Saturday, April 30, 2011

Bernanke Starts Talking, Gold Surges Past $1,558
Remember when every appearance of Obama and Geithner would send the market plunging before the institution of central planning? Well, we now have a new phenomenon: every time the Chairsatan opens his mouth gold surges.

Doug Casey: Precious Metals vs. the USD

Guess Who Just Got Invited To The Printer Party...

Check out the comments from bullish readers who are selecting elements from the periodic table...hilarious.  Half of them probably flunked bonehead chemistry, but they're dead on with this basic economy law of supply and demand.  Too much supply of paper currencies = devaluation of said paper currencies.

St. Louis Fed Stunner: Admits QE May Lead To Rise Rather Than Drop In Unemployment

Perhaps Bernanke should have listened to this Fed economist.  Wow.

Thursday, April 28, 2011

More Americans Believe The Country Is In A Depression Than Growing

And this was Treasury Secretary Tim Geithner's proclamation that the economy was recovering back in 2010:

But then again, the government declared the recession ended in June 2009.

When do the pitchforks emerge?

Why the experts missed the crash
Why are so many experts so wrong, yet people keep listening to them? Who really is worth listening to about the future? The author of Expert Political Judgement builds on Isaah Berlin's characterization of judgment modes into Hedgehogs (who know one big thing) and Foxes (who know many things). Hedgehogs don't notice and don't care when they're wrong; that's why they're so compelling. Foxes learn.

I agree with Tetlock, but he completely misses the mark when he says Lawrence Summers has good predictive ability.  Summers was instrumental in levering up the US banking system under Clinton, which subsequently crashed a decade later.  On the other hand, Summers resigned from Obama's cabinet last year, a possible precursor to another financial crisis.

Bernanke's Press Conference, August 1, 2012 (April 28, 2011)

This is a parody on a parrot--or Fed Chairman Ben Bernanke, take your pick.

James Turk - The Waterfall Decline in the US Dollar Has Begun

Backwardation refers to the market condition wherein the price of a forward or futures contract is trading below the present spot price. The resulting futures or forward curve would typically be downward sloping (i.e. "inverted"), since contracts for farther dates would typically trade at even lower prices. (The curves in question plot market prices for various contracts at different maturities—cf. term structure of interest rates) 

Normal backwardation refers to the market condition wherein the price of a forward or futures contract is less than the expected future spot price (i.e. theoretical forward or futures price form the cost-of-carry model).

The opposite market condition to backwardation is known as contango.

A backwardation starts when the difference between the forward price and the spot price is less than the cost of carry, or when there can be no delivery arbitrage because the asset is not currently available for purchase.
 Hi-ho silver.

Wal-Mart: Our shoppers are 'running out of money'
Wal-Mart's core shoppers are running out of money much faster than a year ago due to rising gasoline prices, and the retail giant is worried, CEO Mike Duke said Wednesday.

"We're seeing core consumers under a lot of pressure," Duke said at an event in New York. "There's no doubt that rising fuel prices are having an impact."

Wal-Mart shoppers, many of whom live paycheck to paycheck, typically shop in bulk at the beginning of the month when their paychecks come in.

Lately, they're "running out of money" at a faster clip, he said.

"Purchases are really dropping off by the end of the month even more than last year," Duke said. "This end-of-month [purchases] cycle is growing to be a concern.

Fight of the Century: Keynes vs. Hayek Round Two

Everything’s OK with Economy, Go Back to Sleep

Paul Krugman = idiot Nobel Laureate in Economics.

Ron Paul says Bernanke ducks the issue

Wednesday, April 27, 2011

Auerbach Says Fed's Bernanke in `Very Bad, Deep Hole'

The Fed corrupts and lies.  Skip to the four-minute mark of this video.

The Dog That Didn’t Bark

Dollar CRASHING: Gold and silver explode to new highs after today's Fed conference

