Political Metals

Bill Murphy | LeMetropoleCafe

“The way I see it, if you want the rainbow, you gotta put up with the rain.” … Dolly Parton

GO GATA!!!

The reason for this rare, extra commentary over a weekend is to focus on a couple of points which really stand out in their particular significance and are worth pondering in terms of what is coming down the road for financial markets.

The first is what we jumped all over on PLANET GATA from the get-go about the JP Morgan hedge trade flap gone wrong. It made NO sense from the very beginning to any of us that such a commotion was made over a $2 billion loss on a trade, for whatever reason, when they had just reported yearly gains of $18 billion. Clearly, Mr. Dimon’s public pronouncement, that caught the attention of the entire investment world, was only paving the way for future announcements that will be much more dramatic. All he was doing when he inferred the losses MIGHT get worse was protecting himself, as best he could, by going on the record.

The latest news on JPM…

14:31 JPM JP Morgan Chase struggling to unwind ill-placed bets – WSJ

While breaking no real news, this story notes that the bank’s losses could eventually prove to be even bigger than the $5B some people familiar with the matter have been predicting (see linked comment). The losses could potentially deepen if the company sells its positions into a market that has turned against said positions.
The article notes that while the bank has said that it will take its time unwinding the positions, this does not necessarily guarantee smaller final losses than trying to close out the trades sooner, as the market could turn sharply against the bank in the near term. 
Reference Link: Wall Street Journal 

14:50 JPM CFTC latest federal agency to begin investigating JPMorgan Chase – NYT DealBook

NYT Dealbook reports, citing people briefed on the matter, that the Commodity Futures Trading Commission opened an enforcement case on Friday examining the bank’s trading loss. The CFTC joins the SEC and FBI in investigating possible wrongdoing at the bank. Gary Gensler, the agency’s chairman, is expected to disclose the investigation when he testifies on Tuesday before the Senate Banking Committee.
Dealbook says that the CFTC will potentially examine whether the bank’s trading affected the market for credit derivatives, for which it has jurisdiction.
Reference Link: NY Times

This latest investigation into JP Morgan might be a big deal for the GATA camp. This is actually quite complicated, but very intriguing. The CFTC has been investigating JPM’s role in the silver market manipulation scheme for what will be four years soon. FOUR YEARS! Good friends, like Dave from Denver, have nothing but loathsome talk about the CFTC, for good reason. GATA’s rationale (speaking for myself) about this ridiculous investigation is that the CFTC really has uncovered the scam, but because it is backed by the US Government, they are flabbergasted about what to do, so they do nothing.

The reason they have not closed the case is because they are petrified the silver market might blow up down the road. Think about if you were them. They want this to go away, but if the silver market does blow up, and there is some kind of “Force Majeure” declared in silver by JPM, the CFTC would not only look like fools, but, perhaps it might be said they were more than negligent. Thus, they have done nothing.

Well, all of a sudden, Lo and Behold a new factor enters the silver scam investigation, which directly affects Morgan’s constant claims to the CFTC that their huge silver short position is hedged. Ya mean like hedged in an economic sense as per their claims re the latest credit derivatives market trade was a hedge? This just might force the CFTC to demand JP Morgan prove their claims their silver short position is really a hedged one. This is what I suspect might occur due to the growing scrutiny over Morgan’s trading activities. The CFTC people, except for Bart “Elliot Ness” Chilton, are sycophants and have toed the company line … but there is a point when FEAR makes that no longer viable. They are not going to go to jail for taking one for the team. My guess is we are getting close to that Tipping Point.

As the JP Morgan hedged losses mount and become “official,” the heat on them is going to mount. They will be scrutinized every way imaginable. How can all the class action lawsuits against them, and blatant evidence against them via just what Andrew Maquire has sent to the CFTC via their role in the silver scam, be ignored?

We have already been informed, as of a week ago, that the Morgan losses on their “hedge trade” fiasco could be as high as $15 billion, or more. Already, even the WSJ is alluding that their losses are higher than $5 billion. This is MEGA! As we have discussed on PLANET GATA, this is not just about Morgan, but confidence in the entire financial system. If the $70 trillion derivatives book at Morgan goes NUCLEAR, we could have a financial market TITANIC event which might be right around the corner.

GOOD GRIEF!

