Dr. Ron Paul, U.S. Representative from Texas, wants to have an audit of the gold held at Ft. Knox that is under the supposed control of the Federal Reserve. He even plans to introduce legislation next year to force the Fed to conduct an audit:
“If there was no question about the gold being there, you think they would be anxious to prove gold is there,” he said of the Federal Reserve.
This is not the first time the congressman has made his pitch. “In the early 1980s when I was on the gold commission, I asked them to recommend to the Congress that they audit the gold reserves – we had 17 members of the commission and 15 voted no to the audit,” said Paul. “I think there was only one decent audit done 50 years ago,” he said.
Paging Dr. Paul! Paging Dr. Paul! The U.S. gold reserves held at Ft. Knox and elsewhere are actually under the control of the U.S. Mint, a bureau of the U.S. Treasury Department, and these gold reserves are ALREADY being audited by the independent accounting firm KPMG. In fact, an annual audit has been ongoing for a number of years, first by inspectors of the U.S. Treasury Department since the 1980s (Treasury inspectors are sworn federal law enforcement personnel) with additional audits by independent accounting firms starting in the 1990s.
When KPMG was appointed independent auditors for the 2005 fiscal year, the accounting firm insisted on a revised audit format that involved a complete audit included accompanying Treasury inspectors on the physical count of bullion in vault facilities at the Ft. Knox and West Point bullion depositories. Prior to this and despite Dr. Paul’s claim that the last audit was conducted in the 1950s, Treasury inspectors had conducted rotating audits of bullion held at the Ft. Knox, West Point and other depositories since the 1980s as part of a comprehensive overhaul of governmental accountability by the Office of the Management and Budget. These audits include test weighing and assays that have periodically revealed minor discrepancies in bullion fineness and weight over the years. Not all the bullion is counted each year, mind you, rather it is done on a rotating basis with Treasury seals being placed on each audited vault. The inspectors check at least on an annual basis that these seals have not been tampered with. According to my reckoning, all vaults should have been initially rotated through a few years ago, which means that the vaults now being inspected are already on their second or third audit pass.
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silverax Windbag Wisdom
In a recent interview conducted by Jeff Clark of Casey Research and self-declared as The Best Gold Interview of 2010, Andy Schectman of Miles Franklin discusses the future supply situation in the retail bullion market. Unfortunately, most people who have been around the block in the gold market will not find his views to be particularly insightful or surprising so we’d like to spice things up a bit by adding our own contrarian arguments and twisted perspective.
Among Mr. Schectman’s not-very-extraordinary claims is that the apparent shortage of gold and silver bullion and the resulting premiums that arose during the financial crisis in 2008 were caused by extremely strong demand from panicked retail buyers. Mr. Schectman then warns us that we should expect more retail shortages in the future. We can’t really argue with his logic but we believe he is only telling half the story given that many dealers were in fact rationing their existing inventories as a result of low bullion prices. Simply put, the dealers were unwilling to sell the shelves bare at prices so terribly low.
While it is true that bullion dealers are running a business like everybody else, most of them are also gold (and/or silver) bugs and consequently have much of their wealth sunk into their business in the form of bullion inventory. That way when the eventual and inevitable price spike to $5,000 gold and $500 silver comes, they can sell it all and retire as billionaires. This might not be the case for the large corporation-style dealers or the tiny numismatic coin shop mom-ann-pops but there are a lot of dealers between those two extremes. Their inventories are typically not hedged or only slightly so. More to the point, these dealers are expecting the big score along the way and would only sell out at a loss under desperate circumstances.
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silverax Windbag Wisdom
It has now been over two months since the CFTC hearings on the COMEX metals and Ted Butler reports this week an Impressive Result of over 3,000 comment letters about the hearings of which apparently 95% or more were Butler copycat comments urging the commission to limit silver positions to 1,500 contracts. Alas, I fail to see anything impressive about this given that the only position limits the commission would consider changing are speculative limits. Unfortunately the big bad bullion banks are not holding their short positions as speculators but rather as commercial hedgers. To hope the commission would limit hedging positions is beyond silly, it is seriously deranged. Doing so in COMEX silver and/or COMEX gold without setting similar limits in all other futures markets will never happen.
What Ted Butler and others concerned about silver price suppression should have done, instead of making an ineffectual plea for across-the-board position limits in silver that includes commercial hedgers, was to ask the commission to institute robust compliance review and enforcement over the hedging designation of commercial positions. By their own admissions during the hearings, neither the commission nor the SRO (the exchange itself) have spent a lot of time or effort historically on reviewing hedging designations of the commercials. This means that the bullion banks are largely taken at their word that their positions are legitimate hedges. Shining a bright light at the bullion banks by instituting thorough periodic policing action would surely result in some commercial short positions being disqualified, and such shorts would likely be closed permanently.
