Political Metals

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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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Much has been written about how a handful of large commercial banks are suppressing the price of gold and silver though their massive short positions in the futures market. Both here and elsewhere in blogsphere, you read of frustrations being vented over the failure or refusal of the Commodities and Futures Trading Commission (CFTC) to act on these market manipulators.

Despite thousands of public comments calling for imposition of position limits following the public hearings in March 2010, nothing has been implemented to-date. It’s all quiet now, after the initial noise generated over the Dodd-Frank act. As an agency tasked with providing oversight, the CFTC appears to be closing both eyes and acting like a toothless tiger.

All these discussions, complaints and rants on the banksters and the CFTC featured here are highly focused on the gold & silver market. Readers may have the impression that it is an issue unique to this market, and some may even smell a conspiracy theory here.

I came across a recent interview by Paul Jay of the Real News Network discussing the same issues mentioned above with Michael Greenberger, professor of law at the University of Maryland - but from a different perspective. They talked about how big banks have been artificially inflating the price of food & fuel through the same manipulative mechanism in the futures market. Some key points include:

• The CFTC assisting selected big banks and people who just want to bet, who don’t touch the underlying commodities but want to bet on price direction.
• Stealth exemptions on position limits given to Goldman Sachs et al so that they can profitably run their “betting parlours”.
• Futures market for food & fuel comprises 20% real hedgers (for whom the futures market was originally designed) and 80% commercial speculators who have nothing to do with the physical commodities.

Sounds familiar? This video should help cast away any doubt that allegations of gold & silver price manipulation by the banksters, assisted by the CFTC, are for real. We’re not the only ones affected. The whole commodities market is similarly tainted - by the same culprits.

Related Articles:

• Commodity Futures Trading Commission (CFTC)
• The Silvery Silence of CFTC, CME, JPM & BlackRock
• Ted Butler’s 5 Questions for Gary Gensler, Chairman of the CFTC
• What Big Banks are doing in the commodities market
• Precious Metals Price Discovery about to Change

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When someone like Ted Butler says “It was something I had never witnessed before”, it must be something we should take cognisance of, considering the fact that he’s one of the most authoritative, if not the most authoritative silver guru around.

Here’s a summary of last weeks silver price action followed by Ted Butler’s take from his Weekly Review of May 7, 2011.

• 30% decline in a week
• Biggest price loss in 31 years
• $6 takedown in 12 minutes on Sunday evening (May 1, US time) on light volume
• 8 years of global Silver supply changed hands last week (on paper!)
• 84% increase in silver margin, 5 increases in 8 days

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Theodore Butler | silverseek

The historic decline this week in silver creates strong emotion. Watching great amounts of wealth disappear, quite literally in minutes amid disorderly trading conditions is a genuine fear for any investor. Worse is seeing no obvious legitimate reason to explain the carnage. If that doesn’t scare you, nothing will. Especially if you already harbored unease about how the whole silver market operated.

But fear is an emotion that burns out fairly quickly. A human being can’t stay in an intense state of fear of financial catastrophe without selling out at some point or mentally adjusting to the new level of price. Then the conditions that led to the fear in the first place are replaced by some other emotion. If evidence exists that the sudden financial loss could and should have been prevented, the new emotion becomes one of anger. Anger at who or what might have caused the loss and who should have prevented it. I think there is compelling evidence pointing to who and what caused this silver crash as well as who should have prevented it.

The first thing we must recognize is that this was an unusually intense price smash. Silver fell 30% for the week, its biggest price loss in 31 years. The decline was highlighted by record trading volume on the COMEX and in shares of SLV. From any objective measure, the trading was disorderly, indicating little true liquidity despite the record volume. That’s because much of the trading was conducted by high frequency trading (HFT) computer bots whose clear purpose seems to be to cause disruptions to prices. These are the same disruptive traders that caused the flash crash in the stock market last year. I believe it was these traders who started the price decline with the $6 hit in 12 minutes on last Sunday evening. Their primary reason for existence seems to be causing prices to collapse.

Why these HFT cheaters are allowed to pollute our markets is beyond me. The only clear beneficiary to their trading is the exchange itself which pockets fees on every contract traded. After they crashed the stock market last year, I believe the HFT computer bots toned down their stock market activity due to regulatory pressure. That’s fine, but why were they then allowed to infect silver trading with their disruptive practices? This is just one question I have about this week’s events in the silver market and I will list them all in a moment. First I would like to get something off my chest.

I am appalled at what happened in silver this week for a very special reason. I can’t say this latest blatant take down looks out of place for a manipulated market which I have been alleging for 25 years. In fact, not that we needed additional proof that the silver market was rigged, but this intentional price smash provided that proof in spades. Admittedly, I look at silver differently than most folks, but there was something very special about this week. The special reason I am particularly appalled this time is that this is the first silver price smash for the record books that took place during the tenure of Gary Gensler as Chairman of the CFTC. There have been some multi-dollar price declines since Gensler was confirmed in May of 2009, but this week’s smash is the first mega-down move under his watch. That makes it very special to me.

As you know, I have put Gensler on a pedestal, repeatedly referring to him as the greatest chairman in CFTC history. Considering my past experiences with the agency, I still marvel at my transformation. I think he has done more than anyone ever to reform commodity regulation, including working diligently, although very quietly, to end the silver manipulation. As you also may know, I have generally come under great criticism and disagreement from many of you about my opinion of Gensler. I have respected that criticism and have used it to reflect on and test my continued belief in the chairman.