Americans are Preparing at Unprecedented Levels

Jim Rogers says the US will certainly lose its AAA credit rating

Peter Schiff - Fed’s Actions Cause Massive Gold & Silver Buying
“Ben Bernanke may deny that there is a causal relationship between his monetary policy and rising prices but the market knows differently.  In fact when Ben Bernanke denies the relationship, then the expectation is that he is going to continue on his current monetary policy course which is the green light to buy gold, buy silver, buy oil, buy commodities, sell the dollar and that’s exactly what’s happening.  That’s why the dollar is hitting new lows today.”
You could see the dollar begin to fall as soon as the statement was released, and then the fall intensified when he (Bernanke) began opening up his mouth.  He’s either lying or he’s incompetent or a combination of both, but neither inspires confidence in our country, our currency or our economy.  I mean whenever Ben Bernanke opens his mouth you want to sell anything that is related to the United States.
They said they are going to continue to reinvest their maturing principle back into treasuries, so the Fed said they are basically not going to shrink their balance sheet and that’s inflationary on its own.  Who are they kidding?  The Fed is going to keep buying bonds because if the Fed doesn’t who else is going to do it?  There is nobody who is going to buy them because the rates are too low.  So the Fed is just talking, but anybody who understands reality can see through it.   And obviously with the gold price soaring and the dollar plunging, a lot of people can see through it.”
“I think as early as this fall we could be in a dollar crisis because I expect the dollar to weaken throughout the summer.  And if we don’t get a big bounce during the summer when they end QE2, which I don’t think they are going to end it but they might pretend they are ending it, if the market senses that the Fed is still printing money which they will be doing, the dollar I think could go into free fall.  That is going to force the Fed’s hand and you are going to have really high interest rates and this economy is going to implode...but we have a phony economy that needs to implode.”
“I think gold is going to have a big move.  I think gold is underpriced right now.  I don’t think this is going to be the move that wakes them (the public) up out of their coma, I think that move is coming.  It’s going to be a much more spectacular move down the line.”
“When this market senses that this gold rally is real.  The gold bull market is 10 years old, you would think they would figure it out by now but there is more fear than greed in the gold market and you can see that in the mining stocks.  So I think we are still early in the gold bull market.”

Statement on Federal Reserve's Press Conference - Ron Paul

And So The Billionaires Turn On Each Other - Sokol's Lawyer Accuses Buffett Of Lying

How The Comex Lost 20% Of Its "Registered" Silver In One Week, Or Where There's Smoke Of A Run, There's Probably A Run

I blogged about this reclassification from registered silver to eligible silver last week.  Now I feel really dumb I sold 20% of my mining holdings this morning.  In a secular bull market, be right and sit tight.  Don't try to pick the tops--you'll be wrong more often than right.  From a risk management stand point, taking partial profits was the prudent strategy--I won't beat myself up too much.  But this imminent shortage of physical silver could be a cataclysmic event, a shortage I knew of, but didn't listen to.  Another painful lesson learned.

Banks, Hedge Funds Threaten A Repeat Of Lehman If Debt Ceiling Not Raised

This letter is the reason why the US national debt ceiling will be raised.

Here is the roster of members on the committee backing the letter:

They will get their wish in May.

The Debt-Ceiling Charade

When a household credit card limit is about to be exceeded, the household usually gets a 2nd job, attempts to get more overtime hours--anything to bring in more income.  They also undergo cost-cutting activities like eating out at restaurants less, cancelling non-essential expenses like vacations, entertainment, even driving less and turning down the thermometer in the winter.

In other words, when household budgets are squeezed, they attempt to bring in more income and simultaneously, reduce and cut expenses.

However, when the US government is about to reach its debt ceiling, what does Congress do?  It merely increases the ceiling amount, so the government can continue its overspending ways, and then relies on the Fed and US Treasury to print more currency to enable that spending.  Only with Congress, you get the usual chicanery of a fiscal tug of war that is nothing more than theater.

Tuesday, April 26, 2011

Ron Paul Was Tempted To Walk Away From Presidential Race, But Fears U.S. Is In ‘A Slow Motion Default’
Congressman Ron Paul, en route to Iowa to announce the creation of the presidential campaign exploratory committee, told an editorial breakfast of The New York Sun that “it’s tempting to just walk away” from the presidential race “but if what we’re predicting happens, we’re going to have to step up.”

He was referring to the collapse of the dollar and the threat of wider inflation and the damage they are doing to ordinary Americans, who are suddenly facing soaring gasoline prices and grocery bills and an erosion of their savings and the value of their homes.

The Congressman said he was not concerned about the talk about how a vote against raising the debt ceiling would lead to a default, saying America is in “a slow motion default now.” He was referring to the collapse in the value of the dollar to below a 1,500th of an ounce of gold. The debt ceiling vote will come up in Congress shortly.

