DSCO

One of my laggards had a big day last night, after their meeting with their FDA. I suppose I could exit with a small gain after averaging down, but after the trials and tribulations of the former incompetent CEO, I'm tempted to wait it out until FDA approval. Surfaxin will save many lives with Respiratory Distress Syndrome, so I will hang in there.

http://philadelphia.bizjournals.com/philadelphia/stories/2009/09/28/daily17.html?ana=yfcpc

There was a chance Discover Laboratories (symbol "DSCO") would be forced to shut its doors, but there was just too much technology for it to collapse. A partnership, and accompanying cash, should enable DSCO to reach the finish line.

Disclosure: I am long shares of DSCO.

APT

Alpha Protech N-95 masks for swine flu protection were covered by CNBC today. We got in a couple months ago in the $2's. Shares surged almost $1 above $5 this morning after the segment. Take away message: better early than late.

http://www.cnbc.com/id/15840232?video=1280599599&play=1

Here's a history of my blogs on APT:

http://gregnguyen.blogspot.com/2009/08/apt-announces-record-earnings.html

http://gregnguyen.blogspot.com/2009/08/apt-and-sva.html

I've made a killing by being early, but based on revisiting these previous blogs, I could have actually made even more had I trusted my initial instincts. Another take away message: if your investment thesis is solid, your timing doesn't have to be perfect.

Disclosure: I am long shares of APT.

Shocking, but revealing quotes from the Fed

In rare moments of candor from Federal Reserve officials:

"The last duty of a central banker is to tell the public the truth."

— Alan Blinder, Vice Chairman of the Federal Reserve, in an interview on The Nightly Business Report on PBS, 1994

Dallas Fed President, Richard Fisher, espoused [in a rare moment of clarity and candor] back on April 16, 2007,

“I have spoken in previous speeches of our “faith-based currency,” a term I use only slightly tongue in cheek. The dollar—like the euro, the yen, the British pound and other currencies—is what economists call a fiat currency. It is backed only by the federal government’s power to raise the revenues needed to meet its obligations and by the rectitude of the U.S. central bank. If the market were to lose faith in either assumption, the dollar would be debased.”

This is an article about Robert Mundell, "Father of the Euro":
http://www.dailymarkets.com/contributor/2008/10/20/china-should-buy-all-imf-gold-father-of-the-euro-robert-mundell/

"China Should Buy All IMF Gold Says “Father of the Euro” Robert Mundell

Robert Mundell, the Nobel Prize-winning economist from Columbia University who is regarded as the inventor of the euro told the annual fall dinner meeting of the Committee for Monetary Research and Education (the CMRE) in New York that China, with its huge dollar surplus, has a great interest in buying gold to hedge its dollar exposure but is unlikely to do anything disruptive to the world economic order.

Mundell proposed that if the International Monetary Fund really does sell its gold, as is occasionally proposed, China should purchase all of it. Since Mundell is officially an adviser to the Chinese government, presumably it already has heard this suggestion from him."

G-20 summit: was anything concrete accomplished?

With media outlets now reporting green shoots are turning brown, and that fiscal responsibility still rules the day, I'm finding fewer reasons to blog. Now I can just include links to articles exposing the short-sighted economic policies of the US and other cash-starved countries.
http://www.telegraph.co.uk/finance/comment/liamhalligan/6234947/No-reform-just-a-cosmetic-patch-for-a-discredited-flawed-regime.html

Julian Robertson on CNBC

Julian Robertson is a legend on Wall Street--when he speaks, Wall Street listens. His nickname was "Never Been Wrong Robertson." He founded Tiger Management, once the largest hedge fund in the world, with $22 billion under management at its peak.

Of course, he was wrong a few times: he missed the tech boom, and ended up closing the fund in 2000. His other misses included going long on US Airways, which folded in 2002, and shorting copper last year, which rallied in 2009. However, his market calls have generally been prescient, and his performance and insight on markets is revered by the Street, including many hedge fund managers who learned their craft under Robertson.

http://pragcap.com/were-going-to-pay-the-piper

Gold vs. the USDollar

The price of gold isn't increasing in real terms--it has retained its value for 6000 years. The reason why gold prices have increased in nominal terms is due to weakness in the USDollar. This gold vs. USDollar chart gives a clear illustration of what's happening to the tenuous status of the world's reserve currency.