Now, for the weekend edition, number two re the understandable, but nauseating, commotion over the Facebook IPO on Friday, which was heralded by CNBC all week.

First, the background…

*The Dow is going down day after day, not with any fanfare, but all rallies are sold. In very quiet and subdued selling, general investors inherently know something is wrong and are acting upon that instinct.

*Europe is falling apart we know, but little is being said about how the US financial system is in parallel with Europe. How bad is this? Just the state of California budget deficit goes from something like $8 billion to a staggering $16 billion and it creates almost no commotion. Huh?

Getting back into the GATA aspect of this is that the US financial markets are all about market manipulation. You need to go nowhere further on what the real deal about US financial markets than this headline…

Banks spend big to prop up Facebook shares on first day of trading
By GARETT SLOANE and MARK DECAMBRE
Last Updated: 8:15 AM, May 19, 2012
Posted: 11:34 PM, May 18, 2012

It was another Wall Street bailout — but this time the banks had to cough up the cash. Facebook’s underwriters propped up the social-network’s trading debut yesterday, as the shares threatened to crash through the initial public offering price of $38. The banks working on the massive $16 billion IPO, including Morgan Stanley, JPMorgan Chase and Goldman Sachs, did their duty by buying up large blocks of Facebook stock toward the end of the day to support the price.

Facebook shares opened up 11 percent at $42.05, and traded as high as $45, before running out of steam, disappointing investors hoping for a big first-day pop. The shares closed up just 0.6 percent at $38.23.

Without the bank bailout, Facebook’s IPO would have been a loser on the day, Wall Street insiders said.

The heavy buying, however, cut into the banks’ already meager fees on the deal. The underwriters agreed to accept a smaller cut — just 1.1 percent of the $16 billion Facebook raised in the IPO — in order to land the high-profile assignment.

After splitting $176 million in fees, the firms likely spent more than they made in fees by buying the swooning stock. Sam Hamadeh, CEO of research firm Privco, believes the banks spent around $380 million on Facebook stock.

“On the heels of JPMorgan’s $2 billion ‘hedging’ trading loss, tThe underwriters have used up all the fees they made on the Facebook deal just to buy and prop up the stock to prevent a busted IPO,” said Hamadeh.

Another source said that the banks took a substantial hit yesterday, which started strong despite glitches that delayed Nasdaq trading in Facebook shares by 30 minutes past their 11 a.m. scheduled debut.

While there was plenty of finger-pointing yesterday, many blamed the bankers for setting the price too high to allow for upside. The IPO share priced at the high end of the $34 to $38 range, which had been raised from an initial range of $28 to $35.

The bankers were wary of pricing the shares too low, leaving money on the table and leading to an outrageous first-day pop. They were shooting for a modest first-day gain in the range of 5 percent to 10 percent.

Still, some observers heaped scorn on Facebook insiders who dumped their shares, saying it was a red flag that weighed on the stock.

Facebook had increased the number of shares being sold in the IPO by 25 percent, to 425 million, with most of the additional float coming from early investors looking to cash out.

The company’s sky-high valuation also made some investors queasy. At $38 a share, Facebook is valued at $104 billion — even though it only made $3.7 billion last year.

Facebook’s big day was a drag on other tech stocks. Trading in shares of Zynga was halted yesterday after a sharp drop, and the stock closed down 13.4 percent at $7.16. China’s social network RenRen was also down more than 20 percent, to $4.93.
gsloane@nypost.com

My take on this, from my Behavioral Finance background on how our financial system really operates, is the effort to hold up the Facebook IPO was an effort to hold up the stock market as a whole. For the BF folks, perception is everything. That is why they do what they do. The Counterparty Risk Management Policy Group (do a Google if new to you), led by the same firms that held up the Facebook share price, does not exist for no reason. One of their mandates is to promote market stability and that is what they just did. That Group works closed with the Plunge Protection Team (Working Group on Capital Markets) to support the US stock market at various times.

What we saw in the price rises of gold and silver at the end of the week was stunning and totally out of the natural order of the gold/silver price manipulation scheme. It was a wowser! My smeller tells me, because the dramatic rally was so pronounced, that we are headed for some serious fireworks in the financial arena.

The Gold Cartel could be in deep trouble now because their honcho, JP Morgan, is in deepening trouble. This is no minor event in terms of the gold/silver market manipulation scandal.

