NYMEX Chairman) and David Salomon (reported to Robert Ruben at Goldman Sachs) and are also an "Authorized Participant" in the iShares Silver ETF (SLV).
Are you beginning to see the problem? He who has the biggest, fastest and smartest computers (or programmers) can set the price and will ALWAYS WIN! No longer is there any kind of true supply/demand factors related to commodity exchanges or prices. Computer trading should be outlawed...the convenience and efficiency it provides does not offset the detrimental effects and potential for total and complete market manipulation.
CFTC Created to Cover Up the Manipulation
When the computer rigging programs were implemented there needed to be some kind of cover to ensure secrecy and maintain a false confidence in free markets. In 1974 Congress passed the Commodity Futures Trading Commission Act that overhauled the Commodity Exchange Act and created the CFTC as an independent agency with powers greater than those of its predecessor agency, the Commodity Exchange Authority.
From that moment the CFTC has been run by board appointees that showcased a revolving door of Wall Street insiders ensuring that the computer market rigging operations were not interfered with. The only notable exception is Brooksley Born who was fired by President Clinton when she found out the truth about our supposed "free markets" and tried to warn everyone. (see The Warning)
Listen to Brooksley Born explain the problems in her own words when she accepted her JFK Profiles in Courage Award in August 2009.
A while back I gave up my fight against the CFTC as I determined that they were NOT protecting the best interest of the investor but rather they were protecting the computer market rigging operations and the people involved. Here is one of my last articles on the subject:
Road to Roota III -- Who's the little man behind the curtain?
Now that you have some background let's get back to $6,000 Silver!
Historically, when any price rigging operation stops the violence of the ensuing price changes are determined by the length and scale of the manipulation as well as the underlying fundamentals of the item being rigged. Take for example the famous 1980's case of the Hunt brothers trying to corner the silver market. From early 1974 the Hunt brothers started accumulating silver which ultimately drove the price from $6/oz to $50/oz until January 21, 1980 when the CFTC finally pulled the plug on their operation. Within 2 months the price of silver plummeted from $50/oz to $10/oz and the silver price was back under control of the US Government and Banking Cabal. An excellent account of what transpired can be found here.
This account shows what can happen to the price of a manipulated commodity when the price manipulation is ended. In the case of the Hunt Brothers the manipulation lasted 6 years and involved approximately 130M oz of physical silver and 90M oz of COMEX silver contracts. This was an attempt at a Long Silver price manipulation but it was going on while the Short Silver Official manipulation was going on trying to keep the price down. The only way the Hunt's accumulated so much silver without the price heading into the many thousands of dollars was the official computer price suppression operation.
The manipulation was ended when the CFTC stopped all COMEX Silver purchases and allowed only silver liquidation sales instantly driving the price down. In 1980 the US Government held 3B oz of silver and in order to maintain the lower silver price levels they sold the entire stock of silver into the market over the next 25 years. That excess supply combined with other governments divesting their silver was enough to continue the price suppression scheme for almost 40 years. That supply is now gone.
One Bank has the Hot Potato
So here we are 40 years after the official manipulation of silver began and the world is finally awakening to the situation. The CFTC, having investigated silver manipulation allegations twice previously, has had an open investigation into silver market manipulation for almost 2 years. They have even stated that the investigation was moved to the "Enforcement Division" within the CFTC which pretty much tells you what the conclusion of the investigation revealed. The FBI has separately stated that they are investigating JP Morgan for silver market manipulation. These two facts and the absolute SILENCE from JP Morgan are strong indicators that the long term manipulation of silver is about to end.
Ted Butler of Butler Research has been exposing the official manipulation of Silver for the past 25 years. His research was instrumental in exposing the gold/silver leasing operations and the massive concentrated short positions in both gold and silver. On September 3, 2008 Butler published a report entitled Fact Versus Speculation where he showed how one bank, JP Morgan Chase, took over the Bear Stearns Silver COMEX Short position of 30,000 contracts or 150M oz.
Since this report was published JP Morgan has continued its silver market rigging antics in an effort to get out of this precarious short position. After Butler exposed JPM as the culprit there have been wild orchestrated swings in the price of silver as JPM attempts to cover their massive COMEX short position. The price of silver has risen from $13 to currently over $20 in this time frame and the size of the short position held by JP Morgan has gyrated wildly between 30k and 40k contracts as they desperately try to shake the longs to cover their shorts. But even with this rise in price the short position is STILL above 30k contracts according to the CFTC's latest Bank Participation Report.
Add to this various silver market manipulation tools such as naked shorting silver ETF's, falsifying COMEX warehouse data, unallocated silver, leasing and swapping metal and you have a situation that dwarfs the Hunt brothers case.
Of course, JP Morgan is no ordinary bank because they are also the LARGEST derivative holder in the WORLD at $75.3 TRILLION! Do remember Warren Buffett calling derivatives "Weapons of Mass Financial Destruction"? Well, JP Morgan holds the mother load when it comes to silver too with $8.4 BILLION of Silver derivative contracts!
(OCC Report table 9: Classified as "PREC METALS"... might be a little platinum but not much).
