Smoking Guns and Banks That Smoke
Note: Originally posted at Metal Augmentor on June 8, 2009 at 1:07 P.M. EST.
By now many of you know that each month the Commodities Futures Trading Commission (CFTC) on its website publishes a so-called Bank Participation Report. We can thank Ted Butler for publicizing this report as frankly I never bothered to look at it until he started to discuss it last year. The latest report for June 2009 can be found here. This report informs the public about the number of U.S. futures exchange contract positions held by U.S. and international banks. The CFTC has separate reports for futures contracts and options.
Last August, the number of short futures positions in COMEX silver held by U.S. banks (2 specific banks to be precise — JPMorgan Chase and HSBC) increased from 6,199 contracts (about 5% of all short positions) in the previous month to 33,805 contracts (about 25% of all short positions). Subsequently, the price of silver dropped from over $16 in early August to an eventual low of $8.40 in October. Seeing this as cause and effect, many silver investors and even several analysts believed this to be a proverbial smoking gun proving once and for all that the silver market is being manipulated by the evil banksters.
I wasn’t so sure about this although I did join the chorus asking the CFTC to look into the matter. Alas, after a quick promise to do so, we’ve heard nothing for many months. I’m not going to sit around and wait, however, so I’ve been doing my own research and critical thinking about the issue. And although I’ve come up with some interesting possibilities, none of my theories are as interesting as the following table that offers up a major helping of reality.
|
U.S. Bank COMEX Silver Futures Short Position |
||
| June 3, 2008 | 2,829 |
3% |
| July 1, 2008 | 6,177 |
5% |
| August 5, 2008 | 33,805 |
25% |
| September 2, 2008 | 32,698 |
28% |
| October 7, 2008 | 23,308 |
23% |
| November 4, 2008 | 22,684 |
24% |
| December 2, 2008 | 24,657 |
30% |
| January 6, 2009 | 24,689 |
28% |
| February 3, 2009 | 27,189 |
29% |
| March 3, 2009 | 30,838 |
33% |
| April 7, 2009 | 28,492 |
31% |
| May 5, 2009 | 26,206 |
29% |
| June 2, 2009 | 27,503 |
26% |
As you look over this data, something interesting should pop out at you. Namely, that the short futures position of U.S. banks in COMEX silver has not changed much since last August. Yet silver has made nearly a round trip from $16.40 on August 5, 2008 to $8.40 on October 28, 2008 and back to $16.20 this past week. In other words, the Bank Participation data appears to be pretty much irrelevant as far as the price of silver is considered.
If the Bank Participation Report is indeed the smoking gun of COMEX silver manipulation, that leaves two possibilities to explain the above data. One is that the banks responsible for shorting COMEX silver appear to be losing the battle to keep the price suppressed. Not only that, but they don’t even seem capable of increasing their short positions to stem rallies like the one from $8.40 on October 28, 2009 to $16.20 this past week. If this is true, the most reasonable conclusion might be that these banks are trapped in their COMEX short futures positions, which means they could be forced eventually to buy back in at much higher prices. That would be a “short squeeze”.
The other possibility in a COMEX silver manipulation scenario is that the banks have not finished trashing silver and they will only be reducing their short positions once silver has made its final low, presumably below last October’s bottom at $8.40. This would be a “washout”.
Unfortunately, there is no way to handicap whether a “short squeeze” or a “washout” will take place as long as we assume that the large COMEX short futures positions of the U.S. banks are the smoking guns that prove silve price manipulation. In order to pick the correct option, we might as well study tea leaves.
What if, instead, we studied the Bank Participation Report under the assumption that it is NOT a smoking gun? Can we then find some use in it? I humbly offer one hypothesis.
Let’s go out on a limb and suppose that the increase in the COMEX silver short futures positions by the U.S. banks did not directly cause the price of silver to fall. This is actually pretty easy to do since the short futures positions were put on before the price of silver actually fell.
If the short futures position of the U.S. banks didn’t cause the price of silver to fall, which is obviously true, perhaps the same market conditions that did cause the price of silver to fall also resulted in the banks establishing the large short futures position. How would that work?
To answer the question, we obviously need to look at the market conditions that prevailed during the relevant time frame. And because we have hypothetically eliminated the “smoking gun thesis”, we must now substitute bona fide market forces for the price manipulation that is alleged to have caused the price of silver to decline precipitously.
Here are a few possibilities involving bona fide market forces.
(1) The normal physical buying patterns simply dried up.
This doesn’t seem very likely. Smelter and refinery schedules remained tight during the collapse in silver prices so industrial offtake is unlikely to have measurably declined, especially in comparison to crude oil and many other commodities. Moreover, investment demand for physical silver actually got stronger and stronger as prices fell. For example, between the end of July 2008 and the low in late October, the various ETFs and investment funds added more than 20 million ounces of silver to their holdings. Meanwhile, trading volume on the COMEX continued to be vigorous and open interest did not meaningfully fall until silver was near its eventual low in October. Overall, speculative long liquidation on the COMEX was orderly and opportunistic. I personally observed most of the price declines and they occurred on surprisingly small COMEX volumes that were nevertheless well supported on the bid side. If anything, the COMEX buying appeared to be more robust than one might have expected under the circumstances.