At the breakfast Dr. Paul sketched what is emerging as the structure of a broad presidential platform, connecting the events around the world — including the turmoil in the Middle East — to the impact of the collapsing dollar and a global system of fiat money. He noted that much of the rebellion in the Middle East was triggered by the rise in food prices related to the collapsing American currency and inflationary policies by other governments.

“Don't you think it’s demagogic to accuse the Chinese of manipulating their currency when we've been manipulating our currency forever,” Dr. Paul said.

State pension crisis balloons

Europe's sovereign debt crises are well-publicized, as is Japan's, especially since their twin disasters.  It appears the fiscal problems here in the US have been forgotten as a result.  By some measures, the US debt problem is worse.

'New funds considered' to protect reserves
The central bank is planning new investment funds to diversify holdings in the nation's $3 trillion foreign exchange reserves, to hedge against depreciation and inflation risks, according to a news report.

The proposed funds will invest some of the foreign reserves in energy and precious metal markets, the New Century Weekly said on Monday, citing unnamed sources close to the People's Bank of China.

Bankers' wives got no-risk loans

I blogged about this earlier, on how the Fed was bailing out everybody and his brother.  Now we find out they were doling out free money to bankers' wives, Central banks of terrorist countries, foreign car manufacturers, motorcycle companies, etc.--on the backs of taxpayers.  I hope you are as outraged as I am.

Historical bubbles

Click on image to enlarge.

Short Sellers Now Screaming About a Buy Side Silver Conspiracy


Simon Black Answers The Question Du Jour: "Should I Sell My Silver?"

USDollar vs. gold

Click on image to enlarge.
But the dollar’s path (the green line) requires a little thought. It’s clearly down, but doesn’t seem to be falling as consistently and dramatically as gold is rising. Why is that? Because the dollar in being measured against other currencies — which are also falling in real terms — so the destruction of the euro and yen are masking the dollar’s decline. In other words, all the major currencies are being inflated away, with the dollar just slightly ahead of the ugly pack.

Gold, meanwhile, doesn’t “rise” or “fall”. It holds its value while the currencies in which it is valued fluctuate. So this chart actually depicts two ways of measuring the dollar. The green line is versus other currencies, which is a false measurement because it explains nothing about the real trajectory of the dollar. The gold line is the inverse of the dollar’s true value, as measured against the only remaining real form of money. Seen this way, gold’s rocking bull market is actually the dollar’s epic bear market. Neither is likely to end anytime soon.

Meeting of the Federal Open Market Committee on June 29-30, 2005

The Fed knew the housing bubble was about to burst in 2005.  So why did Fed Chairman Bernanke tell the world everything was fine in 2005, 2006, 2007, and even 2008 when we had a financial meltdown?  It's 234 pages long, but if you care to skim it, you'll know the FOMC saw it coming, even if they failed to warn the public.

Monday, April 25, 2011

Apmex Starts Reverse Inquiry: Seeks To Buy "Any Quantity" Of Silver From Clients At $3 Over Spot

Apmex, one of the largest dealers in north America wants your gold and silver coins (because they have depleted their inventory).  They're willing to pay a premium over spot price.  It may explain why the spot price dropped in overnight trading.

Precious metals-On the Edge with Max Keiser-04-22-2011, Endeavor CEO Brad Cooke

Gold and silver drop and are being pinned around $1500 and $45

In overnight Asian trading, both gold and silver correct and are being pinned around $1500 and $45.  This is typical before options expiration (tomorrow, April 26, 2011) as options sellers of both puts and calls want to make sure the options they write expire worthless.

Now What? Gold $1,518 Silver $49.25

This is a balanced approach on the bull market in gold and silver.  Grandich is taking partial profits here, calling a temporary top in both, while remaining bullish in the long-term.

James Turk - Silver Still in Backwardation, Headed Higher

No contango = backwardation in silver still exists, even at much higher price levels = still bullish.

London Source - Asian Buyers Will Take Silver Over $100
As I mentioned to you previously, the Asians have also been taking delivery of silver out of SLV and will continue to do so.  You have to understand that these Asian buyers are planning to take delivery of all of the available phyiscal silver they can get their hands on and will continue doing so for the foreseeable future.” 

When asked at what price the Chinese will stop buying silver the London source replied, “The Chinese want out of dollars and they will continue aggressively purchasing both gold and silver in order to diversify.  They don’t care whether silver is $50, $60 or $100, they will just continue accumulating.  The Chinese may be patient buyers, accumulating on weakness, but you can bet that their relentless purchases of physical silver will eventually push the price well over $100 an ounce.”