All hands on deck to prepare for the financial market commotion that seems to be right around the corner!

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Related Articles:

• JP Morgan Chase for Dummies
• Can you spot the Bubble(s)?

Ron Paul

The Fed: Mend It or End It?

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Last week I held a hearing to examine the various proposals that have been put forth both to mend and to end the Fed. The purpose was to spur a vigorous and long-lasting discussion about the Fed’s problems, hopefully leading to concrete actions to rein in the Fed.

First, it is important to understand the Federal Reserve System. Some people claim it is a secret cabal of elite bankers, while others claim it is part of the federal government. In reality it is a bit of both. The Federal Reserve System is the collusion of big government and big business to profit at the expense of taxpayers. The Fed’s bailout of large banks during the financial crisis propped up poorly-run corporations that should have gone under, giving them a market-distorting advantage that no business in the United States should receive. The recent news about JP Morgan is a case in point. JP Morgan, a recipient of $25 billion in bailout money, recently announced it lost another $2 billion. If a corporation shows itself to be a bottomless money pit of “errors, sloppiness and bad judgment,” the Fed shouldn’t have expected $25 billion in free money to change that or teach anyone a lesson in fiscal discipline. But it determined that this form of deliberate capital destruction was preferable to one business suffering bankruptcy. Clearly, some changes need to be made.

Several reforms for the Fed were discussed at the hearing. One was a call for the full employment mandate to be repealed, in order to allow the Fed to focus solely on stable prices.

Another reform calls for changes to the composition of the Federal Open Market Committee. Still another proposal was for outright nationalization of the Fed or of its functions. But if what the Fed does now is bad and inflationary, allowing the Treasury to print and issue money at-will would be even worse, and could possibly lead to a Weimar-like hyperinflation.

The problems and advantages of the gold standard were discussed at the hearing. The era of the classical gold standard was undoubtedly one of the greatest eras in human history. For a period of several decades in the late 19th century, the West made enormous advances. However, the gold standard was still run by government. The temptation to suspend gold redemption reared its head again with the outbreak of World War I. Once the tie to gold was severed and fiscal restraint thrown to the wind, undoing the damage would have required great fiscal austerity. Instead, the Western world proceeded to set up a gold-exchange standard which lasted not even a decade before easy money led to the Great Depression.

While returning to the gold standard would certainly be far better than maintaining the current fiat paper system, as long as the government retains the power to go off gold we may end up repeating the same mistakes.

The only viable solution is to get government out of the money business permanently. The way to bring this about is through currency competition: allow parallel currencies to circulate without receiving any special recognition or favor from the government. Fiat paper monetary standards throughout history have always collapsed due to their inflationary nature, and our current fiat paper standard will be no different.

It is imperative that the American people be educated on the dangers of the Fed and the importance of restoring sound money. The laying of the groundwork must begin today, so that the American people will be prepared for the day when the mirage the Fed has created evaporates completely. The full hearing footage is available on my website and I would encourage every American to take a look.

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Breaking News:

JP Morgan sent out a notice at 4:30 p.m. that it would be holding a conference call at 5 p.m. which will include CEO James Dimon.

At the conference call, as reported by WSJ, Jamie announced that the the largest US bank has “taken $2 billion in trading losses in the past six weeks and could face an additional $1 billion in second-quarter losses due to market volatility”.

Here’s a Dummy trying to make sense of Wallstreet speak.

The losses stemmed from derivatives bets gone wrong in the bank’s Chief Investment Office, a part of the corporate branch of the bank that manages risk… Jamie announced.

So they lost $2 billion in 6 weeks and possibly another $1 billion over the next month. But what exactly are these derivative bets? Isn’t betting associated with gambling? Did the largest bank in the US take some of their bailout money, went gambling and now calling a press conference to announce their losses?

Mr. Dimon said the so-called synthetic hedge, using insurance-like contracts known as credit-default swaps, was “poorly executed” and “poorly monitored.” He said the bank has an extensive review underway of what went wrong, and that there were “many errors,” “sloppiness” and “bad judgment” on the bank’s part.

Ah… it’s not gambling, it’s actually a “synthetic hedge”. But I don’t even understand what’s a hedge, never mind the difference between synthetic and real! All I know up to this point is they lost big time through derivatives bets, which is a synthetic hedge, also known as credit-default-swaps. That’s quite a mouthful for a mere mortal.