This report was for the quarter ending June 2010 when the price of silver was $18.50. That translates into over 450 MILLION OUNCES of notional silver derivative contracts that remain open!
COME ON PEOPLE!
I'm starting to think my $6,000/oz silver call is too conservative!
What's going to happen when JP Morgan's derivative monument comes crashing down...which it almost did in September 2008?
So here's where I get to $6,000 per oz for silver.
1) I know silver has not been freely traded in 40 years so today's price if irrelevant.
2) I, like many, estimate there is only about 1B ounces in above ground physical silver for investment purposes.
3) I, like many, estimate there is only 5B ounces of above ground physical gold for investment purposes.
4) If the price of gold is not manipulated, like the banks claim, then the price of silver should be 5x the price of gold due to its supply/demand fundamentals.
CONCLUSION: The price of gold is around $1,300/oz so the true Fair Market Value of Silver should be over $6,000/oz in a FREE market!
It's simple, if you remove ONE BANK from the supply side of the equation the price of silver will SKYROCKET overnight.
ONE BANK controls the price of silver.
ONE BANK controls the fate of our monetary system.
ONE BANK is behind the curtain pulling the silver manipulation levers.
ONE BANK has control over a nation that was founded by "We the People".
ONE BANK MUST GO AWAY TO SAVE OUR LIBERTY!
May the Road you choose be the Right Road.
Well they maybe right in their spoilt western enclaves for now, but when it all goes to hell in a hand basket, gold (and silver) revert to what they have been since the dawn of time, the ultimate medium of exchange and store of true wealth.
Brilliant Video detailing life and death in Zimbabwe. Life is given by Gold, death comes to those without Gold. Is this why God decreed Gold & Silver as Money?
Note: Every fiat currency pretending to be money has failed eventually, all 3800 of them since 407BC.
3 December 2010
Since last August the silver market has been on a tear to the upside and the physical market is now again facing reported shortages. The demand for coin is at its highest levels in 25 years as reported by coin dealers.
Once silver broke above $20 dollars there was a triple demand factor that came into play.
The first is the industry that uses silver. It's made a mad dash to the buy line to secure supplies. No user in his right mind is going to stick around and wait for the shortage to become acute and hold up production. That is a show stopper and industrial use is the largest demand factor in the fabrication of silver. I was informed by a person who was building a database for a company in late October that the company she was doing business for was in panic mode buying up to a year's worth of silver so as to hedge for future price increases. She did not even work there and was providing a service for the business. She said that the talk was rampant among the executives.
Consider what Ted Butler, who was way ahead of the curve wrote in 2006
World silver inventories are at the lowest point in 200 years. Industry requires over 900 million ounces each year. Silver is the best conductor of electricity. Every computer, server, monitor, cell phone and switch must have silver. Lasers, satellites, high-tech weaponry and robotics, all require silver. Digital technology and telecommunications need silver. Around the house there's silver in every TV, washing machine, wall switch and refrigerator. Conductors, switches, contracts and fuses use silver because it does not corrode or cause overheating and fires. Silver is used heavily in photography and in prints. Meanwhile, new and exotic uses for silver are expanding.
A new double layer of silver on glass is sweeping the window market, as it reflects away almost 95% of the hot rays of the sun. A new electronic application for "smart tags" that are replacing bar codes could use significant quantities of silver.
Silver achieves the most brilliant polish of any metal and is the best reflector of light, allowing it to be used in mirrors and in coatings for glass, cellophane or metals. Chemical reactions can be significantly increased by adding silver. Approximately 700 tons of silver are in continuous use in the world's chemical industry for the production of plastics.
Batteries are now manufactured with silver alloys. Lead-free silver solder is used heavily for joining materials and producing leak-tight joints. Silver is also widely used in silk-screened circuit paths, membrane switches, electrically heated automobile windows, and adhesives. Silver has a variety of uses in pharmaceuticals. Silver sulfadiazine is the most powerful compound for burn treatment. Catheters impregnated with silver eliminate bacteria. Silver is increasingly being tapped for its bactericidal properties and water purification. In the face of all these industrial uses there is less silver available.
Here we have a vital material, known to all men for all time, literally disappearing before our eyes, both above and below ground. It is a material upon which modern life and rising standards of living are dependent. It is beyond indispensable, it is a miracle metal.
The second factor that is coming into play is the loss of confidence in paper money and the realization by many that silver is not only an industrial metal but was a monetary metal.
Silver has been around for just as long -- if not longer --- than gold. It was currency in the past --- and who is to say it will not be currency in the future? Indeed -- gold bugs who favor a return to the gold standard -- would stand a better chance if they were pushing a bimetallic system of both gold and silver. At least there would be more "currency" to go around. As nations that look to establish the former glory -- it might not be beyond the realm of China to go that route.
Silver Sycee in one form or another was a means of exchange in China for over 1000 years. In fact -- a quick history of money is simply -- barter -- livestock/Crops -- cowry shells (tools) -- silver -- leather banknotes (deer skin) -- paper currency (first introduced by China 9th to 15th Century) -- potlatch -& wampum (north American Indians)--- gold standard -- paper currency. So if we exit paper currency --- there are only two choices on the above list --- silver and gold. And silver has been used more times and more places than gold has.
