Monday, February 14, 2011

First silver futures backwardation since '97-98

From Reuters

By Frank Tang

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

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

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

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

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

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

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

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

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

Bernanke's Free Ride Is Over

Ben Bernanke took over as Chairman of the Board of Governors of the Federal Reserve System on February 1, 2006. On February 9, 2011, his free ride ended. On that day, Paul Ryan's House Budget Committee grilled him.

Bernanke has yet to appear before Ron Paul's Subcommittee on Monetary Policy. Whether Bernanke will ever agree to testify before that subcommittee remains an open question. If the House does not compel him to show up, he may be able to escape stiff cross-examining. If the House refuses to compel him to testify, then the House once again has capitulated on a bipartisan basis. We shall see.

Bernanke is not used to tough questions. Some of the questioning wound up on YouTube within hours.

You may not perceive the extraordinary nature of all this. You can be sure that he perceives it. For almost a century, representatives of the Federal Reserve have been dealt with deferentially by Congress. In theory, the Federal Reserve answers to Congress. In fact, Congress asks few questions.

The sign of the FED's operational autonomy is the absence of any independent audit by any agency of the United States government. This includes any audit of the gold that the FED legally has stored for the government since 1933. The last audit of the gold in Fort Knox was in 1953. There has never been an independent audit of the gold inside the vault of the New York Federal Reserve Bank (privately owned) at 33 Liberty Street, New York City.


Between 1953 and 1974, no one got inside the vault at Ft. Knox, where (supposedly) 147 million ounces of gold are stored. In 1974, Congressman Phil Crane (R-Ill) strongly suggested to the Secretary of the Treasury that a group of citizens and a few congressmen be allowed to tour the facility. Secretary Simon got this approved. This was the first tour of the Ft. Knox vault since Roosevelt toured it during World War II. That had been the only other tour. An account of the 1974 tour is here.

Ron Paul has introduced a bill to audit all of the nation's gold. His 2009 bill to audit the FED was held up by Barney Frank. Although a majority of the House co-sponsored the bill, Frank never allowed it to get to the floor of the House for a vote. A gutted version was allowed into the bank reform law of 2010.

Any full-scale audit of the FED by the General Accounting Office or other government agency should determine three things: (1) how much U.S. gold is in all depositories; (2) the fineness of the gold (coin melt is only 90% gold and is not suitable for delivery to the metals markets); (3) which nations and central banks have title to the gold in the vaults.

The FED has of course strenuously resisted any audit. An audit is officially rejected by the FED for this reason: it would be an infringement on the autonomy of the FED. Bernanke told Congress what the situation was in 2009. The FED, not Congress, was in charge. He said that the FED should not be subject to an audit by Congress.

"We will continue to work with the Congress to provide the information it needs to oversee our activities effectively, yet in a way that does not compromise monetary policy independence."

"Wait a minute," you may be thinking. "The Federal Reserve is legally an agency of the U.S. government. The government should audit every agency." That sounds nice, but the government does not audit agencies with real autonomy and serious power, such as the CIA and the National Security Agency (NSA). The FED is different. Unlike those agencies, 12 of its administrative agencies, the regional FED banks, are privately owned organizations. This is why their Web addresses end in .org, not .gov.

Whenever we find a government agency that is not subject to an audit by the government, we can be sure we are dealing with an agency that possesses real power. The FED possesses such power.


The chairmen of two Congressional committees are openly critical of the FED. This has not happened before. The only chairman as hostile to the FED as Ron Paul is, was Wright Patman of east Texas. He was a left-wing Populist. He was a greenbacker. He favored a pure fiat currency, unbacked by even the pretense of gold. From 1929 to 1976, he was a thorn in the side of the FED. During World War II, he teamed up with Jerry Vorhis, a California Congressman who shared his greenback views. Together, they got a law signed that forced the FED to repay to the Treasury all interest income from Treasury bonds that was not used for operating expenses. That has put a significant lid on FED income over the last six decades. In 2010, it paid back $78.4 billion, up from $47 billion in 2009.

Patman was removed as chairman of the Banking Committee in a coup engineered by Democrats. He died in March of 1976, a month before Ron Paul was elected to Congress in a special election to fill a recently vacated position. Paul is as hostile to the FED as Patman was, but on a different basis: a free market monetary standard in which the U.S. government is not involved. He thinks gold would become the monetary unit of preference.

Patman never had another House chairman share his views of the Federal Reserve. Ron Paul knows that, within the Tea Party, there is significant hostility to the FED. For the first time in post-World War I history, there is a significant minority of voters who know that the FED is an autonomous agency in control of monetary policy. They do not think the FED should be trusted by Congress or anyone else.

Bernanke now faces a situation never faced by a FED Chairman before. What he says is not simply reported in the financial press. It winds up on YouTube within a few minutes. This is not what he meant by "transparency." YouTube existed for only a year before Greenspan left office. Bernanke is subject to criticism on the Web in a way that Greenspan avoided, because Greenspan was always ready to inflate to overcome recession. Today, the FED inflates, but unemployment remains persistently high – higher than it did in any post-World War II recession. His statement to the Budget Committee was subdued.

While indicators of spending and production have been encouraging on balance, the job market has improved only slowly. Following the loss of about 8-3/4 million jobs from 2008 through 2009, private-sector employment expanded by a little more than 1 million in 2010. However, this gain was barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly erode the wide margin of slack that remains in our labor market. Notable declines in the unemployment rate in December and January, together with improvement in indicators of job openings and firms' hiring plans, do provide some grounds for optimism on the employment front. Even so, with output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level. Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established.

There was not much lipstick for this pig. The job market is locked in recessionary mode, and nothing that the FED or the government has done has put people back to work. Bill Clinton's promise to end welfare as we have known it looked good for a decade, but it has been replaced by a politically permanent dole.