What then are these credit-default swaps?

I know what’s a swap. You give me something, I give you another. But they’re  swapping “credit-default” for something else? That sounds like a weird thing to be swapping. Fortunately I have good ole Wikipedia to the rescue:

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a loan default or other credit event. The buyer of the CDS makes a series of payments (the CDS “fee” or “spread”) to the seller and, in exchange, receives a payoff if the loan defaults.

Oh, how could I have missed something so obvious! Didn’t Mr. Dimon say it’s an “insurance-like” contract? Now I get it, so I’ll just call it an insurance. JP Morgan sells insurance and receives an insurance premium. It works something like this: You lend me money, then buy an insurance policy from JPM saying that if I fail to repay your loan when it becomes due, they will pay you for the sum insured.

But insurance companies do payouts all the time. What’s the big deal? Then I recall that when there’s a major disaster - like the recent Christchurch earthquake, the payout was so big that AMI, the insurer, went under and had to be bailed out by the government to the tune of NZ$1 billion.

Now it begins to make sense why the conference call was made in such a haste. I recall that Greece defaulted in their debt triggering a payout around a figure of $3.5 billion, and I know JP Morgan is one of the major insurers and major holders of other types of “insurance contracts” collectively known as OTC Derivatives.

But how big exactly is JPM’s potential liability to these kinds of bets?

According to the Bank of International Settlements (BIS), which is the Central Bank of all national Central Banks, the total outstanding OTC Derivatives is $708 Trillion. Of this total notional amount,

• 67% are interest rate contracts,
• 8% are credit default swaps (CDS), 
• 9% are foreign exchange contracts,
• 2% are commodity contracts,
• 1% are equity contracts, and
• 12% are others.

Since CDS makes up only 8% of the total OTC Derivatives, and a relatively minor default by Greece caused such a significant loss for JPM, imagine what will happen to JPM and the likes of JPM when the other PIGS countries ( Portugal, Italy, Greece and Spain) actually go into default. Also imagine what will happen when the interest rate contracts, comprising the bulk of OTC Derivatives actually triggered?

There must be good reasons why derivatives are referred to as Financial Weapons of Mass Destruction (WMD).  Trying to time the explosion or implosion of this WMD is futile. Preparing for its consequences is vital. Take a look at the chart below, and see if you can spot where in this crazy world of finance is the safest place to be.

Mouse over each bar for details. Click to read data source

Updates:

• J.P. Morgan Chase fell 9.2%, its biggest percent drop since August
• Federal Reserve Officials investigating JPM’s losses
• Bernanke’s speech on May 10 “Conditions in the banking system–and the financial sector more broadly–have improved significantly in the past few years..”
• Derivatives: The $600 Trillion Time Bomb That’s Set to Explode
• Double or Nothing: How Wall Street is Destroying Itself (using Martingale system)
• Jim Willie explains JPM’s precarious position, new global financial system & why the USA will be a 3rd world state going forward
  

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[Active updates: Developing stories] The South Carolina Treasurer’s Office, acting upon a directive from the state legislature, has recently published a report on the advisability of investing in gold and silver. Basically, the state legislature wanted to know if it’s wise to invest public funds under it’s custody in gold & silver.

 Here’s what the Treasurer’s Office has to say about itself:

Our mission is to serve the citizens of South Carolina by providing the most efficient banking, investment and financial management service for South Carolina State Government. Our commitment is to safeguard our State’s financial resources and to maximize return on our State’s investments.

This is a tall order, hence we can assume that the report must be well researched and credible.  It concluded that it is not advisable to invest public funds in gold & silver because:-

1. There’s escalating market speculation
2. Current value (I think they mean price) is too high
3. Market possibly in a bubble
4. South Carolina Code of Laws states that the Treasurer has “ full power to invest” in  debt instruments of the US government and corporations, but makes no mention of investments in derivatives of gold & silver. Hence investing in gold & silver derivatives may “create a legal conflict”

While the timestamp of the document was 27 Feb 2012, it can be assumed that the report was prepared soon after the end of September 23, 2011 due to this inclusion. From the perspective of a short term investment, that was a pretty good call, considering the fact that gold and silver have been taken down to $1624 and $31.40 respectively as I write.

