Today In Silver

NOTE: Portions of this commentary were originally posted at Metal Augmentor on June 10, 2009 at 2:29PM EST.

Self-proclaimed economist Jeff Nielson asks, Will a ‘Silver Bullet’ Finally Kill the Metal Manipulators?. Here is an excerpt:

Specifically, at a time when actual silver inventories are at their lowest level in centuries, the (supposed) amount of “bullion” these funds claim to hold has singlehandedly resulted in “official” inventory levels tripling in just three years – after plunging by 90%.

Today’s market price is based upon these phony “inventories” despite the fact that the bullion-banks who claim to hold all this silver are never subjected to audits, to determine that they are not only holding enough silver to cover their custodial agreements with the “bullion-ETFs” - but are also holding sufficient silver to cover the MUCH larger “short” positions of these Manipulators (see “Silver Manipulation the worst in history – Ted Butler”).

Unless and until there is such a full and complete audit, the only rational assumption for investors is this supposed “tripling”of inventories is totally illusory, which also means that the “bullion” that is claimed to be held by these bullion-ETFs is also illusory.

As I have also mentioned before, it is elementary economics than any “good” which is undervalued will be over-consumed (relative to its current price). Thus, we have TWO extremely important dynamics which are setting up this sector for a final “implosion” of the criminal conspiracy by the anti-precious metals cabal.

First, price-suppression means the (actual) tiny inventories of silver are still declining not increasing. It is simply absurd to claim that with record, investment demand and declining mine production (due to the dramatic cuts in base metals production) that inventories are increasing. The under-pricing of silver simply confirms this trend.

Secondly, with real inventories only 1/3rd of what is claimed by the Manipulators, continuing to under-price silver (through continued manipulation) must result in a supply “squeeze” which inevitably causes the price to “spike” (and begin to correct toward some sort of medium-term equilibrium). Given that there has been no similar depletion of gold stockpiles (merely the transfer of ownership), it is far more likely that the final defeat of the anti-gold cabal will be accomplished via a default in silver markets.

The BIG question in the minds of all precious metals “bulls” is when and how will this final victory occur?

Many commentators have pointed to the rigged Comex markets in New York as the place where the final destruction of the Manipulators will occur. However, with the short positions of the bullion-banks, and their (supposed) “custodial agreements” with the bullion-ETFs being “two sides of the same coin”, then implosion could originate in either component of this fraudulent manipulation.

A bullion-default at the Comex (or “Crimex”, as some like to call it) is a very simple scenario. The Comex is essentially selling its phony, “paper” futures for less than any other bullion market. Thus, at some point, large buyers will simply step into this market and continue relentless, heavy buying until default occurs.

Specifically, there would be a “failure to deliver” of bullion to a buyer (or buyers) - who chose to hold their futures contract until expiry, and thus take “physical” delivery of real bullion. As has been reported by several commentators, apparently such a default nearly occurred just weeks ago (see “Did ECB save Deutsche Bank from Comex gold-default?”).

There has been a great deal of frustration among the “gold bugs” (in particular) that such a final “show-down” has not already taken place. However, perhaps we would all be more patient in this respect if we were to try to put ourselves in the position of such big “players”.

Our response is as follows.

Both SLV and GLD hold their silver and gold bullion in allocated accounts under the LBMA system, which has lasted for 300+ years without a single documented incident of material loss. Not a single incident of loss through many wars including two World Wars, depressions, collapses of fiat currencies and other crises.

This is what Jeff Nielson’s allegations must be measured against. Not a single incident of loss in three centuries. Sorry Jeff Nielson, but the odds are long against your theories. Very long.

Furthermore, the custodians of GLD and SLV (which include subsidiaries of HSBC and JPMorgan Chase) have no claims on the trusts that actually own the bullion other than for payment of storage fees. Thus, issues of solvency or any other matters pertaining to the custodians are irrelevant. Moreover, the sponsors of these trusts — World Gold Council and Barclays Global Investors — have no claims on the trusts other than for payment of sponsorship fees. In fact the trusts must, by contract, own bullion in an outright and unencumbered form as allocated LBMA accounts. This is the same manner in which much of the world’s bullion is owned by the wealthy.

Finally, circumventing the terms of a trust agreement by any party, whether the sponsor, custodian or trustee, would be a criminal and civil violation of both state and federal laws. I know many of you may be thinking, “What’s the big deal, these banksters have broken pretty much every law already”. Well, they haven’t broken laws yet by inappropriately disposing of trust assets. That would be the legal equivalent of selling stocks out of clients’ brokerage accounts and taking the money. Or rifling through safe deposit boxes and selling the contents.

Better Alternatives to SLV and GLD?

It may seem like Central Fund of Canada (”CEF”), GoldMoney and others have a superior storage and security arrangement compared to SLV or GLD but since these products do not use LBMA warehouses that have been hardened by centuries of crisis, they have not been tested under fire. In some ways they might actually be subject to greater risk of loss than SLV or GLD. Laugh at your own peril but CEF goes through an extremely convoluted private security arrangement to protect its bullion for a very good reason — it doesn’t have the benefit of 300-year-time-tested LBMA warehouses. The only form of gold and silver ownership that is more secure is properly safeguarded bullion in one’s own possession.