(2) Selling of paper silver contracts (including COMEX) overwhelmed the buyers.
This is the usual reason that has been offered to explain the crash in silver prices (not only this one, but every other one in the past as well), but it doesn’t actually explain a valid market process. For example, if more COMEX silver futures were being offered than the longs were willing to buy, open interest representing the number of contracts outstanding should have increased. Open interest, however, fell from the summer 2008 peak of 143,000 contracts to a low of 82,000 by December 2008. Moreover, long liquidations in COMEX silver futures appear to have been surprisingly orderly and did not occur primarily during the waterfall declines but at resting points. That doesn’t mean there weren’t margin calls and panic selling in COMEX silver but such activity doesn’t appear to have been as widespread as many people believed (and that included me at the time).
What about other paper contracts for silver, namely over-the-counter derivatives? Could there have been a wholesale flood of silver derivatives leading to a price decline? In a word, no. Derivative contracts in silver are transacted at a price referenced to the market, not the other way around. The only way an “excess supply” of derivative paper could theoretically depress the market price of silver is if somehow physical demand could be diverted to such derivative paper. I’m aware that certain individuals have alleged that the bullion ETFs were established precisely for this purpose, but that still wouldn’t account for demand in the over-the-counter (OTC) spot market, COMEX or the retail silver market. None of these markets had their demand diverted to derivative paper. Moreover, derivative paper is a credit instrument and it is quite improbable that banks and their counterparties were willing to extend credit indexed to the price of silver while they refused to lend for any other purpose.
(3) Selling of physical silver on the OTC spot market overwhelmed buying of physical silver on the OTC spot market.
At first blush, this doesn’t seem to make any sense. After all, retail PM demand was strong and the bullion ETFs saw big purchases during the price decline as I’ve already mentioned above. It turns out, however, that retail and ETF transactions are actually a small segment of the overall physical silver and gold markets. By far most of the transaction volume takes place in the over-the-counter (OTC) spot market. Unfortunately, being over the counter means this market is quite opaque to outsiders like us. Here are some statistics to demonstrate the size of this market (source is LBMA Clearing Statistics):
|
Million of Ounces Cleared |
|
| June 2008 | 119.5 |
| July 2008 | 105.5 |
| August 2008 | 150.0 |
| September 2008 | 143.7 |
| October 2008 | 136.2 |
| November 2008 | 107.6 |
| December 2008 | 102.1 |
Compared to the 20 million ounces or so silver acquired by the ETFs during this period as well as the few million ounces of retail purchases, we can clearly see the OTC spot market is absolutely massive. But did you notice something interesting? There was a big jump in LBMA clearing volume during August, September and October. As it turns out, these are usually the dead months on the OTC spot market during most years. I’m not going to provide figures or charts to demonstrate this simple fact, just go to the LBMA Clearing Statistics and check for yourself. In any case, it should be pretty clear that something very unusual happened in the OTC spot market for silver during August to October 2008 right after the banks built up a big COMEX short futures position and during the same period that silver prices crashed by 50%. At the same time, there wasn’t anywhere near such unusual activity in the OTC spot market for gold nor was there such a large decline in the gold price.
What I’m saying is that selling of physical silver on the OTC spot market may have, in fact, overwhelmed buying of physical silver on the OTC spot market. How could that be? Well, physical silver may be rare but it is still not as rare as teeth on a hen. There are undoubtedly some large stocks of silver out there and these do change hands from time to time. When they do, the OTC spot market is the only market big enough to handle the volume.
Intraday price action tends to support the idea that selling in the OTC spot market was responsible for the vast majority of the precipitous price decline in silver. According to my calculation, the majority of the drop in silver prices from $18 on August 1, 2008 to $8.40 on October 28, 2008 occurred when the main OTC spot market (London) was in session but neither the COMEX nor the major (U.S. based) ETFs were trading. Furthermore, the U.S. retail bullion dealers were closed during most of these price declines as well.
So, it appears that we may have found a market force that could hypothetically explain the crash in the price of silver. Namely, large trades in physical silver took place on the OTC spot market and there were more buyers than sellers. At the same time, the conditions for physical gold were more favorable due to a better balance between buying and selling on the OTC spot market.
Smoking Banks?
Now let’s bring back into the fold those two rascally banks that were short all those COMEX silver futures. What role could they have possibly played in a scenario where physical silver selling overwhelmed physical silver buying on the OTC spot market? Remember, the banks increased their net short position in COMEX silver futures by 27,628 contracts (138 million ounces) as of August 2008 from virtually nothing two months before. Moreover, they continue to hold these elevated short futures positions even today despite having had ample opportunity to unload them at sub-$10 silver prices. What exactly are these banks smoking?
One possible answer, and the most plausible in my opinion, is that a number of investment entities and perhaps even very wealthy individuals were accumulating long physical silver (and gold, of course) positions on the OTC spot market sometime immediately prior to August 2008. That idea hopefully doesn’t sound too crazy considering the atmosphere at the time. You might recall that crude oil was on a moon shot toward $150 even as some “experts” were tripping over each other with higher and higher price targets (a guy at Goldman Sachs even famously predicted $200 oil).