Lessons from the Great Depression

They are not the lessons many would surmise. Art Laffer, the creator of the Laffer Curve, theorizes that increasing tax rates do not necessarily increase tax revenues. He's been proven wrong on a few issues, especially after his infamous debate against Peter Schiff on CNBC in 2006. In the live debate, Laffer insisted that the economy and the mortgage industry specifically, were doing fine. Schiff took the opposite side of the debate--that the US economy was headed towards the mother lode of collapses due to unsustainable consumption fueled by debt and false prosperity. Schiff, of course, won that debate--and bet, handily.



In other words, Laffer totally missed the call on the impending financial meltdown.

But Laffer does bring up some good historical points on the Great Depression:

http://online.wsj.com/article/SB10001424052970203440104574402822202944230.html?mod=googlenews_wsj

Precious metals manipulation

In surprising actions and admissions of guilt, the CFTC gave an update on their ongoing investigation of silver manipulation at the COMEX, and the Fed admitted to gold swaps with foreign central banks. These gold bug conspiracy theorists aren't so nutty after all.

http://news.silverseek.com/SilverSeek/1253632847.php

http://www.gata.org/node/7819


Folks, the cat is out of the bag that the Federal Reserve Bank, US Treasury Department, commercial bullion banks (foreign and domestic), and the recent Administrations have all been culprits in a long-running price suppression scheme for gold and silver. The cracks are being slowly exposed.

Profligate spending has its unintended but predictable consequences--the debasing of a currency, in this case, the USDollar. This, in turn, saps confidence in the world's reserve currency. Rising prices in gold and silver are open indicators of that phenomenon, so it stands to reason central bankers are motivated to suppress precious metals prices.

Sovereign funds are no longer willing to be held hostage to the US Treasury's printing presses. Neither are hedges funds or individuals looking to preserve their wealth. And neither should you.

FDIC bailing out banks--er, or the other way around

In an interesting yet practical twist of fate, healthy banks may provide funding for the FDIC, whose charter is to insure bank deposits when insolvent banks go into receivorship.

http://www.nytimes.com/2009/09/22/business/22bailout.html?_r=2

See my recent blog on funding concerns regarding the FDIC:

http://gregnguyen.blogspot.com/2009/09/fdic-insolvency.html

I guess that's what happens when the back stop needs a back stop.

Buy gold, but try silver also.

I've posted a few blogs on why silver price will probably move higher than gold. Here's a disturbing, but bullish article on silver, and why owning shares of SLV, the silver Exchange Traded Fund (ETF), are problematic:

http://www.investmentrarities.com/ted_butler_comentary/06-16-08.html

With gold and silver, you're better off owning the physical bullion or coins. However, there are storage costs to take into account.

The ETF's are generally safe, and proclaim to be backed by the physical metal. However, in the case of a financial armageddon, all you may end up with are paper certificates with empty claims on silver bullion that may not exist. I'm not making a prediction it will happen, but in light of last year's financial meltdown and our current economic condition, I can't rule out any potential statistical outliers either.

Today, silver is pivoting around the $17/oz. price point, up 150% in just 4 years. It is real money, just like gold, and has no counterparty currency risk. It has to be explored and mined, requiring billions of dollars to bring to market. Paper currencies, on the other hand, can be created simply from a keystroke by some central banker. And lately, Ben Bernanke and Tim Geithner must be getting carpal tunnel syndrome.

So much for the correction in gold

Over the weekend, I foreccasted gold would correct below $1000 after peaking around $1020 last week. My rationale was twofold and the usual:
1) the commercial bullion banks increased their short positions to all-time highs. Undoubtedly, many were naked shorts with no physical gold backing them.
2) the long gold trade was getting crowded with gold surpassing the psychologically important $1000/oz. threshold.

The only question was how low gold would correct to. Based on previous dips, the charts favored a move back down to $950. The caveat was that too much buying pressure from China and other Asian countries, as well as nervous investors worldwide would prop up any declines.

