Political Metals

-

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.
- 

Part 1

Part 2

-

Further Reading:

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

-

“When you own gold you’re fighting every central bank in the world”. Jim Rickards

To a great extend, that holds true for silver as well. This week, holders of Political Metals lost a battle, but certainly not the war. Measured against the USD, gold and silver are worth less compared to a week ago by 9.6% and 26.3% respectively.

It all started with Ben Bernanke’s statement, following the 2-day FOMC meeting, stating the obvious - that “there are significant downside risks to the economic outlook, including strains in global financial markets”. His antidote was a plan to purchase $400 billion of long-term Treasury bonds and to sell an equivalent amount of short-term debt. More commonly referred to as “Operation Twist 2″, this plan seeks to further reduce long term interest rates, after having pledged to hold short term rates practically at zero until 2013.

That announcement, made in the backdrop of the Eurozone debt crisis and news of slower growth in China, sent global stocks and commodity markets into a waterfall decline. This set up was ideal for the bullion banks who have massive gold and silver short positions. All they needed to do was to pull the trigger, and that’s exactly what they did on Thursday. Silver was pushed down sharply through its key 50 and 200 day moving averages, triggering an avalanche of tech funds selling the following day.

Going for the final kill of the week, news of yet another margin hike by CME (gold by 21%, silver by 16%) leaked into the market towards the end of Friday’s trading day. That further fuelled the selling, pushing silver briefly below $30 before closing at $31.08 - down 26.3% for the week.

In other markets this week, the Dow suffered its biggest loss since 2008. In four days U.S. stocks lost $1.1 trillion in value.  The MSCI all-country world share index (tracking thousands of stocks from developed and emerging countries) recorded its second worst quarter in 23 years and the 30-year bond rates dropped 55bps - the biggest move since the 1987 Black Monday.

So there you have it, Dr. Ben Bernanke, bullion banks & CME working together in perfect harmony. I don’t believe for a moment that the resulting market turmoil was any surprise to Bernanke. Despite saying that gold is not money, he’s smarter than most people made him out to be. After all, he achieved an SAT score of 1590 out of 1600, graduated from Harvard and has a PhD in economics from MIT. Contrary to its statutory mandate of foster maximum employment and price stability, this market turmoil I believe is a piece of precision engineering to achieve some larger agenda. This round is yours, congratulations Ben!

This engineered global markets take down could be part of the deflationary phase that Mike Maloney talked about, which is a prelude to the hyper-inflation phase. They have to assist the bullion banks cover their shorts and bring the Political Metals price down to a lower base before starting the next round of QE or equivalent. Marc Faber told ThomsonReuters that “if the S&P drops to around 900-950, we’ll get QE3 for sure”.

Four ways to view the developments over the past week

If you’re reading this blog, you’re not a professional or a day trader, possibly someone already invested in gold or silver, someone holding some Political Metals (I distinguish between investing & holding here) or someone in the process of researching the matter. As non professional traders, we have to look through and not at the turmoil unfolding before us. All of the bloody carnage above are on “paper” or bits on silicon - illusionary financial derivatives of something tangible (like gold and silver) or derivatives of something totally virtual and non-physical (like interest rates, bonds, debts, CDS, etc). Real or imaginary, they are all derivatives backed by nothing more than a promise or lies of a third party.

Unfortunately, in so far as gold & silver is concerned, the outcome of the imaginary paper price wars above gets applied to the physical world. Price discovery currently comes from the paper derivatives market. Banks and multi billion dollar hedge funds throwing thousands of futures contracts or bets at each other (most of which are done through computerised High Frequency Trading algorithms) determine the price of the coin or bar you pick up at your local bullion dealers. Until such time when this absurd situation of the tail wagging the dog changes, I suggest 4 possible ways for you to view the developments over the past week, using silver as an example.

There’s a big difference between Investing(1) & Holding(2). If you adopt approach (1), and are smart enough to handle scenario (3), congratulations! Trading this dip or swapping silver for gold just before the GSR shot over 56 would have reaped a handsome return. After years of following newsletter writers, both paid and free, I came to the conclusion that attempting to achieve (3) is at best illusionary, and at worst risky. This is particularly true in a manipulated market. Take a look at some of the forecasts by well respected industry players here. Either they missed this week’s price action or are not telling us something. Richard Russell puts it this way:

I look at gold and silver, not as a play for profits, but as an accumulation of hard assets, in a world that it drowning in fiat money, and a world that will probably print trillions more of irredeemable paper.