But then something went terribly wrong with the commodity picture. Crude oil tried but could not break $150. By the end of July, it had retreated to $120. There was a sudden shift in market sentiment. Risk seeking quickly flipped to risk aversion. Credit had been getting tighter over the previous few months but suddenly there was a squeeze. A growing number of traders sold assets in order to be the first out the door. These assets included commodity positions. Usually such selling in the commodity sector meant closing out paper contracts such as futures or over-the-counter derivatives. Eliminating such positions did have the effect of reducing risk but didn’t necessarily provide liquidity since they were so leveraged to being with. A position in physical silver could, however, be sold in order to raise cash. The same is true of gold, and indeed, the Bank Participation Report does show a big increase in short COMEX gold futures as of August 2008 that has remained until today.
Taken together, the market data seems to suggest that some of the players who accumulated large physical silver and gold positions were desperate to raise cash by July 2008 but did not want to dump their bullion. If true, it is very possible that these players went to the banks with hats in hand to explain their need for cash and competing desire to hold onto their precious metals. The banks hatched a solution. They would, for a fee, loan cash money against the precious metals, which would be held as collateral. If the loan was paid off, the metal would be returned. If there was a default on the loan, the banks would keep the collateral without further recourse.
This would have looked like a dandy arrangement to both sides except for one thing. What happens if the price of silver and gold drops? The value of the collateral is no longer sufficient to cover the loan. Thus, the banks need price protection. Well, they need not look any further than the friendly folks at the COMEX who make it almost too easy to hedge commercial long exposure. Commercial traders barely have to put up any margin to speak of, which would be an important consideration at a time when the banks themselves are starting to run short of cash.
And indeed, that is exactly what happened starting in August 2008. The banks had less and less funds available to lend. Clients who needed liquidity could no longer borrow by putting up silver and gold as collateral. Thus they had to sell into the OTC spot market. And sell they did, especially silver. This is evident from the LBMA Clearing Statistics. Not surprisingly, the price of silver was hammered. Gold, not so much.
It is very likely that some of the “silver and gold collateral loans” defaulted almost immediately. Meanwhile, bank liquidity continued to deteriorate. By the middle of September a historic banking crisis was in full swing. Lehman Brothers folded. AIG was bailed out at huge taxpayer expense. And physical silver and gold were mercilessly sold without regard to price, no doubt in part by the banks that had acquired physical silver and gold as collateral on defaulted loans. The result was one waterfall price decline after another for silver (and to a lesser extent gold) even as retail and ETF investors were buying with both hands.
The above sequence of events explains why only silver and gold saw a major increase in short futures positions in the Bank Participation Report as the banking crisis and commodity crash evolved. Simply put, silver and gold were the only “commodities” that were held by cash-strapped investors in large physical quantities instead of as leveraged paper derivative positions. Actually, that is not quite true. Other metals including palladium, platinum and even copper were held in large physical quantities as well. Indeed, the prices of these other metals fell even more than silver but since none of them had a futures market that was nearly as liquid as COMEX silver and COMEX gold, the banks were not in a position to offer collateral-backed loans to cash-strapped PGM and base metal investors. As a result, there wasn’t such a glaring short position for these other metals in the Bank Participation Report (although there was indeed a short position in both NYMEX platinum and palladium).
In the end, the bank loan scheme may have had the effect of concentrating the silver and gold that came on the market. Essentially the scheme resulted in a deferral of physical sales that would have otherwise occurred in a more orderly manner and in a relatively stable market during July and early August 2008. Instead, the sales occurred during the height of the financial crisis between the middle of August and the end of October. I note that if the banks were indeed trying to suppress the price of gold and silver, such a result would have been a perfect solution for such a nefarious purpose. Thus, this theory has the benefit of making sense whether or not you believe that the banks actively collude to suppress silver and gold prices.
Conclusion
Even if I am right, none of this means squat if we are not able to identify the implications of the above theory. Considering that the banks still hold large short positions in COMEX silver (and gold), the issue is still very much alive even if the “experts” are no longer talking about it. Out of the many possible ways this could end, I’ve picked out what I believe might be the two most important considerations.
One, the slide in silver prices may have accelerated in the middle of last August because the banks were no longer willing to lend on silver beyond that point. To support this contention, I would note that COMEX open interest peaked at 140,000 contracts on August 12, 2008 just as silver sliced through the critical $16 price level. This could have marked the maximum extent of bank involvement in lending on physical gold and silver collateral for a number of reasons, not the least of which was shrinking bank liquidity.
Two, if the banks are still holding their COMEX short positions as hedges against loan collateral in the form of physical silver and gold, that could represent a dangerous overhang to the market. It is especially troubling that the loans have not been paid back in almost a year. Another squeeze in liquidity could cause more defaults that would force the banks to sell the silver and gold collateral. One possible early manifestation of this would be a sudden jump in the contango especially as measured by the LBMA silver forward rates. It is beyond the scope of the present commentary to explain why this would be the case, but if enough readers are interested, I could write a postscript that goes into the technical explanation.
