A Template for Slaughter
Over the past few months, it has seemed like whenever there was yet another government intervention in the monetary/banking/financial system, gold and silver prices have immediately retreated instead of behaving in a resurgent manner. Presumably this is because each time market participants fear that the latest intervention will have the same effect as Paul Volcker’s courageous decision to raise the fed funds rate sky high starting in 1979 under lame-duck President Carter. This would be histerically funny if it didn’t just happen again.
And so it is with the Senate “yes” vote last night on what could finally (not in a happily anticipated sense) turn out to be the fuel that helicopter Ben needs to take flight (see my post just previous to this). As I write this, silver appears intent to test its September low in the $10.30-10.40 range and from all appearances there is a good chance it will even dip to the single digits. Some of this has to do with commodity-sector sympathy given that oil has resumed its decline and copper is finally (given my copper puts, this is happily anticipated in my case) falling off a cliff. Yet gold is still trying to hang tough around $830, almost a full $100 above its September low. The relative performance of gold should be no surprise given the basis work that I have been sharing with GSUL 5 registrants, and which I will be sharing with all Metal Augmentor subscribers once the service has officially launched. It should also not be a surprise to those who have been following the LBMA forward rates, which are a form of basis that I will better explain at GSUL 5 as well as once The Metal Augmentor is fully up and running.
I hate not being able to go into greater detail for all of your benefit, but I can say that the lack of backwardation in gold and silver are indicative of the resolve that the insiders of the financial industry still have to delay or displace the current crisis to some future date. The basis is telling us it is not yet the Last CONtango in Washington. The basis is saying that the financial system is not in fact on the very edge of a cliff, or at least that it has not yet irrecoverably leaned over the edge.
A reader has asked that I mention the beating that the HUI has taken today: down 50 points to 265 for a 16% loss. The XAU didn’t fare much better: down 20 points to 111 for a 15% loss. Many individual mining names were crushed for even bigger losses up to 25%. This sure is blood in the streets but there is a chance it could still run thicker. I haven’t checked the companies covered in our Mining Equities Report but I would suspect some of them are holding up better than this. Speaking of the report, we plan to have an update in a couple of weeks and also a few companies that we will be adding over the next several days. I will be posting a special password-protected entry and e-mailing the password to Founding Members shortly so please keep an eye out. Also, we are in the process of writing the second installment of the report, which will be available for free to Founding Members as part of their one year subscription to The Metal Augmentor. This second report will cover producing mining companies with low cash costs with the idea that they have both defensive qualities and above-average prospects for price recovery if and when the current bloodbath is over.
I must say I will be very surprised if silver does not go below $10 and trade down to $9 in the near future. Silver may very well be done for a investment for a few years now. Looking back over the past 7 years since roughly the bull market in PM stated. I can tell you from reading all the silver analysts, commentary, advice, reccomendations and blogg sites, 98% of them got it WRONG. We had a short period there where silver moved from about $12-$21, which was a excellent trade over those few months. However for a long term investment 5-15 years, it has been a disaster for the majority of investors. Most people are probably in silver between $11.50-$19.00. We are so far out of the money now by most investors its laughable. Not to mention all the people who invested in the ETF, which I believe is below its IPO price of two in a half years ago. I will not be selling any of my physical silver. However I will not be purchasing any additional silver on a regular bases as I have been doing for almost 6 years now. For the forseeable future there is no catalyst to drive silver higher, 1-3 years probably. It may very well trade in a range as it did for almost 20 years. Silver has been just like the dotcoms, a sharp rise up when everybody get on and a fast drop back where everybody continues to ride it down hoping for better days. Oh please don’t comeback with the contrarian view either, that dog won’t hunt.
Silver, if you want to pick a fight with Kondratiev or Juglar be my guest. I think you’ll loose.
Commodities are very depressed against all assests. The CRB is at its lowest point against gold in 8 years. the CRB is at its lowest point against the S&P500 in 25 years.
Silver, trading at 75 to gold is dirt cheap. It’s trading range is 20 - 100 against gold. Relative to every paper assest on the planet it’s cheap.
The Cycle says silver price must rise against gold, so it will. If not today, than tomorrow. If not tomorrow than next week. If not next week, then next month…
Correction: the CRB is trading at a 25(!) year low against gold.
The next several weeks just might make HISTORY. I don’t think people realize just how bad this CREDIT SITUATION has become. Of course the future can not be told as we do not know what the WIZARDS at the GOVT and WALL STREET will do.
The reason why we will NOT HAVE DEFLATION as we had in the 1930’s is due to the fact that the country had a SMALL POPULATION with LARGE SURPLUSES OF RESOURCES STILL LOCKED IN THE GROUND at DIRT CHEAP PRICES. Today….the opposite is the CASE…the United States PEAKED in OIL PRODUCTION in 1971 with 10 MILLION BARRELS A DAY. Today we can only produce about 5.5 MILLION BARRELS. Each Year the rate falls. We CONSUME 20 MILLION BARRELS a DAY.