Finally, if you’ve been waiting patiently (4) or have spare dry powder, congratulations! While the paper price of gold & silver gets whacked, physical demand is very strong. KWN reported that Sprott Money temporarily runs out of physical silver. So, get ready to pick up your discount. Not necessarily immediately, but then again, picking the absolute bottom can also be illusionary. Best industry advise is cost averaging.

Updated:

• 28 Sep “On the basis of the hard information available early this week, it is highly likely that gold and silver prices were pushed down rather than fell as a result of free market trading.” Read Patrick A. Heller’s take on how the recent gold & silver market manipulation was orchestrated.
• 30 Sep “Engineered fall in gold and silver; Trying to scare people out of precious metals“ Gerald Celente

-

This is my response to the article A challenge to debate: How safe is gold? by Sam Chee Kong of Malaysia Chronicle. Since links in the comments section don’t work, here’s the fully linked comment.

“But despite having one less competitor in the safe haven basket, the price of gold did not rocket up as expected. Instead it went down about $50 when the CHF news hit the streets.”

That’s because the price of gold as we know it is manipulated, although its value remains untouched. The “gold price” that the market uses is influenced largely by gold futures and options trading at the CME, which are essentially gold derivatives or “paper gold”. High Frequency Trading (HFT) by bullion banks largely determine the price of paper gold which in turn is adopted as a basis for this debate.

Because of this, gold’s price action does not make sense most of the time, and the case in point is the one you cited above. If you assume that the gold price is a reflection of the value of physical gold in a free market, your observation and conclusion is spot on. If however, you factor in the issue of manipulation, you will come to a totally opposite conclusion.  In the event cited above, gold was taken down five minutes before the announcement and the subsequent plunge of CHF. See this minute-by-minute chart of CHF and gold price actions.

If one argues that the gold price action was because of leaked news, should not the same apply for the CHF/EUR chart? To understand what happened behind the scene, listen to the comments by fund manager Ben Davis of Hinde Capital (4mins into the audio clip) and read the analysis by professional commodities trader Dan Norcini.

For in-depth discussion on manipulation of gold (& silver), visit politicalmetals.com to understand the political nature of gold and silver. Only then can you understand why gold (& silver) prices behave the way they do and why you should view them as the ultimate safe haven and store of value compared to fiat currencies or any financial instruments and paper derivatives.

I could do a point by point rebuttal of the whole article, but it’ll be quite pointless if this fundamental premise upon which the whole debate is based is not sorted out first. In the interim, just ignore the minute-by-minute, hourly, daily or even weekly price of gold. They’re all noise due to massive manipulation. To make sense of the place of gold (& silver) in the larger scheme of things, look at their prices on a monthly and yearly chart. While the powers that be are able to do massive manipulations to paint the tape on short term charts, this effect is less pronounced in long term charts.

Conclusion:

The current price discovery mechanism of gold is akin to the tail wagging the dog (paper gold influencing physical gold). Coupled with central bank manipulations, it will be a futile exercise to engage in a debate over gold’s role in one’s portfolio based on short term price actions. However, things are looking brighter going forward. With the expected opening of the Pan Asia Gold Exchange (PAGE) in China by the end of this year, Comex will no longer have the monopoly to determine the price of paper gold, and by extension, that of physical gold. When we finally see the dog wagging its tail, the proper price discovery mechanism for gold would have been in place. By then, gold’s role will be so evident this debate becomes unnecessary.

by Theodore Butler - Butler Research | August 11th, 2011

Here’s an excerpt from an update sent to subscribers on August 10, 2011. For subscription information please go to www.butlerresearch.com

It is important to try to understand, as much as possible, what are the dynamics behind the large price moves recently. It is human nature to accept any plausible-sounding reason offered if it is in conformance with the price direction. In a big price move, we demand an immediate explanation and then we accept any explanation offered, even if it doesn’t stand the scrutiny of further analysis. For instance, big price declines in copper and crude oil are immediately explained and accepted as being due to weakness in the world economy. Yet we know that the world economy and copper and oil fundamentals can’t possibly change quickly enough to be the real explanation. Please allow me to offer what I think is the real cause behind all the crazy price volatility and then to suggest something constructive you might want to do about it.