For now, I’ll just note that while we’ve had quite a climb in the silver forward rates since the mild backwardation in the shorter maturities earlier this year, we haven’t reached the critical point. In my estimation, the critical point would be reached if the normalized forward rate (after removing the effect of interest) climbs above the historical average. This is something to watch closely while the bank participation in COMEX silver futures remains so large and so short, and I intend to do just that. Unfortunately, recent efforts to build a normalized data series for LBMA silver forward rates have stalled and we really need to get going again o
For example, if more COMEX silver futures were being offered than the longs were willing to buy, open interest representing the number of contracts outstanding should have increased.
I lack understanding of this, for open interest to increase doesn’t there need to be a buyer for the seller?
That first paragraph was a quote from Tom’s article
Good question, here is how the markets work. Some longs who are not willing to buy at the current price will buy at a lower price. In other words, they have bids to buy under the current price. The way a short would manipulate the market lower is to overwhelm the bids at the current price so that these lower bids are triggered. This would increase open interest. By contrast, if longs are liquidating on a price decline without shorts hitting the bids, we would expect open interest to remain steady (if other longs are picking up the liquidated position) or decline (if shorts are covering at a profit).
I think I understand that. Would it be true to say that if there were more longs willing to buy than futures contracts being offered, then open interest would increase along with the futures price, as higher bids (asks?) of the shorts are hit?
I can see where looking at the volume of contracts outstanding gives the appearance of continuity. However, what about overwhelming the bids to hit the stops of the longs and starting a drop that they then covered into? Net number of contracts remain constant, but the damage was done to the price. and those who had long positions were releaved of their money.
July 1, 2008 6,177 5%
August 5, 2008 33,805 25%
Could that have been enough to break the back of the longs and get the liquidation going? What would be telling would be daily stats of volumes of contracts sold by the shorts. From that you could draw more meaningful conclusions.
Just my thoughts.
Nice work Tom!
So, if I’ve got this right, then last fall we experienced a time-concentrated liquidation of accumulated physical silver bullion in the OTC market by distressed “investors” and their distressed bankers who also sold off bullion collateral from defaulted loans.
It seems these “investors” were the weak hands - tragically levered and vulnerable to bank credit. From this point on I will refer to these “investors” as @*&!s.
Some thoughts/questions,
The magnitude of the post July 2008 increase in silver ounces cleared on the spot market over the subsequent three month period of Aug, Sep, October (111million?) is indeed comparable to the ounces represented by the post July increase in open COMEX bank short positions.
November activity on the spot market then dropped back to July levels (coinciding with the low in silver price) - but not so on COMEX..?
When banks and @*&!s dumped physical silver on the spot market why weren’t the COMEX hedges taken off with the physical sales?
Did the banks see a sure thing and front-run this physical selling, maintaining their COMEX shorts? But there were not enough sellers at the lows for them to cover into?
Maybe the banks ARE trapped having wanted to exit earlier.
Not to say they can’t get out later.
Another thought,
My guess is that any one @*&! did not have that significant of an amount of silver bullion in dollar terms relative to his other positions. The amount of cash represented by this hoard would pale to the risk of NOT dumping other leveraged paper positions in a negative environment. It’s difficult for me to understand how they could view their silver bullion as a means to raise meaningful cash in an attempt to hold onto high leverage - either by borrowing against the silver or even selling it.
If our clever @*&!s wanted to hold onto their metal, why didn’t they just sell down their other leveraged paper positions faster – get off the punch – rather than risking their hold on a relatively small pile of physical silver by borrowing against it?
Let alone giving banks a heads up on vulnerable physical silver.
Instead of taking on MORE bank debt encumbering their silver, why didn’t they exit leveraged positions faster while hedging their physical silver with some COMEX shorts? If silver dropped with other markets they’d raise cash on the hedges and still own their silver. If silver held or rallied, they could then sell the metal into a stronger and more orderly silver market to raise cash while taking off the hedges.
Perhaps they did do this…?
With your scenario Tom I note an apparent mindset incongruity and incompetence on the part of these physical silver @*&!s who had the knowledge and sense to hold some physical, but subsequently chose to remain leveraged and vulnerable in a bad environment. You are saying they badly managed their bullion. They lost their silver!
Weak hands yes.
Are they stupid?
Maybe I’m just not smart enough to get it.
I wonder who the buyers WERE of all this cheap dumped silver last fall.
I wonder if they are also weak hands?
I doubt it.
After all the damage done to this market, can there still be that much physical silver out there in weak hands?
However, we are near the price levels of last August when the banks put on these shorts. They will want lower prices to cover.
All I have are questions, subjective opinion, and a renewed sense of awe at the idiocy of “managed” money.
The speed with which gold and silver prices recovered I think supports the idea of PM’s moving from weak to strong hands. Peter Schiff has also mentioned this recently.
The chances of another washout in PM’s would seem small and if it does it will probably rebound as quickly.
What a joy to read such articles. Thanks to Tom, I recently sold some SLV for cash (maintaining a considerably large core position) and now I intend to only rebuild my positions once the stock markets crashed (due to the liquidity squeeze triggered by the black hole of the bond market), open intrests declined and precious metals re-enter backwardation.