However, this piece is not about how good the Treasurer’s Office was at making an investment call based on price. Neither is it about whether gold & silver is in a bubble. These conclusions (2) & (3) are opinions of the Treasurer’s Office, which are subjective. Of greater interest are the facts revealed in the body of the report.

Regular readers of this blog would have noticed that there are several key issues that are repeatedly discussed or highlighted here (through news feeds or third party contributions). They include:-

1. Gold & silver prices are being suppressed
2. Central Banks & major bullion banks are suppressing their prices
3. Naked short selling is one of the price suppression mechanism
4. Bullion Banks and exchanges practice fractional reserve bullion banking
5. Stay out of gold or silver bank accounts, ETFs, Certificates, and all forms of derivatives
6. The safest way to own gold & silver is to hold physical gold & silver

Items (1) to (4) are often disputed by the mainstream media and investors, sometimes referring to them as conspiracy theories. Hence, it is most interesting to see what this government published report has to say about these 6 issues.

Price Suppression is Real

In one short paragraph, this report confirms in no uncertain terms the truth behind the so called “conspiracy theories”. Not only does it confirm the existence of price suppression, it discloses the WHOs and the HOWs!

Risks of holding gold through ETFs, Certificates, Bank Accounts & other Derivatives

It has been repeatedly emphasized here that the only secure means of owning gold & silver is by holding physical coins and bars in your own possession or stored in a private vault outside the banking system. Anything else is a derivative – a paper or electronic representation of the real thing.

This report explains the nature of these derivatives and lists the risks associated with each, together with reasons why the Treasury’s Office advised against investing in them.

The full report in pdf is available for download at the South Carolina Treasurer’s website. Text from relevant sections is reproduced below with comments related to the 6 items above highlighted. Most of the remarks are self explanatory. There are, however, two groups of comments that warrant some discussion.

1. Allocated & Unallocated Accounts

Ways to Invest: Certificates
Unallocated gold certiñcates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the bank’s gold on deposit. Allocated gold certificates should be correlated with speciñc numbered bars, however it is difficult to prove whether a bank is improperly allocating a single bar to more than one investor.

Ways to Invest: Accounts
One of the most important differences between accounts is whether the gold is held on an allocated or unallocated basis. Another major difference is the strength of the account holder’s claim on the gold, in the event that the account administrator faces gold-denominated liabilities, asset forfeiture, or bankruptcy.

The above describes two products offered by banks to clients who want to invest in gold (or silver) without having to deal with the physical metals. For example, when a bank accepts $2,000 from a customer and issues a gold certificate or credits the customer’s gold account under the unallocated system, the bank is not obliged to buy and store 1.2 oz (at current price) of gold on behalf of the customer. It holds only a tiny portion of that amount in gold. Hence when many of its the customers decide to redeem their certificates at the same time, the bank will not have sufficient gold to deliver. This is what’s referred to as a “run on the bank’s gold on deposit”. The same applies when depositing cash in your bank. The practice of keeping only a tiny fraction of what’s rightfully belonging to the customers (gold or cash) is referred to as fractional reserve banking.

When selling allocated gold products, the bank is legally required to hold 100% of the customers deposit in physical metal. For example, if a customer deposits sufficient cash to own a 400 oz gold bar and is assigned a bar bearing serial No: AGR Matthey 156571, how can one be sure that the same bar or a portion thereof is not assigned to another customer at the same time? That’s the issue raised by the report – and the risk is real.

This brings us back to “the only secure means of owning gold & silver is by holding physical coins and bars in your own possession or stored in a private vault outside the banking system”. If you have to use a third party to store your metals, use specialized private vaults instead, because banks operate on a fractional reserve banking system.

There are many companies outside the banking system that offer secure vaulting services. Generally, they have very high transparency, including publishing audited client holdings on the web for public scrutiny (without any login required). Of course clients’ ID are anonymous, and known only to the operator and the client.

Try these links:
GoldMoney bar list and BullionVault client holdings. Their reviews can be found here.

Learn more about private vaulting services, including issues like ownership, custody, bailment, counter-party risks, and performance risks. 

2. Reason for not investing in physical gold & silver

The report listed 5 ways to invest in gold & silver – ETPs, Certificates, Accounts, Derivatives and physical coins & bars. Notice how it highlights & explains all the risks associated with ETPs, Certificates, Accounts and Derivatives and the reasons why it is not advisable for the Treasury to invest in these.