This SUBURBAN ECONOMY needs a certain amount of OIL INPUTS to FUNCTION or the whole thing COLLAPSES. This is the INFLATIONARY IRONY. Back in the 30’s we had a more RURAL SOCIETY with less in CITIES and SUBURBS. TODAY people punch KEYS on a computer or Fry Burgers at the McFATS…..no real PRODUCTIVE WORTH.
To keep this SYSTEM GOING….we will need to IMPORT OIL….but we will no longer be able to SEND FINANCIAL INSTRUMENTS for GOODS overseas. That has now becme a DEAD END. This will be the INFLATION.
If people think there is DEFLATION in COMMODITIES and ENERGY….just wait until this winter when an ENERGY SHORTAGE will prove that THEORY FOLLY. Next year….AMERICANS who are living 2 families in a HOUSE will be paying more for FOOD, ENERGY and GOLD and SILVER.
I still get credit card offers in the mail, and my bank just raised the limit. So much for a credit crunch…
Kitco no longer has any 1 oz gold eagles or maples listed for sale on their site.
The larger the shortage of physical te lower the COMEX price.
This should make sense since the price of a contract at the COMEX is nothing more than a PROMISE to deliver. Since there is hardly any physical silver left, the promises become worthless.
You could also see it as a risk of default, where the discount of the COMEX price to the physical price reflects this risk. The higher the risk, the higher the discount, the lower the COMEX price.
Buying silver to make money? Hooey. One should be buying silver to avoid losing it. Silver and Gold are the ONLY REAL MONEY. Changes in the value of money with respect to the FED Res Note merely reflects the changes in the value of that underlying piece of paper. The silver and gold prices spiked last March after a herd of speculators piled in. But that is not the proper angle from which to view the PM’s. While “forces” currently weigh heavily on the Comex paper price, this cannot last forever. Patience, Yoda says.
Second but unrelated point: Now that the House has reversed itself in an apparent Janus ‘about face,’ we are left with one simple task at the voting booth next month. T’row da bums out.
Buried within the language of the legislation is the following quirk: the government will be in the mortgage rate/principal reduction/modification business. I hope you all understand what that means for the current occupant of your domicile. Now I’m not recommending this (there are laws against it, I believe; I mean the recommending part as an act of sedition or something that probably falls under the wide umbrella of the Patriot Act) but one COULD simply stop making payments and wait for the House Member in Charge of Mortgage Adjustments This Month to show up at one’s double-wide. Following the requisite cuppa (hot toddy, Congressman?) I’m certain you could do better than you’re doing now. Hey, it could happen.
Which leads to this: how do think the government is going to implement that policy? Clearly, the mortgage industry is going to busy at the bank what with all those GSE checks coming in every day. And Mish was worried there’d be no jobs created by this legislation. C’mon, we’re all gonna be workin’ for the House.
Actually, with this Bill, we already are.
Buying silver to make money? Hooey. One should be buying silver to avoid losing it. Silver and Gold are the ONLY REAL MONEY. Changes in the value of money with respect to the FED Res Note merely reflects the changes in the value of that underlying piece of paper. The silver and gold prices spiked last March after a herd of speculators piled in. But that is not the proper angle from which to view the PM’s. While “forces” currently weigh heavily on the Comex paper price, this cannot last forever. Patience, Yoda says.
Second but unrelated point: Now that the House has reversed itself in an apparent Janus ‘about face,’ we are left with one simple task at the voting booth next month. T’row da bums out.
Buried within the language of the legislation is the following quirk: the government will be in the mortgage rate/principal reduction/modification business. I hope you all understand what that means for the current occupant of your domicile. Now I’m not recommending this (there are laws against it, I believe; I mean the recommending part as an act of sedition or something that probably falls under the wide umbrella of the Patriot Act) but one COULD simply stop making payments and wait for the House Member in Charge of Mortgage Adjustments This Month to show up at one’s double-wide. Following the requisite cuppa (hot toddy, Congressman?) I’m certain you could do better than you’re doing now. Hey, it could happen.
Which leads to this: how do think the government is going to implement that policy? Clearly, the mortgage industry is going to busy at the bank what with all those GSE checks coming in every day. And Mish was worried there’d be no jobs created by this legislation. C’mon, we’re all gonna be workin’ for the House.
Actually, with this Bill, we already are.
” dieuwer Says:
October 3rd, 2008 at 6:41 am
The larger the shortage of physical te lower the COMEX price.
This should make sense since the price of a contract at the COMEX is nothing more than a PROMISE to deliver. Since there is hardly any physical silver left, the promises become worthless.