@BarbarianWho Maybe your @*&!s were simply dealing in “baskets” of general commodities and not specifically silver. Silver represents a pretty small percentage of the R&J CRB and if the managed money was just exiting the sector en masse it would hit silver particularly hard.
I read yesterday that the silver commercials have been net short since 1986. This tends to support what you are saying Tom. However, I think this just limits the range that Silver can move in.
Fekete is on record as saying it will be Silver that breaks the market into much higher ground.
Tom,
If banks did sell the physical at LBME/OTC as a collateral, why then there was a scarcity of retail physical bullion (not only coins but also 1000oz bars) ?
@forwill
Absolutely.
Silver futures were dumped along with other commodity futures.
I still believe silver price was/is determined in the leveraged futures market (unfortunately).
However, Tom brought up an interesting scenario with OTC physical. I’m just not sure it all makes sense to me yet.
Also reluctant to accept the notion at face value that there was that much physical silver out there in the hands of over-extended “investors” who can be so lame. I don’t think we are far enough into the secular precious metals bull market to see so many weak hands. Just a bias, but I believe most holders of REAL silver bullion know the value fundamentals and don’t view their physical as a brief trade - except perhaps a gold-silver ratio trade. These are strong hands.
Even in Tom’s scenario these “investors” wanted to hold onto their silver. Yet they managed that effort so badly..?
Yes, there are always some distressed sellers - but that much silver?
Smells a bit. We’re missing something.
Dear Tom,
You leave one possible explanation for the large concentration of shorts since last August, ie, these big guys have acquired physical silver, and are holding still. As per my information, JP Morgan Chase acquired big amounts of silver at $16, and short sold that on Nymex to cover for price drops in the wake of coming Olympics, and, possible changes in the markets. As you can see, these guys are sophisticated, since the lowest short positions in November combine with the lowest prices. My premise is that they would cover more once silver were to decisively break through $16.
Yes, and that in fact is what happens until the price gets high enough and the short bids start to thin out, at which point open interest tends to top out as longs are merely swapping positions as other trend-riding longs pile on. That is the beginning of the end of the move.
Hello Web Elf and thanks for your initial comment here. Any future comments will not be held for moderation and will appear immediately. What you say is possible but keep in mind that “covering” is another word for “buying”. The risk to the shorts therefore is an immediate slingshot back up in price as there are no sellers. It is actually quite difficult to pull off something like this on a coordinated basis between several “cabal” members considering the alleged size of the manipulative short position. Perhaps a few hundred contracts could clear in such a manipulation but not thousands and certainly not tens of thousands. More likely what would happen is that the shorts “paint the tape” to panic the dumb speculative longs who then become their own worst enemies as they try to be the first out the door. Such a manipulation is certainly possible but one might argue the speculative longs are as much at fault as the shorts that would initiate the panic.
There was never any “scarcity” of 1000oz bars on the OTC market which consists primarily of bullion stored in allocated and unallocated format in London vaults.
@BarbarianWho
Wow, that is a very thorough critique! I don’t know where to start answering it other than to say the theory obviously doesn’t answer every question. A few thoughts:
Actually, those are DAILY average clearing figures! They can’t be compared directly other than to indicate there was a major increase in OTC trading at a time of year it usually doesn’t occur.
According to the theory, the banks continue to hold loans against bullion collateral meaning that the “investors” have not yet folded. One possible resolution is that the investors are able to “repay” the loan in the future and reclaim the bullion. I’ve had at least one person point out that in that case the banks may have to lift the COMEX shorts in a hurry and that could drive gold and silver higher, but I’m not sure about that because it is very possible that part of the arrangement is actually that the investors hold COMEX longs as a substitute for the collateral. Thus, closing the COMEX shorts would mean closing the COMEX longs as well. These “investors” holding COMEX longs would make sense especially in that establishing the bank short position between July and August could have been easily accomplished if that were the case, and it also makes sense insofar as the “investors” wanted to retain long metal exposure regardless of being able to repay the loan. The interesting aspect this segue brings up is that the “investors” will just be making profits to repay the loan when gold and silver climb above their July 2008 average price level.
Now you’re thinking! I don’t think this is precluded and in fact it is pretty much exactly the same thing I am saying except without the “loan” part. That said, consider that an “investor” could not get the lower margin rates applicable to commercial traders and it would be very risky for that “investor” or group of “investors” to manage such very large short positions. Also, without delivering the metal to COMEX warehouses (likely most of it was held in London) there is no true “hedge” and a price rise could create a margin call that might create even more losses for the “investor”. All of these problems can be solved, however, by using the friendly neighborhood services of the local bullion banker, whose job it is to help exactly in such a situation. In other words, this is an argument of form over substance.
You better believe there is still some weak hands out there, just look at the large speculator position in gold and many commodities. While there is much less in silver on a relative basis, which is great, the silver market became so frayed last year that it probably doesn’t matter as a few thousand panicky large speculator COMEX long positions would probably send silver back in the crapper as well.
These weak hands aren’t limited to gold and silver either. Who the hell owns NYMEX WTI crude oil futures above $70 with the global economy still so far from a recovery?
Okay, I think that is enough. Hopefully I’ve provided a few more ideas to demonstrate that while this is a theory it isn’t completely farfetched and it does deserve to be given some heed with the US Bank Participation positions monitored going forward.