Sure enough, gold briefly corrected below $1000, and sure enough rebounded this morning in New York's COMEX. Tonite, in Asian trading, gold is surging up $10, testing the $1020 highs.

This signals a change in the gold and silver marketplace, in my opinion. Not only has sentiment changed to a bullish tone for precious metals, but the corrections and rallies have also taken on different dynamics. Violent price declines spurred on by the commercial shorts are met with equally violent upswings. There are no steady climbs. Each decline has triggered a vigorous upward response.

Precious metals markets have always been volatile, and the recent volatility isn't necessarily greater, but the longs seem to be responding quicker, meaning big funds are behind the powerful rallies, not just retail gold bugs. The long positions now have juice behind them. The Goliath bullion banks now have a more powerful foe on the other side of the trade--they can no longer whipsaw the star-crossed retail gold investors. The counterparty longs are now hedge funds and sovereign funds with deep pockets. The stakes in this tug-of-war just got a lot more interesting.

The SEC

This is an excerpt from Chris Wood, of Casey Research:

I would say that rather than worry about it right now, we should first go ahead and abolish the SEC.

Of course this won’t happen until we witness a complete collapse of our current economic system as we know it. But let me briefly lay out part of the case for why Congress should do it. And please note that in the interest of time, I will be borrowing heavily from Graeme B. Littler’s essay titled, of course, “Abolish the SEC.”

* The SEC profits from its blunders. As Ludwig von Mises observed, “government regulation generates unforeseen problems, which excuses more regulation, which causes still more unforeseen problems.” The SEC has a history of growing and profiting from crises. Most recently, a guy by the name of Bernie Madoff comes to mind. Although the SEC missed uncovering Madoff’s $50 billion Ponzi scheme for a decade (despite constant warnings from outsiders), the commission now says it needs more money to prevent schemes like that in the future. In FY 2008, the SEC was authorized to spend $906 million, by the way.

* The SEC erects barriers to competition. Thanks to the SEC, it costs a lot more than it otherwise would to raise capital by issuing stock. The process requires a mountain of paperwork, CPAs, and lawyers. Many small companies, which don’t have the resources to negotiate this bureaucratic maze, can’t raise new money and grow. Large, established firms do just fine, however, and like the lessened competition.

* The SEC is anti-shareholder. By hampering corporate “raiders,” the SEC defends the interests of corporate management over the shareholders’. Raiders seek to make a profit by buying out a firm’s owners, firing inefficient managers, and replacing them with people who will make the company more profitable. The SEC requires “raiders” to file public reports after they acquire a small percentage of a company’s stock. These filings are designed to tip off management about possible tender offers, thus giving them plenty of time to plot a takeover defense to secure their jobs at shareholder expense.

It’s true that the securities industry is not problem-free. And it never will be. But it would function better without the SEC.

Correction in gold may be coming near-term

The IMF is planning to sell massive quantities of gold, almost 13 million ounces. The proceeds will be used to fund loans to poor countries. This will put selling pressure on the price of gold near-term, and will present a good opportunity to add to gold and gold-related holdings. If prices correct, this may be our last opportunity to buy gold under $1000/ounce.

Central banks from Russia, China, and India will be net buyers of this gold, which should provide some support. Mid-term and long-term, with renewed interest in India and newfound interest from China, the investment thesis for gold remains bullish.

http://www.imf.org/external/np/exr/faq/goldfaqs.htm

ARNA announces BLOSSOM results

In one of the wildest trading sessions in recent memory, shares of Arena Pharmaceuticals (symbol "ARNA") surged 40% in after-hours trading last night, after they issued a press release they would announce top-line results for Lorcaserin, their weight loss drug. Obviously, investors were anticipating that results would be positive. At midnight, when ARNA did publish BLOSSOM results, their second of two pivotal, Phase III clinical trials, the headline mentioned that positive results were achieved for efficacy and safety. The pre-close and after-hours buying of calls and shares appeared justified, as rumors of leaks were pervasive among trading desks.