Notice also that there are NO risk associated with physical metals. The only reason given for not investing in coins and bars is “South Carolina does not have the capacity to store or funding to secure gold and silver bullion”.

What a lame excuse! Do they not know that in April last year, “The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion“?

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Proviso 89.145 GP:
Gold & Silver Investments
Office of State Treasurer

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GOLD AND SILVER AS AN INVESTMENT:
Historically, investors have purchased gold as a hedge against an economic, a political, or a currency crisis. A decline in investment markets, a growing national debt, a weak currency, increasing inflation, military conflicts and social unrest are the most common reasons for investment in gold. Currently, gold and silver are at historic highs leading many expert investors to conclude that a bubble has been created in the precious metals market. Since the US recession began, the value of gold and silver has increased as investment markets perform poorly, troublesome economic news is announced, and when uncertainty in international markets intensifies.

Similar to other commodities, the value of gold and silver is determined by supply and demand, as well as speculation. The Federal Reserve, The London Bullion Market Association, JP Morgan Chase, and HSBC Holdings have practiced fractional-reserve banking and engaged in naked short selling causing artiñcial price suppression.

There are several ways to invest in gold and silver: bars, coins, ETP’s, certificates, accounts, and derivatives. If a state were to choose to invest in gold (and silver), it would likely choose to invest by:

1. ETP’s-Exchange Traded Products. This allows the stakeholder to invest in bullion without having to store bars and coins. The ñrst gold ETF (Exchange Traded Fund) was created in 2003 and has been viewed largely as a success, but has also been compared to investing in mortgagebacked securities. The annual expenses of the fund (storage, insurance, and management fees) are charged by selling a small amount of gold represented by each certificate, so the amount of gold in each certificate will gradually decline over time. ETF’s are investment companies that are legally classified as open-end companies or Unit Investment Trusts (UIT), but differ from traditional open-end companies and U]T’s. The main differences are that ETF’s do not sell directly to investors and they issue their shares in what are called Creation Units. Also, the Creation Units may not be purchased with cash but a basket of securities that mirrors the ETF‘s portfolio. The Usually, the Creation Units are split up and re-sold on a secondary market.

2. Certificates- allow investors to avoid the risks and costs associated with the transfer and storage of bullion by taking on a set of risks and costs associated with the certificate itself. Banks may issue gold certificates for gold which is allocated (non-fungible) or unallocated (fungible). Unallocated gold certiñcates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the bank’s gold on deposit. Allocated gold certificates should be correlated with speciñc numbered bars, however it is difficult to prove whether a bank is improperly allocating a single bar to more than one investor. The US ñrst authorized the use of gold certificates in 1863. By the early l930’s the US placed restrictions on private gold ownership and therefore, the gold certificates stopped circulating as money, but certificates are still issued by gold pool programs for investment purposes.

3. Accounts- Many banks offer gold accounts where gold can be instantly bought or sold just like any foreign currency on a fractional reserve (non-allocated, fungible) basis. Pool accounts, facilitate highly liquid, but unallocated claims on gold owned by the company. Digital gold currency systems operate like pool accounts and additionally allow the direct transfer of fungible gold between members of the service. Different accounts impose varying types of intermediation between the client and their gold. One of the most important differences between accounts is whether the gold is held on an allocated or unallocated basis. Another major difference is the strength of the account holder’s claim on the gold, in the event that the account administrator faces gold-denominated liabilities, asset forfeiture, or bankruptcy.

4. Derivatives- The product symbol for gold futures is GC, and it is traded in a standard contract
size of 100 troy ounces. In the US, gold futures are primarily traded on the New York Commodities Exchange (COMEX). As of 2009 holders of COMEX gold futures have experienced problems taking delivery of their metal. Along with chronic delivery delays, some investors have received delivery of bars not matching their contract in serial number and weight. Because of these problems, there are concerns that COMEX may not have the gold inventory to back its existing warehouse receipts.

ADVISABILITY:
There is no statute preventing the State from investing in gold and silver. The various methods of investment in gold and silver each carry different and often significant risks, the foremost being speculation. As the US has experienced the recent bursts in the housing and tech bubbles, it is important to take caution when contemplating an unconventional investment. Taxpayer money (state funds and state pension) across the US has not typically been used to invest in gold or silver bullion.