The public remains concerned about the stubborn resistance to recovery in the job market. People know that an economy that cannot provide jobs is a sub-par economy. Yet the total number of Americans employed today is the same as in 1999, while the population has moved from 279 million to 313 million.

The job market is paralyzed. This is why Bernanke cannot hide. The voters are pressuring Congress to do something. The Democrats lost the House in 2010 because of the lack of jobs. If unemployment had been at 6%, the Democrats would probably have won. It was not the Federal deficit that did them in. It was the deficit plus no jobs.

The situation is so bad today that something in the range of 17 million college graduates are working in jobs that require only high school graduate's skills. These people serve as the reserve army of the underemployed.

There is little likelihood that new college graduates will find an improved job market in the next two years. For high school graduates, it will be even worse. They are in competition for jobs that are being filled by college graduates – low pay, low responsibility, entry-level jobs.

Bernanke cannot talk his way out of this corner. He is not an inspiring speaker anyway. Greenspan was lively, even though he spoke in gibberish. Paul Volcker was something of a spellbinder, if only because of his 6'7" frame and his Red Auerbach cigar. Nobody remembers G. William Miller, who served for 18 months under Carter. Arthur Burns smoked a pipe and had the air of a kindly banker explaining things to a small businessman looking for a loan. That takes us back to 1970. So, Bernanke's dishwater dull testimony puts him at a disadvantage in the era of YouTube. He makes his case the way a professor makes his case to a group of freshmen at a community college. He drones on and on about how things are getting better, but not much better.

The public wants things to get much better. The public is going to remain disappointed.


This phrase has been applied to Federal Reserve policy since at least 1935. The FED expands the monetary base, but commercial banks may not lend as much as they are legally entitled to lend, given the increase in the FED's holdings of paper, meaning the FED's balance sheet, meaning the monetary base. Until 2008, there was no post-War case of pushing on a string. It was discussed by analysts who predicted price deflation in the early 1970s, but that turned out to be the most inflationary peacetime decade in American history. The deflationists looked silly – even more silly than Keynesians who said that price inflation would end recessions. It didn't.

Today, the Keynesians are in high cotton. They are seen by the financial media as the only economists with a plan of action. Bernanke is their most highly placed representative. But, in the area of job creation, the old magic is no longer working. The monetary base is rising, but there is not much consumer price inflation, but there is also no consumer price deflation. Why? The answer appears to be the theory of pushing on a string.

You can lead a horse to water, but you can't make him drink. You can lead a banker to a business in need of financing, but you can't make him lend. The fact that an opportunity exists is not the same as a booming economy.

Losses lie ahead for local banks. Businesses are sitting on near-cash assets because the economy is fragile, and managers want liquidity in any future crisis. They cannot trust the banks to lend in a recession. The banks are not lending today. The solution is near-cash reserves. So, the fact that businesses are sitting on liquid reserves is no guarantee that they will put these reserves to work by starting new projects, buying new equipment, and hiring unemployed workers.

This recession is like no other. The level of skepticism has persisted. This is why Bernanke's words ring hollow.

More recently, however, we have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold. Notably, real consumer spending rose at an annual rate of more than 4 percent in the fourth quarter. Although strong sales of motor vehicles accounted for a significant portion of this pickup, the recent gains in consumer spending appear reasonably broad based.

Cuba Gooding's line in "Jerry McGuire" seems appropriate: "Show me the money!" Clara Peller's line in the 1984 Wendy's ads ring even truer: "Where's the beef?"

The deficit is now out of control. Bernanke keeps hammering on this, because it is true. He told the Budget Committee that the projections of the Congressional Budget Office regarding the budget deficits are grim. Then he tossed this hand grenade. Its projections are low-ball.

The CBO's long-term budget projections, by design, do not account for the likely adverse economic effects of such high debt and deficits. But if government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe. Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living. Moreover, diminishing investor confidence that deficits will be brought under control would ultimately lead to sharply rising interest rates on government debt and, potentially, to broader financial turmoil. In a vicious circle, high and rising interest rates would cause debt-service payments on the federal debt to grow even faster, resulting in further increases in the debt-to-GDP ratio and making fiscal adjustment all the more difficult.

Don't bother to look for the silver lining. He did not offer any. He ended with this: "Our nation cannot reasonably expect to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face."

Read it again. He has broken with the dominant Keynesian-monetarist-supply side mantra. He has said that, if Congress does not cut spending, there is no way to grow our way out of a fiscal crisis.

Congress is not going to cut spending. He knows that. We all know that. The reality of this can be seen in this clever video on the deficit as a row of shot glasses.

So, we find ourselves on the highway to fiscal hell. The Congress is unrepentant. The President has proposed a $53 billion, six-year expenditure on high-speed trains. As to who will ride on these trains, we are not told. At what price per ticket? We are not told. To get from where to where? Why? It is all a little vague, but the fact that it will cost $53 billion to build, let alone operate, is not a consideration.


Bernanke will give lots more testimonies. He will not find an audience of subservient listeners. The members of the committees are aware that the economy back home is in bad shape. Bernanke is trying to pass on the Old Maid of unemployment to them. "It's Congress's fault. Blame Congress." They are not going to cut spending. Then how will they shift blame away from themselves? The target is obvious: the FED.

Bernanke's free ride is over. So is the Federal Reserve's.

February 12, 2011

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Protecting Yourself in the Coming US Monetary Crisis

Silver - It doesn't grow on trees

Truth about Markets

Max & Stacey discuss peak everything - Oil, water, credit.............listen here

Ron Paul: US to blame for Egypt chaos

NIA - News update