However, once the data was released, the market's reaction in pre-market morning trading was negative, once again underwhelmed by Lorcaserin not meeting the 5% average placebo-adjusted weight loss. To make matters worse, unlike BLOOM, the categorical 5% weight loss did not exceed double the placebo categorical 5% weight loss either. Thus, shares dropped all the way to $3.80 from last night's $6.76 close.

Upon further analysis and cooler heads, shares have walked up back to the high $5's, meaning after all that whipsawing (which enabled shorts and market makers to profit immensely), shares of ARNA are above water from last night's by almost $1 per share.

Why have the shares rebounded, if the efficacy numbers are "bad"? First of all, BLOSSOM confirmed BLOOM's efficacy AND safety and tolerability. This is significant, as the weight loss sector is littered with marginally effective and intolerable drugs (phentermine has many adverse side effects) to the downright dangerous and lethal (Wyeth's fen-phen was withdrawn due to cardiac valvulopathy). Lorcaserin, on the other hand, has a clean safety profile very similar to a placebo.

BLOSSOM's 20 mg dose confirmed BLOSSOM's efficacy numbers, even if the placebo control group in BLOSSOM had better efficacy than the place group in BLOOM. But more importantly, the FDA guidance for weight loss efficacy needs further scrutiny. It is a minor but important point--one that even ARNA CEO Jack Lief missed in previous presentations, but one I captured several months ago.

ARNA's presentation and conference call today did catch incorporate it, because it is an essential point. According to the guidance established in 2007:

c. Efficacy benchmarks

In general, a product can be considered effective for weight management if after 1 year of treatment either of the following occurs:

• The difference in mean weight loss between the active-product and placebo-treated groups is at least 5 percent and the difference is statistically significant

• The proportion of subjects who lose greater than or equal to 5 percent of baseline body weight in the active-product group is at least 35 percent, is approximately double the proportion in the placebo-treated group, and the difference between groups is statistically significant

Notice 35% of the Lorcaserin-active group has to lose at least 5% body weight. That group has to also be APPROXIMATELY double the placebo-treated group. It doesn't have to EXCEED the doubling of the placebo control group. It did EXCEED in BLOOM, but both BLOOM and BLOSSOM meet this "approximately double" co-primary end point. Additionally, when pooled together, BLOOM and BLOSSOM results exceed it.

I've covered other aspects on why Lorcaserin has a high probability of getting FDA approved, so I won't go into them here. But it is also worth noting that while the average placebo-adjusted weight loss end point of 5% was not met in BLOSSOM either, the either/or component of the co-primary end points (the other being categorical weight loss discussed above) is a good indicator that Lorcaserin is FDA approvable.

And with a clean safety and tolerability profile, it remains the best candidate to achieve FDA approval first, and perhaps reach the broadest target market of obese and overweight patients. The finish line is closer for ARNA, and the market is starting to warm up to it.

Disclosure: long ARNA shares.

Sprott Management on the US Dollar

This is a great, concise explanation on why the US Dollar is eroding, and why precious metals should do well in that environment:

http://www.sprott.com/Docs/MarketsataGlance/09_09_MAAG.pdf

Kinross Says Gold Industry Faces Reserve Crisis

That's the title of a Bloomberg article. Tye Burt, CEO of Kinross Gold, Canada's 3rd largest gold producer:

"Globally, production has been in decline since the peak of 81 million ounces in 2001 to 77 million ounces last year, and we see that decline continuing long term."

Which is interesting, because according to Ed Steer:

"the bullion banks are short north of 31 million ounces of gold... that's 40.2% of last year's gold production!"

I'd love an independent audit of the commercial banks' vaults to verify the physical inventory. In fact, an independent audit of the Fed's gold reserves at Ft. Knox, KY and in New York's Federal Reserve Bank is in order. An independent audit has not been performed at Ft. Knox since 1953, when President Eisenhower was in office.

Does the amount of gold the Fed claims it has in its vaults exist? Why do other countries report declining amounts of gold, yet the Fed insists its' inventory has remained constant over the years? And if so, why don't they open up their vaults for audit? What are they hiding?

