Political Metals

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Shortly after BuySilverMalaysia.com launched its webstore on Feb 2, I learnt from its proprietor that he has received numerous emails asking if he would offer buyback as part of the service. “It seems like Malaysians’ concern is about selling back their silver”, he lamented. You’ll notice that it is one of only two dealers amongst those reviewed here without a buyback service.

This is one of the tell-tale signs that many Malaysians who have recently caught wind of the gold & silver story are erroneously looking at gold & silver as speculative investments. They are interested in making a quick buck by buying these metals with the hope of selling them back to their dealers when prices move up in short order. Some are even excited about gold or silver savings accounts offered by various banks and are happy to invest in paper gold or silver. To get an idea of the general sentiment, check out some lively threads at the Lowyat forum (start here, here or here).

Meanwhile, over in the US, it has been reported that bullion dealers who’ve been serving their customers for decades see very little buybacks. Their long term customers have been accumulating these metals, buying when prices are rising and buying even more when there’s a price dip. How is that so?

In a recent interview by SGTreport, Andy Hoffman of Miles Franklin said:

There are no buy-backs. Customers are not selling anything. They haven’t been selling any gold & silver back to Miles Franklin or any of our competitors for years, and they’re never going to. So don’t ever ever think that when you see a big smash in gold or silver that it’s people selling. It has nothing to do with it. It is the gold cartel naked shorting paper, and it’s only a matter of time before they completely and uterly are destroyed as they were in 1968 with the London Gold Pool, and as they have been every single time in history when they attempt to subvert the forces of real money with paper.

You’re not even investing, you’re just owning real money… and you’re doing it for defense. We’re here to protect ourselves.

People should not think of silver & gold as investments. They are savings.

There you have it. They buy gold & silver for different reasons. Not for speculation. Not even as an investment. They buy whenever they wanted to convert their savings from one form of money into another. It is like someone having more confidence in the SGD than RM looking for opportunities to buy more SGD whenever exchange rates are favorable. They buy and hold gold and silver as savings because they know that these monetary metals store value (retain purchasing power) much better than paper currencies. Most importantly, they own gold & silver fully aware that these are political metals, whose prices are actively managed or manipulated by central banks.

[Note: It may appear from the paragraph above that Americans are astute investors or savers. Far from it. Retail ownership of gold & silver on a per capita basis is much higher in India and many Asian countries than in the US. The "they" refers to a very tiny group of well informed Americans who understand gold & silver for what they are.]

For a better understanding of the issues discussed above, listen to SGTreport’s interview with Andy Hoffman discussing a range of topics including Price Manipulation using High Frequency Trading (HFT), Quantifiable Criminality, Exponentially off-the-chart Methods of Attacking, Silver Subsidies, Gold Silver Ratio (GSR), and more.
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Part 1

Part 2

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Further Reading:

• Difference between Investing and Holding gold & silver
• Introduction to gold price manipulation
• Introduction to silver price manipulation

Pan Asia Gold Exchange (PAGE) building in Kunming City, Yunnan, China

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The much awaited China-based Pan Asia Gold Exchange (PAGE) was scheduled to start trading this June after a ‘soft’ launch at the end of 2011. This exchange that could potentially bring down the Ponzi bullion banking system has been killed before it could see the light of day, according to recent disclosures by Ned Naylor-Leyland and London whistleblower Andrew Maguire.

So “dangerous” was this exchange to the status quo that it faced interference from “a New York based entity with very strong Chinese relationships” soon after the much publicized soft launch. Another factor that helped derail PAGE was the People’s Bank of China’s (PBoC) announcement about control over domestic Gold trading outside of Shanghai.

Before we go into the details of this news, let’s revisit why PAGE managed to send chills down the spine of the powers that be. Consider the following:-

• Currently the prices of gold & silver bullion you pay at your favorite bullion dealers are pegged to or based on the prices of gold & silver contracts transacted at the COMEX in NY and the LBMA in London.

• These contracts are merely paper or electronic representations of gold & silver with little or no physical metals actually changing hands. They are highly leveraged, with approximately 100 oz of paper gold contracts backed by 1 oz of physical gold. For silver, the ratio is about 350:1

• A very very small number of bullion banks (2 to 4) control up to 95% of these paper contracts, and hence are able to influence the price of physical bullion. As ridiculous as it sounds, this is the current price discovery mechanism - virtual paper metals setting the price for physical metals or the classic “tail wagging the dog” mechanism.

• These contracts are denominated in USD.

When such a potential game changer was being conceived, something had to be done, and sure they did. In his recently published research notes “P.A.G.E. Squashed: And now for something completely different…“, Ned Naylor-Leyland of Cheviot Asset Management explains how PAGE was killed.