This week’s events in silver have created what may be a seminal moment. I still hold a deep belief in Gensler’s character and purpose, but it is important to judge how he and the Commission react to this week’s silver price plunge. Certainly, Gensler doesn’t answer to me, but he does answer to the public who he has sworn to serve and protect. The public was not protected this week in silver. I don’t think he had any inkling beforehand about what transpired this week in silver, but he is too smart not to grasp the significance of the silver price plunge and the circumstances that caused it. How he reacts to his first real-time case of blatant fraud and manipulation in silver will be a key test for him. I sure hope his reaction is different from the typical CFTC reaction before he arrived. You know, the three monkeys’ see, hear and speak no evil reaction.

Gensler is fully aware that there have been more public complaints and comments and agency investigations concerning silver over the years than for any other issue in agency history. The public has done whatever has been suggested or required by the Commission to make its voice known on silver. Cumulatively, there have been tens of thousands of public and private comments to the Commission regarding silver, from position limits to pointing out specific instances of trading abuse. While I suspect progress has been made behind the scenes, that progress is not visible to the public. Here we have a case where the public couldn’t possibly be more vocal to the prime regulator about wrong-doing in silver and is then subject to the most egregious takedown in history.

Silver investors are not second class citizens, yet they are being treated as such. Generally, they are among the most God-fearing, family oriented, hard working, law abiding, productive and patriotic members of society. Chairman Gensler and the Commission know this from the comments that silver investors send in continuously. Then why are silver investors not offered equal protection under the law that the Commission has sworn to uphold? Is there something about “and justice for all” that specifically excludes those that invest in silver? If what occurred in silver this week had instead took place in the stock market, corn, cattle, or any other market, there would be non-stop congressional and CFTC inquiry and debate. Instead, silver investors are confronted with a non-stop barrage of propaganda indicating they were idiots for considering silver.

Please allow me to be blunt and specific. These are the questions that Gensler must confront and address–

One - the $6 takedown in 12 minutes on Sunday evening on initial light Globex volume was clearly intended to get silver prices rolling downhill. It was something I had never witnessed before. There were no fundamental developments in silver to account for it. Therefore, this was not true price discovery, but price-setting and manipulation. What is the Commission’s take on this matter?

Two - the series of margin increases by the CME Group had the effect of adding downward pressure to a market already intentionally rolling downhill. At best, the margin increases prove that silver margins were previously much too low and the CME is incompetent and negligent in setting margins and that function should be taken away from them. At worst, the CME intentionally raised and timed silver margins to aid and abet its most important members in causing the price of silver to crash. In other words, the CME resisted raising margins on the way up as that would have damaged the insider shorts and waited until prices began moving lower to hurt the longs and reward the shorts. I’ve learned from experience that it is best to view the CME as a criminal enterprise. What is the Commission’s opinion on this?

Three – 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?

Four – there has been much media and other commentary about silver being in a bubble that burst due to large leveraged speculative buying. This story has been repeated so often that it is now accepted as being true. Yet the CFTC’s own data in the COT reports indicate that no such speculative buying occurred in silver futures prior to the price crash. Commodity law holds that it is a criminal violation to spread false market information. Why is the CFTC allowing this false market information to be disseminated unchallenged? By remaining silent and not setting the record straight, the Commission itself may be in violation of the law.

Five – while outside its direct jurisdiction, the Commission is aware of the allegations of manipulative impact the short selling of shares in the big silver ETF, SLV, has had on the price of silver. What is the Commission’s position on this and has the agency referred this matter to the SEC or taken it up with BlackRock, the trust’s sponsor?

Since the last official denial by the CFTC that anything was wrong in the silver market in May 2008, the agency has issued no further denials. Instead, they initiated a new investigation in September of 2008, but little has been said about the findings of this ongoing silver investigation. I think that the denials of a silver manipulation ceased primarily because of Gary Gensler’s assumption of office two years ago. From day one, he has said and done the things which were consistent with the termination of the silver manipulation. That’s why I have publicly (and privately) expressed my admiration and respect for him.

But this week’s intentional price smash in silver brings us to a critical junction. No, I am not worried about the price of silver in the long term, as the realities of the supply and demand factors are stronger than any manipulation. What I am concerned about are the principles of market integrity and the rule of law. In those terms, what happened this week is the worst thing possible. The public has warned the Commission to no end about wrongdoing in the silver market, only to see that wrongdoing blatantly displayed again. There are many legitimate questions about what actually took place, such as the ones I have listed above.

I think I comprehend the magnitude of the difficult task confronting Gensler in silver. But it is the difficulty of the task that defines the true character of a man or woman. Fixing simple problems and answering easy questions do not lead to greatness. With no pain, comes little gain. Had there been no historic and intentional price crash in silver this week, it would have been appropriate to allow the agency the time necessary to resolve the manipulation. But for the Commission to remain silent now would diminish us all. It’s time for Gensler to speak out on silver and this week’s events. For our collective sake, I hope he does.

Ted Butler

May 7, 2011

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Related Read:

Anatomy of Silver Manipulation (May 1-6 takedown) - By Avery Goodman | Seeking Alpha