Alas, Ted Butler and some silver bugs are so enamored of the silver market that they believe it is special and unique above everything else. Sorry buckos, silver has some great investment and industrial qualities and it is very shiny as well, but the reality is that very few people in the world care a whiff about it. Silver might be everything to you, but to the bullion banks silver is a tiny profit center hardly worth the effort. That implies the possibility of rogue trading desks manipulating the silver market (probably both up and down) but precludes high level collusion between the banks. If the banks are going to collude, it would certainly be in a market bigger and more profitable than silver.
So, congratulations for derailing a potentially positive outcome by shifting the commission’s focus to your demand that silver and gold are to be treated as special markets deserving of special rules. Let’s hope the commission is able to do the right thing by instead announcing regulatory reviews of commercial designations. Sometimes you are your own worst enemy.
silverax Windbag Wisdom
On Friday silver went on a tear starting around noon Eastern time, eventually adding a dollar per ounce and recovering much of the losses suffered earlier in the week. In the meantime gold remained steady above $1,200 per ounce after having caught very impressive flight to safety action while the Greek debt inferno continued to blaze. The fact that silver would have risen strongly on Friday should not be surprising as it was merely recovering its follower status behind gold, which surged pretty much all week and came within a whisker of making a new record high. What is surprising is the nearly vertical lift-off by silver around noon Eastern, and Karl Denninger thinks he knows why:
You don’t think that GOLD was being speculatively shorted beyond intraday position limits, do you? That oval, by the way, is right when the announcement was made.
Or shall we look at SILVER?
Actually Karl, it is very doubtful that gold and silver were “being speculatively shorted beyond intraday position limits”. The reason is simple. As of the Disaggregated COT of May 4, 2010, there were a grand total of 8,627 speculative short futures positions in the reporting category (by definition a non-reporting position cannot exceed position limits). Since the speculative position limit in silver is 6,000 contracts (1,500 in the delivery month but there were only a grand total of 600 contracts outstanding and 418 contracts traded in May COMEX silver on Friday so that limit could not have been exceeded) that means one trader would need to hold the vast majority of speculative short positions. Yes, I know the CFTC warning is about intraday positions but still there are 30 large reporting traders in COMEX silver futures. It is simply inconceivable that a single or even a group of large speculative traders could have each been short more than 6,000 contracts of COMEX silver on an intraday basis especially when we look at the charts and note the trading volume that occurred in the active July 2010 COMEX silver contract during and after the price spike:
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silverax Windbag Wisdom
A picture is worth a thousand words. This was so embarrassingly obvious, too bad we didn’t get a chance to put together an option play on it due to how fast it went down.
UPDATE: Perhaps this is a good time to mention that there is a wealth of information in the comments section of the Metal Augmentor website (most of it accessible only by subscribers) in addition to the official posts. You should get into the habit of reading those comments and maybe even participate yourself. In any case, here is a little comment from Tuesday:
May 4th, 2010 at 16:39
You are probably right, perhaps some puts in the USD although it had a beautiful chart today for such a supposedly ugly currency! I was looking earlier at July COMEX silver call spreads because when volatility is high the straight spreads (bull or bear) can sometimes be “affordable”. Nothing doing so far, however, and I’m actually tempted to look for outright long calls in COMEX silver JUNE in the 18.50 - 19.00 range. Yes, June is not an active month but we are in an interesting period and whatever is going to happen (follow-through, reversal) is probably going to happen in 3 weeks or less. I doubt we flatline here but of course that is the risk.
And then on Wednesday there was this one:
May 5th, 2010 at 14:39
[David makes a point]: I still think the July contract would be better for Silver because I do not see it bouncing right back especially if we get to 16. The damage is done. And with gold breaking below 1160, it will be that much harder for gold to climb back to 1200 range soon.
Crude is looking attractive at 79ish here. I took a lightly long position at 79.19. I’m looking at adding if we get below 79. The positives for crude are 1) continued signs of economic recovery (or at least the repeated drumbeat that we are in an economic recovery), 2) the upcoming peak summer gasoline demand season, 3)potential for the Gulf oil leak to disrupt imports and refinery output, and 4) Opec’s desire to keep oil in the 75 range meaning not down to 60 any time soon. Negatives are fear that demand and economy will remain weak and supplies high.
Sorry, I know this is not Oil-augmentor, but I don’t mind speculating in oil at these prices, but I am timid about silver and gold.
[silverax responds:] Au contraire, silver did jump back up when gold diverged last time and today we are seeing another major divergence with gold actually up but silver still down over 40 cents. I bought a June 18.50 silver call for $700 just in case we get a repeat of what happened last time. Should we we get just a slight recovery in silver back toward $18.00 I will try to sell a 19.00 call for $700 to set up a risk free trade.
As a postscript, I just went ahead a few minutes ago and sold the call option (a bit early I might add) for a tidy $1,500 profit after commission. Probably one of the easiest 1.5G’s I’ve ever made.
silverax Windbag Wisdom
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