Here is Stewart Dougherty's account of KMPG's annual "audit" of the Exchange Stabilization Fund (ESF):

"Even the Treasury Department’s clandestine $50 billion Exchange Stabilization Fund (ESF), which is only one-fifth the value of America’s reported gold holdings, undergoes an annual audit. For fiscal year 2008, this audit was conducted by KPMG, a well-known, independent CPA firm. KPMG’s 2008 ESF audit uncovered “significant deficiencies,” “material weaknesses,” a “weak control environment,” and “several control deficiencies.” If a Treasury organization subject to annual audits could fail its recent exam as broadly as that, what are we to assume about the safety and security of the people’s gold supply, which, like the national money geyser, the Federal Reserve Bank is never audited? And if the ESF is audited each year, what legitimate rationale can there be for not auditing the nation’s gold supply? Something isn’t adding up."

Here's the full length, but insightful article:

http://news.goldseek.com/GoldSeek/1248373722.php

Gold chart

http://www.the-privateer.com/chart/gold-pf.html

This point and figure chart shows support at $950/oz., with the next level of support at $850/oz, should the price of gold correct below $950. Expect retracement higher if we get a test of these support levels.

However, should we consolidate for a few weeks at current levels, expect another move higher, with little resistance, as we are in uncharted all-time highs, at least in terms of a a weakened dollar.

In fact, gold is inversely correlated to the US Dollar. As long as market complacency continues (as measured by a low Volatility Index), equities will continue to rise as investors are willing to take on more risk. This would be bearish for US Treasury bonds--and the US Dollar, which would be bullish for gold. However, if the VIX rises, money will flow back to the dollar as a safety haven, and that will precipitate gold's decline.

That correction in gold may be a good entry point for gold bugs, or for accumulation of more gold mining shares.

Disclosure: I am long gold mining shares.

Barrick, the last of the gold hedgers

Barrick Gold Corporation (symbol "ABX"), the world's largest gold producer, finally removed their hedges against gold spot prices. For over a decade, ABX was one of many gold mining producers who put hedges on gold to lock in future deliveries, and in the process, protect themselves from a decline in the price of gold. In that duration, the hedges have not been profitable, as the price of gold has climbed from $250/oz. to over $1000/oz. today.

Other gold producers have slowly abandoned their hedges over the years, with ABX being the last one to participate in this elaborate gold suppression scheme between the triumvirate of central banks, bullion banks, and gold producers. With news that ABX has unwound its short positions last week, gold bugs are having their day in the sun, as ABX has finally "thrown in the towel". The days of permanent short positions on gold are over--at least for ABX and other gold mining companies. The fortunes of ABX now are completely correlated to its mining operations--and the price of gold, not a derivative financial instrument (a losing one, at that). In other words, ABX anticipates the price of gold to continue to increase going forward.

To gold bugs, this is a seminal event, a confirmation that central banks, bullion banks, and gold mining companies have conspired to suppress gold and silver prices through elaborate gold leasing schemes. I have blogged about it many times, more recently on September 4 and September 5:


http://gregnguyen.blogspot.com/2009/09/ed-steers-take-on-gold.html

http://gregnguyen.blogspot.com/2009/09/silver-futures.html

It's been a running theme, and deservedly so, as illustrated in this lawsuit against JP Morgan and Barrick:

http://www.gata.org/files/BarrickConfessionMotionToDismiss.pdf

These latest findings, along with renewed investor demand for precious metals (including new demand from the Chinese), have caused prices to soar recently.

So the predators are now the prey--the Fed and bullion banks will now attempt to short gold and silver futures contracts on their own, without the veil of gold producers protecting them. The bullion banks will continue to attempt to manipulate prices lower by increasing the number of (naked) short positions, and they will continue to have the blessing of the Federal Reserve, but the cat is out of the bag. At some point, these short positions in New York's COMEX and the London Metals Exchange will need some backing of real, physical gold bullion. A flood of demand for physical delivery in lieu of settlement via cash, will cause a run on gold and silver.

When a failure to deliver occurs, investors worldwide will discover that the Emperor has no clothes.

FDIC (insolvency)

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress to maintain stability and public confidence in the nation's financial system by:

* insuring deposits,
* examining and supervising financial institutions for safety and soundness and consumer protection, and
* managing receiverships.