Silver certificates we're re-issued by the Kennedy Administration in USA and were in fact redeemable in silver until June of 1968. So the thinking that silver can't come back as a monetary instrument is not impossible. In fact -- what will be the alternative to gold and silver? Nothing. Black market or not -- gold and silver will always have their place.
The second factor influencing silver is the loss of confidence in paper currency and the public awareness that is fast becoming a major factor in PHYSICAL DEMAND.
Finally the third factor that comes into play is the massive amount of short positions that have been sold forward by the manipulators of silver. According to the latest statistics there are 154 days of silver production that is currently sold short. As prices rise the shorts have only two choices. Sell more contracts short - or cover the positions. Each drop in silver since the summer has not been met with new short positions. It has been met with short covering. This triple whammy is turning the supply side equation and demand into a runaway freight train.
Silver price points
The chart below uses the silver ETF (SLV) and currently trades about 60 cents below the price of spot silver. The current price point in silver is reaching the major resistance line that was touched during the first week of November. After a $4 dollar correction to $25, silver has rebounded once again to the $29 dollar area. This line is certainly important resistance on the price charts and from a technical perspective certainly should be respected. But the short positions remain very high and the demand is increasing. If investor demand for physical continues and price moves above the 30-31 dollar area it could produce another bout of panic buying. If that were to occur the next target for silver will be the pre shortage panic line in the $35 dollar range.
There are many technical indicators that can be employed in analysis. The use of channel lines is perhaps the least arbitrary for the simple reason that the markets outer symmetry of price action dictates where the channel lines get employed. Granted humans still draw the channel lines but when done correctly, they provide a great tool for where price resistance comes in. Notice how well the lines have established price points of resistance during this bull market.
Why do I call the line of resistance on the above chart the Pre-shortage panic line?
Let's take a look at another silver chart. In this view using the world silver index we can see that the resistance line that was hit in November is by far the most important resistance line for the simple fact that it has contained all silver spikes during this bull market. The 2004, 2006, 2008 and now the 2010 high have one thing in common, the blue resistance line.
This slope represents the markets own maximum growth pattern. Each past high was curtailed by this slope. If there is a shortage then there is a possible buy panic that will exceed this long term resistance line and suppliers will have to bid price up to the silver to deliver what they have committed to and the short positions will have to eventually buy back in to cover their short position.
There is no doubt that this area certainly could provide the area where a price peak could once again come into play. However, the difference this time is that suppression schemes have been brought to the open and if the shorts can't stop the demand coming in - they will have no choice but to try and cover their positions. It is this potential that could propel price higher. Just as there was a mad rush into silver when the breakout line on the chart was exceeded, a move above this blue line could provoke even more buying by those who follow technical price patterns.
Channel lines can be used on all time frames. The Rally from August is displayed below on a daily chart.
It seems the long term fundamental factors have finally combined to produce a dramatic rally in silver. If these trends continue the price channels will be an excellent guide as to the standard deviation that occurs in price parameters and where important price turns might occur. Many have stated that technical indicators don't work in a bull market. I can't disagree. But I still think that price channels do for the simple reason that they are the markets own symmetry of price parameters.
We are now at the next juncture in the 21st Century Silver Bull market. Do you know where your trend line and potential price turn points are?
At our website, we monitor the silver price pattern on an hourly, daily, weekly and monthly chart basis. And we offer commentary on what we think it all means for price, along with support and resistance levels for each day. We also follow the gold market extensively and are just as passionate about it.
If you would like to join us for a month and follow along with a free pass, send us an email at Goldtrends@gmail.com . May you all prosper.
Bill Downey is an independent investor/ trader involved with the study of the Gold and Silver markets since the mid 1980's. He writes articles for public internet distribution as well as his own web site at: http://www.goldtrends.net He has written articles published in Futures Magazine.
© Copyright Bill Downey 2010
Disclaimer - The opinion expressed in this report is the opinion of the author. The information provided was researched carefully, but we cannot guarantee its total accuracy. The report is published for general information and does not address or have purpose or regard to advise specific investments to anyone in the general public. It does not recommend any specific investment advice to anyone.
by Sean Rakhimov
Over the last several months, we have been pondering if governments will come into the silver market. Before we get into that, it is important to note that governments are very different animals and that there are over two hundred of them out there. Therefore, it is a very liberal generalization to lump them all together as if their needs, objectives and agendas were the same. Expecting them all to act in the same fashion for the same reasons is a big stretch. That said, it’s the stigma, the psychological effect, the sentiment and the message it would send to markets that prompts us to group them together in investors’ minds as a market force.
This same topic has been argued in the gold space for several years and now it has come to pass that central banks worldwide have thrown in the towel and became net buyers of gold. Should it be different for silver? By the way, did you notice, how silver silently became mainstream again, and more and more headlines now read “Gold and Silver…” whereas only a couple of years ago silver was nowhere in sight of anyone except the dreaded silver bugs......read on