Recently, with the uncertainty in global markets, the devaluation of the dollar, rising inflation, and a flat US economy, there has been a renewed interest in either moving back to a gold standard, investing in gold or both. The value of gold and silver has significantly increased in the last decade, meaning it would cost a great deal to invest at this time.

Risks:
1. Bars and coins- South Carolina does not have the capacity to store or funding to secure gold and silver bullion. For these reasons the State Treasurer’s Office does not advise investing in gold and silver bars and coins.

2. ETP’s- The armual expenses and costs associated with this type of investment are high. In recent years there have been issues surrounding gold ETP’s. The purchase price provides the investor with a fluctuating amount (in weight) of the metal. Over time, as value increases and more investors participate in the fund, the amount of metal owner by the investor decreases. ETP’s can also be split and sold on the secondary market. For these reasons the State Treasurer’s Ofñce does not advise investing in ETP’s for gold and silver.

3. Certificates- Certificates for allocated gold present an accountability problem. Allocated gold certificates are supposed to be correlated with speciñc numbered bars; however, it is difficult to verify whether a bank is improperly allocating a single bar to more than one investor. Also, unallocated gold certificates are a form of fractional reserve banking and do not guarantee an equal exchange for metal in the event of a run on the bank’s gold on deposit. This is in conflict with S.C. Code of Laws 1976 SECTION 11-9-660. For these reasons, the State Treasurer’s Office cannot advise investing in gold and silver certificates.

4. Accounts- Similar to the risks associated with gold and silver certificates, allocated and unallocated metals held in accounts produce similar accountability problems. The strength of the account holder’s claim on metals is subject to the account administrators liabilities, assets, and/or solvency. Per S.C. Code of Laws 1976 SECTION 11-9-660, the State Treasurer’s Office cannot advise investing in gold and silver accounts.

5. Derivatives- Over the last three years, gold futures traded on the New York Commodities Exchange (COMEX) have encountered significant accountability problems. Holders of COMEX gold ñltures have frequently experienced delivery delays of their metals. Once delivered, there have been many reports of inaccurate weights and serial numbers on bars that do not match the holder’s contract. For these reasons the State Treasurer’s Office does not advise investing in gold and silver derivatives.

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Gold: April 2012

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Having read the above, it may now be easier to make sense of the sharp price decline for both gold & silver over the past 2 days. Lets now ask some questions. Was the price action due to:

• Market forces or Price Suppression in action?
• Falling Demand or Naked Short Selling?
• Human Traders or High Frequency Traders (HFTs)?

Historically, investors have purchased gold as a hedge against an economic, a political, or a currency crisis. A decline in investment markets, a growing national debt, a weak currency, increasing inflation, military conflicts and social unrest are the most common reasons for investment in gold

Recently, with the uncertainty in global markets, the devaluation of the dollar, rising inflation, and a flat US economy, there has been a renewed interest in either moving back to a gold standard, investing in gold or both.

The mainstream media attributed this week’s sharp price decline to  improving economy, low inflation and no imminent QE announcements following the release of the latest FOMC meeting minutes. Given that the above statement was published just 5 weeks before the FOMC minutes, who is lying?

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Developing Stories

12 Apr:
Jason Hommel explains what Blythe Masters actually meant by “the underlying client position that we’re hedging”.

11 Apr:
Ted Butler, the pioneer of silver manipulation investigation finally broke his silence over the Blythe Masters denial video clip. By far, this is THE best, most level-headed, objective rebuttal to Masters’ famous words that they are “not running a large directional position”. Read “JPM’s TV appearance” posted at Silverseek.com.

10 Apr: 

• ZeroHedge’s take on Blythe Masters denial of JPM’s role in price manipulation
• Keiser Report on the same subject. His solution is the Silver Liberation Army (SLA)

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7 Apr:
Mike Maloney on RT discussing gold & silver manipulation, Blythe Masters denial of JPM’s role in price manipulation, “First government admission of price suppression” & High Frequency Sheering. Must Watch!

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6 Apr: 

• JP Morgan and HSBC control over 97% of all of the gold derivatives, according to KWN’s “London Trader – Fed’s Global War Against Gold Escalating”
• GATA: “One of the Masters’ of the universe gets a market manipulation question on CNBC“

Further Reading:

• Storage Options, Bailment, Allocated & Unallocated Accounts Explained
• Gold Manipulation
• Silver Manipulation

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Jim Puplava, president of FPS, discusses the hot topic of Silver Manipulation with four prominent players in the silver market.