According to Kevin McElroy:

Right now the FDIC insures around $4.5 trillion of banking reserves. That’s the money you and I count as “safe” when we deposit it in almost any American bank account.

The actual truth is they insure this $4.5 trillion with just $10.4 billion. That $10.4 billion came directly from the FDIC-insured banks themselves – meaning that it’s an indirect tax on deposits paid by depositors.

Doing some quick math, we can see that $10.4 billion goes into $4.5 trillion 432 times. So essentially, the FDIC insures every $432 of deposits with one lonely dollar. That’s two-tenths of 1% worth of insurance! It’s not hard to imagine a circumstance where that paper-thin cushion gets wiped out.

The FDIC currently insures 8,153 banks. So far this year, 81 have failed – or 1% (in 2007, just three failed). And there are another 416 banks on a watch list. What happens if another 1% fails – or if even two-tenths of 1% fail?

Well, the FDIC has a reinsurer of its own, sort of. It’s called the U.S. taxpayer, backed by the full faith and credit of the Fed’s printing presses. If they can’t tax us enough, they’ll backstop the FDIC with newly created dollars – the very definition of inflation.

Rising defaults among residential subprime mortgage borrowers caused the implosion of major money centers over the last 3 years, catalyzing a string of bank bailouts. Prime borrowers are also defaulting in record numbers due to resetting of Option ARM loans. Commercial real estate loan interest rates will also reset starting next year, instigating a bust in that sector as well.

Regional banks will fail because they lend to the commercial real estate markets, but they won't receive bailouts, as they aren't "too big to fail." And fail they will, further dwindling FDIC reserves. The FDIC itself is insolvent, and will require the US Treasury to bail them out.

And round and round we go. More printing of dollars will be needed to shore up our banking system. The back stop to the banking back stop will be the US tax payer. To make matters worse, not only will taxes increase, but inflation will further decrease consumer purchasing power due to US Dollar debasement.

Hello gold and silver.

BioCryst sponsors a symposium at ICAAC

BioCryst Pharmaceuticals (BCRX) sponsored a symposium at the ICAAC conference last night on emerging therapies for novel strains of the flu:

http://www.icaac.org/index.php?option=com_content&view=article&id=57&Itemid=54

Intravenous Peramivir, BCRX's anti-viral against the flu, made news headlines as well:

http://abcnews.go.com/Health/wireStory?id=8562221

Now that President Obama and Congress have made appropriations for funding of vaccines and anti-virals to combat the pandemic flu, it is now in HHS Secretary Kathleen Sebellius' court to sign off on an order for the strategic national stockpile. The FDA will also have to issue an Emergency Use Authorization since Peramivir is not an approved treatment.

Currently, medical practitioners can order Peramivir for individual hospitalized patients through an emergency use investigational new drug (EIND) process. But an EUA needs to be issued so millions with complicated and severe cases can gain access to Peramivir. Peramivir saves lives--especially with novel strains becoming resistant to Tamiflu (Oseltamivir).

The end of the dollar as the world's reserve currency

It is coming sooner than you think:

In the Thunder Road Report, Paul Mylchreest comments that in Latin America, where he has been living for 25 years, for the first time he can remember, locals are now preferring their own currency to U.S. dollars. He goes on to finish with this comment: "If a fellow with no education, a poor diet, and inadequate medical treatment living at 3,500 metres above sea level can figure out that the US dollar is undesirable as a store of wealth, how much longer do you think it can last as the world's reserve currency."

The gold put option (courtesy of China)

The Chinese are providing a floor on the price of gold:

http://moneynews.newsmax.com/streettalk/china_gold_put/2009/09/09/257918.html

This is not an old theme in these blogs, but now, the Chinese aren't being as evasive about it. They're coming out and declaring they aren't happy with the US Treasury's printing presses.

MelaFind

Watch this video on the benefits of early melanoma detection, and how Electro-Optical Sciences (symbol "MELA") is attacking the problem with MelaFind:

Electro-Optical Sciences, Joseph V. Gulfo, President & CEO at OneMedTV.