You could also see it as a risk of default, where the discount of the COMEX price to the physical price reflects this risk. The higher the risk, the higher the discount, the lower the COMEX price.”
dieuer, I’ve suggested the same thing here and on other sites.
We’re the only two I know of who have come up with this
“offbeat” explanation for depressed paper silver prices.
It certainly makes sense to me…to discount the promise
against the likelihood of physical delivery. There is an
awful lot of precarious paper out there…there is little or no
reason to believe a Comex contract is any more sacred than
any other instrument.
It is hard to argue with the perspective of deteriorating values for promises. But this elegant perspective is missing something ? or early.
If correct (complete or timely), should we not see a wider variation of price around the world?s futures exchanges for similar contracts ? discounting the value of promises between various markets? I?m not seeing that in Tokyo or Dubai where contracts are deliverable in physical.
Though I don?t have experience in taking delivery in those markets, from what I hear it might be easier than off the COMEX. It also appears these other markets are less corrupt.
For now, it appears we?re in the middle of a very broad liquidation across markets ? a scramble for cash.
Perhaps after things settle a bit we will see a wider variation in world futures prices. Wouldn?t that be interesting?
So far though, not yet.
I never put the pieces together until recently as to how the silver shorts (if unhedged) would ever cover their massive position. Although default was always an option, these shorts have proven their mastery by forcing the majority of players out of futures speculation in silver by eroding confidence that any contract actually would be closed out by delivery, by eroding confidence in the brokerage itself of solvency, and finally by nudging frustrated longs into ETFs or physical “in hand” silver. The more longs that leave futures and enter physical trading vehicles, the larger the premium (backwardization) becomes furthering the idea among silver traders to abandon paper and enter physical.
As it becomes more accepted that there are really two distinct markets for silver (physical and paper) seeing any contango in futures is gotta be the biggest joke running.
Mke R…..you are on to something……According to Dan Norcini, the same thing seems to be taking place in the GOLD COMEX:
Open interest in the COMEX GOLD PIT is near freefall dropping another 5,000 contracts yesterday. If someone had told me a couple of years ago that the greatest financial crisis of modern times would see the open interest in gold disappear into a black hole, I would have thought them mentally missing a few screws and yet that is exactly what it is doing.
http://www.jsmineset.com/cwsimages/Miscfiles/6625_October0308Gold1230pmCDT.pdf
It really looks as if traders are getting tired of the COMEX and rather try their luck in the ETF’s.
On the continued silver shortage….Apmex on its blogspot stated this:
…At APMEX, we all but SOLD OUT on just about anything and everything we can get our hands on. We continually scour our resources to meet consumer demand, but as soon as we load the products on the site it sells out ? many times within a few hours. Pay close attention to our website, because you may find that the products you want will sell out faster than you may anticipate.
From the current appearance of the market, very quickly the only products that may soon be available will be 1000 oz Silver Bars and Kilo Gold Bars. There just simply isn?t any smaller product available on the market…
http://apmexdealer.blogspot.com/
We live in interesting times.
So why is SLV, which is backed by physical silver, trading relative to Comex prices?
At 220mn ounces it appears that the demand is there despite the recent sell off, yet it is being priced as a paper asset.
Murrayf:
“So why is SLV, which is backed by physical silver, trading relative to Comex prices?”
That “backing” remains to be seen. Have their holdings been
audited? Granted, its more likely they actually have the stuff
than the Comex has theirs. In fact, Comex has warehouse
stocks to cover at best 20% of the paper silver contracts extant.
Whatever…if you buy SLV, you are buying a “claim”, not physical
silver in your immediate possession.
As the old saying goes, “possession is 9/10ths of the Law”…
it may prove that in PMs “possession is 9/10ths of the value”.
Some really great posts here. Tom may I make a suggestion to keep the reader comments continuing on one page? I’m not sure if/when we are to move the dialogue to the next blog post you make. A lot of valuable insights are lost as older posts descend.
JohnSt,
I agree that SLV has a credibility problem partly because precious metals advocates are a cautious bunch, partly because financial institutions have not exactly been impressing the general public with their trustworthiness of late.
However SLV has taken pains to create a legal setup which isolates it and ownership of the underlying silver from its sponsor Barclays, has published bar numbers at some stage I believe, and does undergo a financial audit.
Tom himself has commented on this: http://silveraxis.com/commentary/slv_backing_allegations.pdf
If SLV were to be seen as a safe alternative to in-the-hand physical it would spell big trouble for Comex because if there is such a shortage of physical where would the SLV brokers go for their purchses? Stand for delivery of Comex futures?
That said, is there such a shortage? I don’t hear of the LME grinding to a halt, or of physical contracts there driving up the price. Perhaps there is a shortage of investment metal, but as yet this has not resulted in a shortage of industrial supplies e.g. 1000oz bars.