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.