Silver futures

Ed Steer's comments on manipulation of silver futures at the COMEX, as shown in September's Bank Participation Report:

In silver, as of Tuesday, two U.S. bullion banks were long 13 contracts and short a whopping 29,888 contracts... 28.0% of the entire silver open interest of 106,761 contracts! This sort of concentration is a prima facie case of manipulation. Any judge could see it... but obviously not anyone at the CFTC.

COMEX gold contracts are equally lopsided: three US bullion banks were long 509 contracts and short 75,550 contracts.

http://www.cftc.gov/dea/bank/deasep09f.htm

Despite the huge number of short contracts relative to long contracts, this represents a net decrease of 30,350 short contracts from August's 105,900 contracts. This explains gold's huge run up in price this past week. It may also be an attempt by the bullion banks to balance out their positions for the following week's Commitment of Traders (COT) report, which has a 10-day lag.

Or it could simply mean these bullion banks can no longer support these increasingly losing short positions. If this scenario is the case, expect another run up in gold prices in the near-term future. On the other hand, if JP Morgan and HSBC are able to slap on more naked short positions, they will again be successful in temporarily knocking back down gold and silver prices. But they may be running out of dry powder.

Things are getting interesting: foreign sovereign funds--including China's central bank--are accumulating gold and silver to shield themselves from a deteriorating dollar, as they hold vast sums of dollar-denominated US securities, including long-term US Treasury bonds. This puts upward buying pressure on gold and silver prices. With a handful of commercial bullion banks taking the opposite side of that trade, something has to give. With declining supplies of physical gold and silver above ground, it will be very apparent who the winners will be.

Gold and silver price suppression

It's becoming clear as day that the commercial bullion banks are throwing the kitchen sink at trying to suppress the precious metals market, even if transparency in the COMEX is a pipe dream propagated by the CFTC. So long as the CFTC, the regulatory body in charge of monitoring the commodities futures exchanges, is captured by the commercials, market manipulation will continue to run rampant in the pits, as retail investors continue to get burned. The CFTC has more at stake and chooses to look the other way. Investor protection is merely lip service, in other words.

Ed Steer spells it out for the gold and silver market at the COMEX:

Now for the open interest numbers. I said yesterday that Wednesday's gold o.i. (ed. open interest) numbers would be "u-g-l-y". In actual fact, they were beyond u-g-l-y. Gold o.i. rose by one of the largest amounts that I've ever seen in the ten years that I've been involved in the precious metals market...26,051 contracts. Total open interest is now 410,754 contracts, and yesterday's volume was a very large 165,302 contracts. Silver was better, with o.i. rising 'only' 1,629 contracts to 108,300 contracts of total open interest... on volume of 33,296... which is a lot.

It should be obvious to anyone that this price rally in gold is being met with ferocious resistance from the bullion banks, who are going short against every long placed. Without a doubt, they piled on the short positions again on Thursday... and I won't be going too far out on a limb to say that we are very near to having the largest net short position in gold in the history of the Comex. That's about 265,000 Comex contracts, or 26.5 million ounces of gold... more than one third of 2009 gold production held short by a handful of bullion banks. And two U.S. bullion banks are short about 18 million ounces of that total. Where the hell is the CFTC???

Which begs the question: how can JP Morgan and HSBC have this much gold and silver in their vaults? The obvious answer is that they don't. In other words, these are naked short sales, which is illegal as it defines market manipulation. Laws have been passed to ban naked short selling (market makers in equities are exempt from naked short sales bans, with the logic being they need that waiver to keep markets liquid) and margin limits increased in the stock market to curb market manipulation, yet the COMEX is full of "Naked Shorties Gone Wild".

To the average layman, your typical response is: "So what? Who cares if a few gold bugs get their heads handed to them by a couple crooked banks?"

Here is your answer: so long as the prices of gold and silver are suppressed, the gold and silver markets will remain distorted. When prices of these commodities are pegged at artificially low prices, there are no incentives for miners to explore and drill these metals. Mines end up closing down, instead of increasing production. Which would be disastrous for our world economy and catalyze hyperinflation at the same time.