Thanks TGupta, As I noted in a response above, I think the reasonable level to cover will be at some price above the average July 2008 price of both gold and silver. I might say at least 10% above as that would take care of both margin and probably holding costs as well. If this is correct, it could mean an extra rocket boost to gold and silver prices should they break that average July 2008 price + 10%. Can anybody figure out what that number would be for both gold and silver?
“Scarcity” is a wrong word - but if I remember correctly, there was an substantial increase in premium on 1000oz retail bars (of course, not so much as on coins) at Tulving and Apmex.
Tom,
do you think this is what happen when silver had a freefall drop in price which you’ve been watching on a screen of your Tradestation ? I don’t think that anyone except shorts would be selling in such a manner (i.e. without waiting even for a smallest price rebound to get better/higher profit).
JAW DROPPING NEWS OR SHOULD I SAY JAW BREAKING NEWS!
Firstly recall that huge COMEX delivery taken back in March by DEUTSCHE BANK.
GOLD SOLD LIKE CHOCOLATE FROM GERMAN VENDING MACHINES
Shoppers in Germany will soon be able to buy gold as easily as bars of chocolate after a firm announced plans to install vending machines selling the precious metal across the country.
By Murray Wardrop
Published: 7:30AM BST 17 Jun 2009
TG-Gold-Super-Markt aims to introduce the machines at 500 locations including train stations and airports in Germany.
The company, based near Stuttgart, hopes to tap into the increasing interest in buying gold following disillusionment in other investments due to the economic downturn.
Gold prices from the machines – about 30 per cent higher than market prices for the cheapest product – will be updated every few minutes.
Customers using a prototype “Gold to go” machine at Frankfurt Airport on Tuesday had the choice of purchasing a 1g wafer of gold for €30, a 10g bar for €245, or gold coins.
A camera on the machine monitors transactions for money laundering controls.
Thomas Geissler, who owns the company behind the idea, said: “German investors have always preferred to hold a lot of personal wealth in gold, for historical reasons. They have twice lost everything.
“Gold is a good thing to have in your pocket in uncertain times.”
Interest in gold has risen during the financial crisis, particularly in Germany, according to GFMS, the London-based precious metals consultancy.
Retail demand reached an estimated 108 tonnes in 2008, up from 36 tonnes in 2007 and 28 tonnes in 2006.
Jens Willenbockel, an investment banker who saw the machine while passing through the airport, told the Financial Times that he believed there could be a market for the venture.
“Because of the crisis there is a lot of awareness of gold,” he said. “It is also a great gift for children – for them getting gold is like a fairytale.”
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5554972/Gold-sold-like-chocolate-from-German-vending-machines.html
Tom, I was just doing some research at LBMA.org and noticed to my surprise that 1 month gold lease rates (LIBOR-GOFO) are negative and have been for some time.
Does this mean some lucky punters are repaying less gold than they borrowed, or am I missing something?
There was a huge liquidity drain from the system today. It is bigger than the one last September which definitely contributed to the market collapse.
http://market-ticker.org/archives/1133-Thursday-Comes-FedWatch.html
Tom,
I wish to know whether the silver miners are also hedging forward their produce like the gold miners did in the past? Otherwise, there doesn’t seem to be any sense why the banks, who might be acting on behalf of silver miners, didn’t cover their full shorts in November at half the price. I also note that they are less willing to short at $15 than they were at $14 in March. As for the critical silver price, it remains $16. The skirmish now seems to be between $14 and $16, give or take a few cents.
THE SMOKING GUN and TREASURY FIRESIDE SALES:
Today we have $109 BILLION in 2’s,5’s and 7′2 being auctioned off. In preperation of the AUCTION yesterday, the TREASURIES SOLD off and RATES skyrocketed again.
2 YEAR NOTE: +7 Basis Points up 7.56%
5 YEAR NOTE: +17 Basis Points up 6.32%
7 YEAR NOTE: +18 Basis Points up 5.41%
10 YEAR NOTE: +18 Basis Points up 4.89%
30 YEAR NOTE: +13 Basis Points up 2.89%
This is only the BEGINNING of the QE. As SINCLAIR STATES….the DOLLAR will have a BAD WINTER. Time to be in GOLD and SILVER.
CORRECTION…BOND AUCTION NEXT WEEK:
The Treasury’s include $40 billion in 2-year notes on Tuesday, $37 billion 5-year notes on Wednesday and $27 billion in 7-year notes on June 25.
As Jim Wille States the QE and TREASURY SALES will be going on FOREVER. At some point….the TREASURY MARKETS will be valued like SUBPRIME MORTGAGES.
Jim Willie’s analysis of Chinese efforts to utilize hedge funds as another means to diversify into tangible resources was fascinating. Particularly the aspect of using their US treasury holdings as funding collateral.
Turning the tables on the financial syndicate.
Go ahead and shoot!
If we see another liquidity drain/bank credit attack on hedge funds that hold politically-incorrect commodity positions it might be the LAST if Willie is right, and the Chinese can move fast enough in building their “Great Wall” of treasuries.