What’s behind the volatility is unbridled speculation and computer-type HFT trading gone wild. Oil didn’t drop $20 a barrel or copper 25 cents a pound because there was a sudden fall-off in demand or increase in supplies. This was all about speculative trading gone haywire. Let me be more specific. The whole premise of the economic justification behind commodity futures trading has been bastardized. US law has sanctioned the trading of commodity futures for the express purpose of allowing legitimate producers and consumers to hedge or transfer their price risks to speculators. But the wild price swings we are witnessing are not related to legitimate hedging. The volatility is as a result of speculators battling speculators, with real hedgers largely on the sideline. This is relatively easy to demonstrate.

The big price moves are the result of moving averages and other technical signals being violated. Technical funds and other momentum type traders rush into and out of the markets, often on an intra-day basis, as a result of these price changes. Against those technical type traders are aligned the “commercials” that take the opposite side of these transactions. But these commercials are also speculators and are not the legitimate hedgers they purport to be. Real producers and consumers don’t hedge based upon changes in moving averages on a daily basis. Real hedgers don’t day trade. Real hedgers don’t engage in HFT. The fact is that the commercial traders are just trading against the tech fund speculators and this makes the commercial traders speculators as well. This is an important distinction. It is why the big commercials in COMEX gold may be in trouble, namely, they weren’t hedging in the first place and their short speculation may have been a serious miscalculation because it wasn’t a legitimate hedge originally.

If my analysis is correct, then most of the volatility is due to one giant sick game of unbridled speculation. The speculators include not just the obvious and visible speculators, but also the commercials pretending to be hedgers. These commercial speculators in drag include the largest banks, like JPMorgan. How has it gotten to the point where our insured deposit taking institutions are among the biggest speculators? This speculative trading activity on the part of banks has greatly increased the current price volatility and increased the dangers of systemic risk. How is that good?

We’ve gotten to this point because our financial system structure has encouraged more and more speculation on the part of our important financial institutions. Leading us on the way to ruin is the criminal enterprise, also known as the CME Group, which has become dependent of encouraging more of the mindless daily speculative trading to fatten its bottom line. So harmful is the CME’s role in all of this that in order for the CME to be blessed, the public must be damned.

What can we do about this sorry state of affairs? Quite simply, what we have been doing, namely, to petition the regulators to enforce the laws governing manipulation and disruptive trading practices. I know that many are tired of petitioning the CFTC because there has been little visible response from them regarding the silver manipulation. Yet I am still convinced that this is the best and perhaps only constructive route. I’m not going to beg you to contact them if you feel it’s a waste of time. Likewise, I’m not going to promise you that the agency will do the right thing, as that’s up to them. All I do know is that silver is manipulated by virtue of a concentrated short position on the COMEX and that is against the law. You must always do what you feel is right, regardless of how it may turn out or how many times you tried in the past or whether someone else will also do the right thing.

I know I’m going to send this article to the CFTC (as well as to the CME and JPMorgan). I invite you to do likewise if you are so inclined or write in your own words and ask them to break up the concentrated short position in silver. I would ask that you remain respectful if you do write so as not to distort the intent of your message. I know most of us are sick and tired of the silver crime in progress and the regulators failure to deal with it, but you must rise above your emotions to be effective.

Theodore Butler
Butlerresearch.com

For subscription information to Ted Butler’s private newsletter, please go to www.butlerresearch.com

Theodore Butler is an independent Silver Analyst who has been publishing unique precious metals commentaries on the internet since 1996. He offers a subscription service with once or twice weekly commentaries including detailed analysis of the Commitment of Traders Report, regulatory developments, supply/demand considerations, and topics of interest to investors in precious metals, with an emphasis on silver. Always outside the box. You can subscribe to his service by clicking here.

After another take down yesterday, gold bounced back to the $1,600 handle and silver above $40 in the Comex Access market today. Gold/Silver ratio dipped briefly below 40.

On the surface, MSM commentators attributed Tuesday’s  sharp 3.7% drop in silver to Obama’s positive announcement about the debt ceiling negotiations.

Behind the scenes however, a more sinister effort to manipulate the silver market was unfolding, as described by BrotherJohnF and Silvergoldsilver below.

-
While BrotherJohn thinks that someone sold or “dumped” 50,000 silver contracts (equivalent to 250M ounces of paper silver or $10B worth of physical silver, or in excess of 1 whole year’s of silver production in the US) in one minute, a more probable scenario would be that it was a result of bullion banks’  High Frequency Trading (HFT) algorithms doing their thing to place the price of paper silver anywhere on the chart that suits them and the powers that be at that point in time. Remember that one minute is an eternity in the world of HFT, where transactions happen in the microseconds. Thousands of trading back and forth within or amongst the Cartel members within that 1 minute could produce the cumulative result discussed in that video.