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Source: Financial Sense Newshour

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More than 3 years into an investigation over alleged manipulation in the silver market, the CFTC released the following statement yesterday.

CFTC Statement Regarding Enforcement Investigation of the Silver Markets

Washington, DC – The Commodity Futures Trading Commission today issued the following statement:

“In September of 2008, the Commission announced the existence of an enforcement investigation into the possibility of unlawful acts in silver markets. Since that time, the staff has analyzed over 100,000 documents and interviewed dozens of witnesses and obtained expert advice. It has been a long, detailed, and thorough investigation, and it continues in an appropriate and considered manner.”

Bart Chilton, one of the commissioners of CFTC was interviewed, I believe for the first time by Eric King of KWN yesterday:

I can tell you based on what I have been told by members of the public and reviewed in publicly available documents, I believe that there’s been violations of the law, The Commodity Exchange Act.

What was he told by members of the public that convinced him to believe that the silver market has been illegally manipulated? Probably referring to whistle blower Andrew Maguire’s emails to CFTC in February 2010, Chilton had this to say:

But when people email me and say, ‘You watch the market (silver) between 9:15 and 9:45 tomorrow and it’s going to tank or it’s going to do this or it’s going to do that.’  I hold on to it and I watch the market and what they say happens, and I’m not saying this always happens, but it happens even 50% of the time, 60% of the time, there’s no way that doesn’t raise my antenna, like major, electric antenna goes up.

With the derivatives market on the verge of implosion in the wake of the Eurozone crisis, any further announcement implying JP Morgan et al may well be what’s required to nudge us over the tipping point. The next few weeks/months could turn out to be very interesting times. However, updates will be few and far in between while I’m taking a break in the Andeas until Feb 2011.

Stay prepared.

Update: 

ZeroHedge just reported a very significant event that may affect global markets next week:

… the CME just made the maintenance margin, traditionally about 26% lower than the initial margin for specs, equal. For everything. Which means that by close of business Monday, millions of options and futures holders will be forced to deposit billions in additional capital to the CME just so they are not found to be margin deficient, and thus receive a margin call. Naturally, since it is very unlikely that this incremental amount of liquidity can be easily procured in one business day, we anticipate the issuance of hundreds of thousands of margin calls Monday, followed by forced liquidations of margin accounts across America… and the world. Just like when Lehman blew up, it took 5 days for Money Markets to break. Is this unprecedented elimination in the distinction between initial and maintenance margin the post-MF equivalent of the first domino to fall this time around?

Update:

There’s another update from ZeroHedge based on a clarification from CME following yesterday’s release.

Yesterday, in what is the worst-phrased and most misleading press release to ever come out of the CME, the exchange issued a notice that going forward all Initial margin would be equal to Maintenance margin. Our gut interpretation was that “Unless we are completely reading it incorrectly, it is nothing short of a margin call for tens if not hundreds of billions worth of product.” Judging by the broad response, our initial reaction is what a prudent, logical human being would assume: after all, it is precisely the undercollateralization of customer accounts, and general underfunding at MF Global that is what brought that particular company down. Well, we wrong wrong. The CME, it appears has taken a page right out of the European playbook, and less than a week after an exchange-cum-Primary Dealer collapsed due to excessive risk taking, the CME has followed up its vague press release from yesterday by inviting even more risk in lowering the initial margin. Why is this a cause for even greater concern? As the CME itself says, “Initial margins are set to provide an additional buffer against future losses in the account” – so going forward that buffer has been reduced by about 30%. But what is the reasoning provided by CME: “The intent and effect of these changes is to decrease the size of any margin calls resulting from the bulk transfer of MF Global customers to new clearing members, not to increase them.” So basically the CME is implicitly putting all of its existing and current clients and customers at further risk by onboarding the accounts of those clients who, like lemmings, held on to their MF Global accounts until after it was too late. Because while the lower Initial margin may apply to MF accounts, it will also apply to any Tom, Dick and Harry beginning Monday, who will suddenly see a 30% reduced gating threshold to put on a position. Any position, no matter how risky. Read full report here.

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Related Articles:

• Providing Oversight With One Eye Closed
• Silver Manipulation