A few months ago I was wondering outloud if data on investor’s electronic limit orders and/or pre-open market orders was secretly shared with “others” in effect giving the “others” a huge advantage in determining price direction and depth of movement. It appears it is!
If you can get past all the(”I’m not doing anything wrong”) euphemisms used by these DARK POOL f*cks, its clear they are using data on our orders to screw us over. http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&date=20090619&id=10039550
It is remarkable, in my opinion the number of people who give credence to these numbers published in the LBMA in the link below….
http://www.lbma.org.uk/stats/clearing
The data, as expected did not transfer well into the blog format, so I will simply pick the month of May for this exercise and discussion.
In May the LBMA (London Bullion Market Association) transferred the ownership of an average of 97Moz of silver thru an average of 342 daily transfers. (And remember this is a daily number.) Between May and April this was around 100Moz per day….And yet most people never seem to find this at all odd…I might add that the folks at the LBMA changed their web site format sometime last year and DROPPED the word ‘daily’ from the page….so one is left with the impression that this is a MONTHLY number….It therefore might be useful to shed some additional light on what these figures imply: approximately 100,000,000 ounces transferred divided by @340 = 292,000 ounces – the average SIZE of EACH transfer in ounces done on a daily basis. That makes the COMEX open interest figures look pretty small and yet both of these institutions set the spot price. But the other obvious conclusion about these very large numbers is that they have to represent multiple sales of the same ounce, and that implies that these transactions are also paper sales. The silver DOES not MOVE out of the vaults in any kind of size….It can’t,,,,,the weights and volumes would make this a logistical impossibility. London traffic would come to a standstill each day JUST due to the numbers of transports moving metal around…Nope, these are paper data entries of sales that are more indicative velocity of changes of ownership (purchases) rather than a real indication of actual bullion available in the market – deliverable silver.
True it would be helpful if we had a firm number for metal in the vaults,,,,.But is this a valid price-finding method if the metal just changes ownership (like most of the trades vs. deliveries leaving the vaults in the COMEX).? Perhaps what goes on in the LBMA is JUST AS VALID as what goes on in the COMEX…And that isn’t saying much. Discussion: the best ranges of amounts of actual bullion still in existence to underpin such sales WORLDWIDE is estimated at between 300,000,000 ounces and (at best) 600,000,000 ounces), and that still means that with the May figures of around 100Moz transfers of ownership per day the LBMA supposedly sells the world’s total existing bullion stockpiles every 6 business days (at worst every 3.5 days or so). This is patently absurd and even resembles the same multiple sales of deliverable silver in the futures market of COMEX . But we should note that the LBMA figure is well down from its recent highs this decade of well over 200Moz per day, and we may be beginning to see the LBMA in a preliminary stage of decline,
Is it any wonder that many gold and silver bugs consider the world monetary system is run by racketeers and crooks? After all these same entities also control the price-finding mechanisms for the main competing currencies, gold and silver?
Keep in mind that multiple sales of this magnitude is taken by the market as indication of supply of actual bullion. But the lie is implied by the numbers of transactions AND the average size of them…..So by these figures there is a LOT of silver in the London Bullion Market Vaults….And all right, I really should ask. How many people COULD take delivery and move it out? We will never know as you can be reasonably assured that there is less than 100Moz of silver in total in the LBMA vaults.
And no newspaper in the world would print this.
And a final thought….Given that the COMEX metal withdrawals are likely fiction these days, we should also assume that these ones are too,,,,,except that the corruptions are created in different ways that are no less lies. They might even transfer ownerships this much,,,,,but as such the best that could be said for the LBMA is that it has a different style of operations for price suppression.
Just having a little fun on a slow day,….
Regards,
Galearis
The current most viewed story at http://www.telegraph.co.uk is “Is This the Death of the Dollar?” by Edmund Conway, about the $134 billion in US bonds. Reader consensus is that there is no way they were counterfeit, and some from The City may know what they are talking about. One quote: “ENORMOUS pressure is being exerted on the Italians and the Japanese to BURY this story, but it will not work…” Check it out!
Justin, negative lease rates may just reflect problems with LIBOR, see the article On The Uselessness Of LIBOR http://zerohedge.blogspot.com/2009/06/on-uselessness-of-libor.html
This is really just the lease rate, which by itself doesn’t say much. What is needed is a way to remove the effect of interest from the forward rate instead of simply subtracting it. In other words, the relationship between the forward rate and the interest rate is non-linear.
Retail doesn’t matter, very few 1000oz bars get sold in retail. What matters is there was no appreciable increase in premium on wholesale bullion.
No I don’t. As I indicated at the time, the price action didn’t result from a barrage of sell orders which is how one would “paint the tape”. Other than a persistent and consistent series of bids to buy (what I labeled the “Hung Brothers”), the price action seemed to come from somewhere else, and now it appears that it was the over-the-counter market. Interesting that “Hung Brothers” has an implication of Asian origin and then we found out a couple months ago that the Chinese have been buying gold. I’ll follow up on this at some point.
@Frederico K.
Selling gold by vending machine will have a near nil impact on physical gold demand.
The lease rate is “indicative only” representing the difference between the forward rate and the LIBOR and does not represent actual transactions. My guess is that no actual “leasing” is being done at a negative rate.