Just after the publicized ‘soft launch’ (with Central government mandarins in attendance) and the noise made on the internet about its implications, the one shareholder in PAGE that had a foreign listing (in the US) suddenly and stealthily increased its share-holding from 10% to 25%, acquiring additional board directors along the way. The rationale for this sudden change in the weighting of shareholders is shrouded in mystery, however what we do know is that this entity then insisted that they be allowed to build the trading platforms for PAGE from the ground up, rather than buying a working platform off the shelf to get PAGE operational in a timely manner.

This blocking tactic at board level effectively stopped the progress of the fully-allocated spot contract in its tracks, and it was immediately clear to the international-facing people that something fundamental had changed internally. Interestingly, the key Independent Director of this small listed entity that blocked the timely roll-out of PAGE is a well-known Western banker within China, whose CV includes work for the Federal Trade Commission, the Sloan Foundation (related to MIT) and his wife is a member of the Council on Foreign Relations.

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London whistleblower Andrew Maguire told King World News:

I’d like to briefly remind King World News listeners just what PAGE (the Pan Asian Gold Exchange) was going to be.  This was going to be a Chinese Exchange that was to completely change the way gold and silver trade globally.

If you recall from our previous interview, it posed an immediate threat to the current fractional reserve bullion banking system.  It was the competition of a brand new fully allocated gold and silver contract being pitched up against unbacked paper contracts.  It’s not a stretch to imagine what a threat these contracts posed to the bullion banks.

The whole thing was killed and we recently found out how PAGE was interfered with.  Within hours of our King World News interview last July, I mean you sure get some hits on your show, Eric, the interference stemmed out of a New York based entity with very strong Chinese relationships.  It delayed it enough to kill it and it was killed.

All is not lost. The people originally behind PAGE have begun work on developing another independent exchange which is more streamlined and better funded, focusing on 1:1 silver contracts to bypass the new PBoC ruling on gold. According to Ned, it is expected to go ‘live’ this summer (northern). Let’s give the bullion banks a few more months!

The aforementioned change in domestic Chinese rules mean that along with every other regional Precious Metals exchange, the new unnamed 1:1 allocated exchange is launching with Silver initially, which of course is the Achilles Heel of the Bullion banking system. This in my opinion is far more bullish and exciting short and medium-term than the Gold contract would have been, as the physical Silver market is so tight.

Furthermore, all the regional exchanges mothballed by the PBoC rule change can switch, and are switching to Silver trading which is not covered by the change in rules. The contract itself will be, as before, an international rolling 90 day spot one, denominated in RMB, and the new entity is supported by the same serious players within the Chinese political and military establishment as before. The physical will be acquired ahead of closing each monthly tranche and will be vaulted entirely outside of the Bullion Banks (i.e. private vaulting facilities). From there the allocated receipts will be recorded on an electronic register and the issue will be tradeable in the secondary market with the register adjusted real-time.

This is extremely good news for holders of real Silver and extremely bad news for holders of fake paper Silver who rely on the 350:1 leverage being maintained as the world’s sole price discovery mechanism for large purchases of the white metal. This effectively will be like dealing in an RMB-denominated and fully allocated version of some of the popular Silver Bullion Trusts, but rather than trading at a premium, the premium will price the issue ahead of purchase, affecting global price discovery, as previously mooted.

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Read the rest of Ned’s report at TFMetalsReport.com. There also an podcast of Ned’s interview with Turd Ferguson on the same page. Listen to Andrew Maguire’s interview with Eric of KingWorldNews here.

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Related Articles:

• Precious Metals Price Discovery about to Change

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If you’ve been following this blog for a while, you’d have noticed that I don’t usually post anything when there’s a sudden upward spike in PMs prices (there’s more than enough cheer leaders out there!), but will almost always have a comment when there’s a sudden smash down - and here’s the latest.

It’s the classic picture of taking the staircase up (red line) and the elevator down (green line). The gradual climb over an entire trading session at the COMEX on Feb 28 has been attributed to short covering and/or new demand. That looks like how genuine buyers in a normal market would behave - buying at a rational pace to prevent sudden price spikes.

Now, take a look at what happened just a few hours ago. We see a series of waterfall declines in just over an hour bringing the price down by over 9%. Does that look like a normal market to you? The mainstream media attributed this to profit taking. The timing coincided with the U.S. Federal Reserve Chairman Ben Bernanke’s  testimony to the U.S. Congress.

Here’s a shorter version with Ron Paul’s comments on the Fed followed by questions to Bernanke after his testimony.

To many market watchers within the PMs community, there’s more than meets the eye.