Why? Because silver, in addition to being a long-standing store of value like gold, is also an industrial metal used in a wide variety of applications. In fact, 97% of silver is used in industries as diverse as electronics (silver is a good conductor), solar panels, electric car batteries, batteries for hand-held devices, biomedical devices, disinfectants, antibiotics, stained glass, clothing, nuclear reactors, mirrors, and electrical contacts. In other words, if supply is constrained, silver prices will soar--and so will wholesale and consumer prices on many items we depend on every day--including "green" technologies. Couple high prices with unmet demand for items like an IPhone, and you have the worst of two worlds: lower gross domestic demand (GDP) and high inflation.

Because gold and silver are "crisis" indicators, the bullion banks--in conjunction with the government--specifically the Fed and US Treasury, continue to suppress the prices of these precious metals. A soaring gold price exposes a lack of confidence in the world financial system--which depends on confidence, as currencies are unpegged to the price of gold. A systemic breakdown would occur.

Their suppression scheme is short-sighted, as it only defers and exacerbates the problem. In fact, ANY market manipulation is a short-term fix--with gargantuan unintended consequences down the road. When free markets are rife with manipulation and intervention, distortions inevitably occur as a result. Witness the subprime mortgage meltdown precursed by suppression of interest rates, which caused an unsustainable real estate bubble that ultimately imploded.

Instead of applying fiscal discipline, curbing astronomical spending and reining in the printing presses, the government is resorting to these secretive price suppression schemes. But as stated before, this price manipulation will eventually fail, because the fundamentals of a shortage will eventually supercede any corrupt price suppression. It is a coiled spring waiting to explode.

How to play this? Expect artificially low interest rates to eventually cause high inflation as an unintended consequence. It's telling that the same critics who derided former Fed Chairman Alan Greenspan's easy money policies are hailing Ben Bernanke's same strategies today. It didn't work then, and it won't work today. This deflationary environment won't last.

Taking delivery on at least a small portion of your portfolio in physical gold and silver would be prudent--coins from a reputable coin dealer. The gold and silver ETF's GLD and SLV, respectively, are good hedges against inflation as they track the prices of the metals themselves, although extreme survivalists are uncomfortable with "paper" gold certificates. They question whether the vaults of these ETF's are independently audited, and whether they can gain access to their gold in the event of a financial catastrophe. As long as you don't believe in financial Armageddon, you should be okay.

For those more adventurous, another option is dabbling in major gold producers. These stocks are extremely volatile, as they are a leveraged play on the price of gold and silver. And for the speculators among us, there are also junior gold producers and prospect generators. For every ten-bagger, there may be dozens of losers. Tread carefully.

These are not specific recommendations, and investors should perform their own due diligence.

Disclosure: Long shares in ABX, SLW, FRG, PZG, RBY.

Gold and silver surge

Silver charged to new 52-week highs today, dragging up gold to near all-time highs along with it. See two of my previous blogs last month on the possible reasons:


http://gregnguyen.blogspot.com/2009/08/silver.html

http://gregnguyen.blogspot.com/2009/08/gold-and-silver-price-suppression.html

Knowledge isn't everything--you also need timing.

Taking (partial) profits

Today is why we take partial profits, while letting the rest ride.

Sinovac Biotech (SVA) dropped $2 down to the $9's. A friend I helped sold out yesterday at the peak at $11.25--most of us sold out in the $9's Friday. Not bad given we bought in the $4's barely more than a month ago.

It is impossible to buy at the absolute low and sell at the absolute high--no one has a crystal ball (although my friend's fortuitous exit was near the peak). However, we can buy lower and sell higher. Now that we're playing with house money, we can focus on other opportunities without getting emotionally attached with one winner.

Having said that, this swine flu play is hardly over. Those of us who got in back in May are REALLY doing well, waiting for more breakouts to the upside--again, with house money.

On a related note, SVA received a commitment of orders from South Korea today, in addition to receiving approval for their flu vaccine from the Chinese State Food and Drug Administration (SFDA) yesterday.

http://finance.yahoo.com/news/Sinovac-Announces-Supply-prnews-1032672347.html?x=0&.v=24