Be that as it may, Jeff Nielson continues thusly:

I would remind people about an event which went practically unreported last year in North America: at the time of AIG’s near-bankruptcy, the European bullion-ETFs “guaranteed” by AIG briefly plunged in value – to a price MUCH lower than the nominal price of the bullion they (supposedly) held. The reason? Investors were “betting” in a clearly visible manner that if AIG was forced into bankruptcy it would not be able to honour its “custodian agreements” with these bullion-ETFs – leaving the investors in these funds holding paper and not bullion.

Thus, the outrageously expensive bail-out of AIG (over $180 BILLION, and counting) was not undertaken solely in order to secretly funnel roughly $10 billion into the vaults of Goldman Sachs. It was also bailed-out to prevent a domino-like chain of events. All it will take is for one “bullion-ETF” to default, and then the entire scheme/scam of the Manipulators would inevitably collapse.

The sequence of events is obvious: after seeing one group of bullion-ETF investors wiped-out (or nearly so) by fraud, then obviously the unit-holders for all (so-called) bullion-ETFs would demand thorough and honest audits of the bullion-banks who are essentially running these scams.

Even if the bullion-banks could scrounge-up enough bullion to cover their “custodial agreements”, there would be little if anything left over to “cover” their much larger “short” positions. With “blood in the water”, futures-buyers would obviously immediately start lining up for “delivery” at the Crimex – hoping to be the last buyer to grab some real bullion before the Manipulators were completely wiped out.

Thus, there appear to be three very plausible scenarios leading to the destruction of the Manipulators, and the explosion of the price of gold and silver.

Actually, the ETF Securities products that Jeff Nielson references above are notes that are specifically not backed by physical bullion but rather contracts issued by AIG. When AIG was collapsing the holders of these particular ETF Securities realized all of a sudden that getting their money back was contingent on the paper promises made by a failing insurance company.

It is important to note, however, that ETF Securities has separate bullion ETF products called ETFS Physical Metal securities that are backed by the same allocated LBMA accounts as SLV and GLD. These ETFs were not hurt at all as a result of the AIG collapse since they have nothing to do with AIG. Indeed, the physical bullion ETFs like ETFS Physical Metals, SLV and GLD actually benefited temporarily from funds transferred by shareholders of the paper-promise ETFs.

In the future, should there be a risk of some type of default on the COMEX or elsewhere in the bullion market, we would expect the panic to start in the paper-promise ETFs initially and later move toward SLV and GLD. Indeed, we would expect that the bullion ETFs that do not use LBMA allocated accounts (such as the iShares COMEX Gold ETF, IAU) or that represent credit securities (ETFS Physical Metals**) would provide the initial warning of a problem. If shareholders start to withdraw funds from these “lesser” ETFs, some of them would be expected to put their money into SLV and GLD. If we held trading positions in SLV and GLD at such time, we would use the opportunity to sell these positions before people started to pull their money out of all the ETFs in earnest.

**To clarify, the ETFS Physical Metal securities are backed by bullion insofar as the issuing company (incorporated in Jersey) holds bullion in allocated LBMA accounts. This is safer than holding paper promises from AIG but still technically not as safe as the trust structure of SLV and GLD. The reason for this is that the ETFS Physical Metal products are essentially collateralized debt securities whereas the SLV and GLD are instruments of trust ownership. In other words, the ETFS products are structured as obligations for the payment of bullion whereas the SLV and GLD products are assets evidencing ownership interest in a trust that holds bullion.

The difference is subtle enough to not matter in most instances but it still comes down to this: a Jersey company is essentially a business that can go bankrupt or become insolvent for a number of reasons whereas a trust (in the case of SLV, specifically a New York trust) is a contractual relationship that offers very limited recourse for third parties (third parties being anybody other than the trustee or the beneficiaries). And in the case of both GLD and SLV, the trust is a passive entity that cannot even incur liabilities other than unpaid storage and trustee fees. On the other hand, holders of ETFS Securities become creditors in case of an insolvency (specifically secured creditors but creditors nonetheless).

Still, one of the real risks of both SLV and GLD is that the sponsor may amend the trust in such a way as to no longer be an attractive market instrument for tracking the price of bullion. This could lead to a large number of ETF shareholders liquidating their positions, which could pressure bullion prices given the size that these ETFs have attained. I’ll bet you haven’t heard many ETF detractors talk about this real risk among the imaginary ones they have concocted.

The bottom line is that any incipient concerns by ETF investors should be transmitted through pricing relationships before things develop into all-out panic. Indeed, we expect that ETF prices will emit similar warnings ahead of “The End” as will the gold and silver basis. Ideally, our early warnings will give Metal Augmentor subscribers some “precious” time to get their affairs in order. Or according to the tsunami analogy, to quickly get off the beach while everybody else marvels at the exposed seabed as a tidal wave gathers on the horizon for its initial surge.

silverax Windbag Wisdom