• GATA: A single seller drove gold down as Bernanke testified
• Dan Norcini: Bernanke tries talking down Commodities
• Jim Sinclair [KWN]: Today was a Cover-Up By the Fed & Mainstream Media
• Jean Marie Eveillard [KWN]: Desperate Central Banks Intervene in Gold Market
• TF Metals Report: CSI Comex - The Gold and Silver Massacre Interesting Read!
• Hugo Salinas Price [KWN]: Central Banks Smashed Gold

Whichever way you look at it, this is another classic example of using a piece of news as trigger to execute trades in a manner that results in the sharpest price decline possible in order to paint the tape (scaring away speculators & momentum traders) or to generate negative publicity in the MSM (scaring away retail “investors”). I tend to agree that it’s yet another example of high handed PMs price manipulation and extreme volatility Jim Sinclair and others have been warning about.

Movements in gold will become so violent that gold will become untradable to individuals.

It applies to silver as well, if not more so. Ever wondered what is meant by that? To find out, try buying from some of the smaller web stores or walking into your favorite over-the-counter dealers during or shortly after a major price slam to take advantage of the unusually low prices. Chances are you’ll be greeted with an unusually high premium or an “Out of Stock” message. They could have genuinely ran out of stock, or may just want to temporarily hold back sales fully aware that this slam down is an abnormally and is short lived.

If indeed the PMs market is being manipulated and their prices are so volatile, does it actually make sense to invest in gold & silver?

Here are some articles to address the above question, some commentaries on previous price take-downs and PMs manipulations.

• Why I don’t invest in precious metals
• Investing in PMs or Holding PMs?
• Gold is NOT an Investment. If you’re Looking for an Investment, Look Elsewhere
• Disconnect Between Paper & Physical Prices And What We Can Do About It
• Currency Wars & Another “Drive-By-Shooting”
• Ted Butler’s 5 Questions for Gary Gensler, Chairman of the CFTC
• Positive outlook for PMs despite recent silver manipulative take down

For the benefit of readers who continue to do their accounting in units of fiat currencies, I’ve summarised the performance of gold and silver in several currencies through the charts below. Hope they help to put things into perspective.

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Gold & silver performance relative to various currencies in 2011

In 2011, gold appreciated by an average of 14.3% against all 75 fiat currencies tracked by goldsilver.com, while silver averaged a corresponding loss of 6.8%. Among the selected currencies of interest charted above, only the Indian Rupee recorded a loss against both gold and silver.

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Gold & silver performance over 12 years

Going back to the beginning of this secular bull market in PMs, both gold and silver charted impressive gains against all tracked currencies. If you’ve been earning or saving in Indian Rupees over the past 12 years, you’d have lost over 500% against both gold and silver. If you think the Indian Rupee had it bad, spare a thought for those who’ve saved in Iranian Rial or Argentinian Peso, which depreciated by 3,368% and 2,240% respectively against gold.

Gold & silver performance before April’s price take downs

Silver’s 2011 performance was extremely volatile peaking in late April.  Silver’s peak and subsequent drop in price mirrored what we witnessed in its 2008 price action when the silver spot price dropped 50% peak to trough intra-year. This chart shows how silver has been leading gold’s performance just before the April price take downs.

Be prepared!

If you’ve been following recent geo-political and macro-economics news, you’d be much better informed than me. Doing a quick review of what transpired during the period I left this blog idle, here’s what I consider noteworthy developments:

• The Fed’s announcement of its zero-rate policy through 2014, requiring it to print more money to buy US Treasuries.
• ECB engaging on its own campaign of printing money hoping to “solve” Euro zone’s deepening debt crisis.
• Start of a countdown to the war with Iran.
• MF Global’s $6.3 billion “repos” saga leading to its collapse and potentially bringing down the Futures/Options (and other derivatives) market along with it.

Bottom line is things are getting worse, not better (as the MSM would have you believe), especially for savers and retirees. 2012 and 2013 are setting themselves up to be potentially disruptive years. Be prepared!

Updates to static pages:

• GoldMoney Review: Discontinued services, Gold & Silver “Client holdings by vaults” charts as at 30 Dec 2011
• BullionVault Review: Gold & Silver  ”Client holdings by vaults” charts as at 30 Dec 2011
• Compare AFE, BullionVault, GoldMoney: Comparative gold & silver holding charts as at 30 Dec 2011 and Alexa comparative traffic rank chart as at 01 Feb 2012.
• Fees Comparison: Highlighting GoldMoney’s zero-spread trading advantage.
• Forecasts: All close ended PMs price action forecasts by industry leaders were off target! New ones are being tracked.

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On the lighter side…

Endemic to the Galápagos Islands, these bright golden land iguanas (Conolophus subcristatus) are incredible friendly and approachable. If not for the 2-meter rule, you could easily reach out to touch them!

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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

In contrast, you get some very established dealers offering much lower premiums in countries where the market is more mature. That’s why I mentioned you should look beyond your borders if you are dealing in larger quantities.

• Difference between Investing and Owning Gold & Silver
• Buying & Storage Options