Related reads on HFT

• High Frequency Trading in Commodities
• “Speed”: Speech by CFTC Commissioner Bart Chilton before the HFT World
• Ted Butler’s 5 Questions for Gary Gensler, Chairman of the CFTC
• Silver might crash?

If you don’t mind a little rough language, here’s Silvergoldsilver’s “SLV manipulation July 18th” video capturing the manipulative trades on the SLV ETF before the take down.

-
Despite the paper price suppression,  several positive outlooks for PMs were recorded at King World News:

• Sean Boyd - Expect $2,200 to $2,400 Gold & $60 to $75 Silver July 21, 2011
• Hathaway - Gold Breakout & Subsequent Trading Encouraging July 20, 2011
• Peter Schiff - Silver Will Eventually Trade Over $200 July 20, 2011
• Embry - Possible High Triple Digit Silver Before This is Over July 19, 2011
• Turk - Expect a Tidal Wave of Buying & Short Covering in Gold July 19, 2011
• London Trader - Potential for Major Short Covering in Gold July 18, 2011

And finally, it’ll be interesting to see what happens when Hong Kong Mercantile Exchange launches silver futures trading tomorrow.

On April 26, three trading days before the “drive-by-shooting of silver” resulting in the $6 takedown in 12 minutes, the CME group announced that it had reached record volume the previous day in its COMEX Silver futures, as well as in open interest of its Silver options.

Yesterday, trading of Silver futures reached 319,204 contracts, surpassing the prior record of 201,216 contracts set on November 9, 2010. At the same time, open interest in Silver options reached a new record of 240,344 contracts. The prior record of 235,992 contracts was set on April 21, 2011.

This record volume for Comex Silver futures in April was almost six times the average monthly volume of the last decade. Many attributed this high volume preceding the May 1 silver take-down and the speed & depth of the “crash” itself to High Frequency Trading (HFT) - the robotic execution of trades by powerful computers “capable of buying and selling thousands of different securities in the time it takes you to blink an eye“.

This CBSNews video The Speed Traders gives a rare behind-the-scene insight into the lightning fast but dark world of HFT.

Consider these stunning facts:

• Over 70% of stocks traded in the US are done through HFT robots. No humans are behind these trades because “humans are way too slow to trade on the kinds of opportunities that we’re trying to capture. We’re trying to capture opportunities that exist for only fractions of a second.”
• Their supercomputers are programmed to place and then cancel thousands of orders a second, trying to sniff out which way a market is moving in order to jump in ahead of big rallies and sell off before big declines
• High frequency traders typically tell their computers to make a profit of a penny or less, 40 million times day.
• Speed in accessing raw data from the stock exchange is so critical that these traders rent expensive data center space so that their machines can be physically close to the exchange’s computers.
• Gaining a few milliseconds may make them millions, if not billions a year
• High frequency trading raises no capital for companies, if anything it’s distracting from the capital raising process
• Proponents of HFT say that they benefit the market by providing liquidity, so that when humans or natural traders want to buy or sell, there’s always a counter-party to the trade.
• Others, like William Silver, disagrees…  ”the volume in most issues is vastly inflated by HFT activity, and many computer models being used to acquire and liquidate large positions are built on false liquidity assumptions. This is no problem when markets remain calm. However, once there is a rush for the exits, institutional holders will find that their assumptions on liquidity were incorrect, and we will then experience another mini crash.”
• There are a lot of people out there who think that the stock market is rigged
• “Since we first aired this story, the Securities and Exchange Commission has proposed further reforms, and high frequency traders are now moving into currency and commodity markets“. - CBS News.

And this was exactly what Ted Butler said in his commentary after the May 1 silver price take down.

the record high trading volume and 30% price smash indicate there was little true liquidity present. This is due to a disproportionate share of trading being performed by HFT computer bots. Why are these traders allowed to exist and control so much a share of silver trading?

The ball is in CFTC’s court.

-

Related Reads on HFT in commodities, particularly gold & silver

• Ted Butler’s 5 Questions for Gary Gensler, Chairman of the CFTC.
• “Speed” - Speech by Commissioner Bart Chilton before the High Frequency Trading World, USA 2010 Conference, New York, NY
• Silver Might Crash?

-