Political Metals

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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

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Here are two great interviews discussing the reasons & implications of the recent price action of gold & silver.
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Sean (SGT Report) discusses the recent silver price take-down with David Schectman.

• Place of technical analysis in a manipulated market
• Silver is so oversold “It’s a License to Steal”
• Difference between physical silver and paper silver prices
• Why hedge funds sold their winning positions in gold & silver
• While hedge funds, Soros & Paulson sold paper silver in the Comex, the Indians, Russians, Chinese, Arabs and retail buyers bought up all the physical silver they could get their hands on. (Make sure you watch part 2)

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Al Korelin (Korelin Economics Report) discusses the recent silver price take-down with David Morgan. Some key points:

• Have the fundamentals for silver changed?
• CME margin hikes favour the shorts
• Political events and how they affect the price of silver
• If you don’t want to lose any money, stay out of the futures market. They are for professionals
• Stay out of this sector if you don’t have a high degree of accumen in the industry or can’t take wild swings

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“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

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