This guy is mistaken if he thinks a reduction of Term Auction Credit is a “liquidity drain” by the Fed. It in fact represents fewer banks bidding at the auction and any liquidity drain is coming out of the Reserve Balances that banks aren’t lending anyway.
@TGupta
Silver miners generally don’t hedge silver but large integrated miners do (think BHP, Rio Tinto, etc.). So do smelters and refiners as well as all along the supply chain from refined bullion to end-product. At any time there are literally tens if not hundreds of millions of ounces in “raw material inventory” that firms may wish to hedge and the bullion banks make it very easy for them to do so. As the price rises the more likely that somebody sitting on inventory would want to hedge. Regarding the $16 for silver, that is a critical price only from a technical perspective, what I was talking about was a critical price from a fundamental perspective. Thus I stand by the $20 number (which of course is also another critical technical level as well).
They certainly cannot keep up this pace and in fact they won’t. I would look for a retrace in Treasury rates over the summer especially as the green shoots wilt in the seering sun.
This is a fact of life. Market makers get to see what is going on and therefore position themselves to profit. Bullion banks do the same thing in gold and silver. You think if they are aware a huge client of theirs is about to liquidate bullion, they won’t go short for the ride?
@Larry Galearis
Hello Larry and thanks for your first comment. Future comments will appear automatically and will not be held for moderation. I would just point out that the LBMA still states on its website that the clearing statistics are daily averages. Also, the clearing statistics reflect actual trades of bullion held in unallocated and allocated form in London warehouses excluding for purposes of overnight credit. Many of these trades are for “leasing” purposes but the vast majority are actual trades between various parties. Just because the bullion isn’t moved physically does not mean it is not a physical trade. What would be the point of moving metal from one warehouse to another? The level of the clearing activity gives us some sense as to the total amount of bullion in London storage, which I personally believe is on the order of 500-750 million ounces of silver on the low side and 1.5 billion ounces on the high side. That said, the vast majority of trades are for positioning purposes and do not represent end-user physical demand. I think only 2-5% of the trades are for actual end-user purposes. This percentage is consistent with other markets.
This story is silly and stinks. Going with “reader consensus” is not a very good idea 99.9% of the time. In any case, it has nothing to do with the U.S. dollar. What are “Federal Reserve Bonds” anyway? To my knowledge the Federal Reserve does not issue bonds.
@silverax
no way these bonds were real. that many just didn’t exist. most likely it was part of a scam to defraud banks into lending aginst them using corrupt bankers who got kickbacks or just plain fooled. the 2 japanese are now unacounted for and most likely in witness protection program or some other renditoned accomodation. The most significant aspect of this case to me is that only about 10% of smuggled goods are intercepted so certainly there are more of these things around and someday we may/will find banks that accepted them and are using them as collateral for transactions or to write other derivatives against or the devil knows what. Maybe they were being marketed to corrupt dictators and money launderers world wide who are now maybe a little afraid of even secret swiss bank accounts. Just more fraud, incompetence and slime to be uncovered as this credit contraction moves along.
Could you use 6 month CD rate and compare to 6 month SIFO…?
http://www.bankrate.com/funnel/graph/Default.aspx?cat=7&ids=156&state=zz&d=1095&t=Line
Tom, if you will pardon my indulgence for a few minutes, I think I may have worked this out, though correct me if I’m wrong.
According to the OTC guide on LBMA.org, when a dealer enters a gold forward contract with a counterparty, the forward price quoted is spot + GOFO, GOFO thus being the forward premium.
Since GOFO is defined as LIBOR-lease rate, if lease rates can be quoted on LBMA as negative (regardless of whether physical is actually being loaned at a negative rate) then surely GOFO is a best an unreliable means of determining backwardation since with negative lease rates GOFO can hardly go negative?
As I understand it, the reason why there is a forward premium is because the dealer borrows USD to buy gold spot at the time the forward contract is entered into, he thus ‘borrows’ gold until the sale is made, which he can lease until then i.e. GOFO=Libor-lease rate. Stripping the interest rate component from the equation simply gives you the spot price, as you say, storage costs are largely fixed.
I’m wondering whether these preposterous negative lease rates are a factor in the June-July settlement price ‘basis’ on COMEX gold has been in backwardation for 3 days (and zero before that), yet GOFO remains positive?
SILVER SIFO RATES
Interesting trend in the SIFO rates in the past several days. They have been unchanged. I have not seen this sort of activity before.
SIFO RATES
17-Jun-09 0.42143 0.43571 0.48571 0.51429 0.60714
18-Jun-09 0.42143 0.44000 0.48857 0.51429 0.62286
19-Jun-09 0.43333 0.45000 0.49167 0.52667 0.58667
22-Jun-09 0.43333 0.45000 0.49167 0.52667 0.58667
23-Jun-09 0.43333 0.45000 0.49167 0.52667 0.58667
24-Jun-09 0.43333 0.45000 0.49167 0.52667 0.58667
25-Jun-09 0.43333 0.45000 0.49167 0.52667 0.58667
Maybe the market makers are having trouble determining the market rate of interest?
That can’t be good