2011 1 oz Silver American Eagle (May 13th) on APMEX

This is an example of how data is distorted by pundits, economists, and the media.  Sales of American Silver Eagle coins are momentarily down, month-over-month.  According to the experts (i.e. silver bears who completely misjudged the bull market in silver), this is a sign of declining demand, much like a decline in new home sales, for example.  Ergo, prices must come down, is the line of thinking.

However, unlike housing demand, which is countered by bulging inventory, there is a physical shortage of silver coins.  In other words, the reason why investors can't buy silver coins is due to lack of inventory--not because there is declining demand.  As a matter of fact, demand is booming among both investors and industrial consumers, and supply cannot keep up.

But leave it up to the anti-silver crowd to use their spin tactics to hoodwink the public.

Consumer Price Index Summary
The Consumer Price Index for All Urban Consumers (CPI-U) increased
 0.5 percent in March on a seasonally adjusted basis, the U.S. Bureau
 of Labor Statistics reported today. Over the last 12 months, the all
 items index increased 2.7 percent before seasonal adjustment.
 The index for all items less food and energy rose 0.1 percent in
 March, a smaller increase than in the previous two months.
 The index for all items less food and energy
 has increased 1.2 percent with the shelter index up 0.9 percent.
The US government must think its citizens are fools to believe this inflation data.  Sure, I cherry-picked some data, and more detailed data does show rising prices in food and energy, but to suggest our cost of living has only increased 2.7% year-over-year is insulting at best.

IMF bombshell: Age of America nears end

As heretic as it sounds, I've postulated that "riskless" US Treasuries are anything but.

Precious Metals Storage Scam: ‘Sorry, Delivery Is Not Possible’

I've said a million times and I'll say it one more time.  Unless you take possession, you don't own it.  Everything else is a paper claim.
Bill Cramer of St. Louis was pretty confident everything was on the up-and-up. He purchased 5000 ounces of silver back in 2003 for a spot price of $4.94 and stored them with an east coast broker. When he was discussing his holdings with his coin dealer, the dealer dared him to try and take delivery of the metal.

Bill took him up on that dare and contacted his broker requesting to take delivery of his supposed physical metal holdings, for which he had been paying storage fees for years. As you may have guessed, the broker advised him that physically delivering the metals was not possible:

So, I took his dare, I called them up, it was June of last year. The metal I had purchased in January of ’03. I said “I’d really like to take delivery of my metal – the five thousand ounces.” They go “well, that’s not possible.” And, I go “well, I’ve been paying storage fees since January of ’03, what do you mean I can’t take delivery.”

“Well, it’s part of the account. It’s called a pool account. And, you don’t take delivery, you just participate in the appreciation.”

So I immediately sold that 5000 ounces at $18.33 and I had my cell phone in my hand and I immediately purchased 2500 silver eagles at $18.41 and that’s how I reconciled the problem of not being able to take delivery of my physical metal from a brokerage account.

If you’re holding metals outside of your immediate possession (i.e. in a safe deposit box, with a family member, an off premises safe or a hole in your backyard), then we strongly suggest you understand what your investment is and is not. If it’s paper, understand that if and when the swindle in paper markets for precious metals is finally understood by mainstream investors, and the paper assets collapse, you will likely be left with nothing.

Silver is going parabolic: Futures trade at new ALL-TIME high this morning

The "end of the dollar's reign" is no prediction... It's here right now

Shakedown nation

Sunday, April 24, 2011

Is gold rising because America is broke?

I agree with the overall premise of this article, but it is not only the US that is broke.  Other developed countries in Europe and Japan are also drowning in debt.

US Default Could Be Disastrous Choice for Economy

This is the most honest story by CNBC I've read in years.  The takeaway message: there is no way to end QE 2.0 in June without seriously disrupting the US Treasury bond market, which would have a cataclysmic effect on global financial markets.  However, if the Fed were to extend QE beyond June, it could intensify inflationary pressures.  See previous blog <click here>.

Stimulus by Fed Is Disappointing, Economists Say

Here's the bottom line:  printing $3 trillion for quantitative easing and permanent open market operations (both policies create currency out of thin air) have produced about $400 billion in economic growth.  The law of diminishing returns is at work, and why economists coin the Fed is "pushing on a string."  Those massive mortgage-backed securities and US Treasury bond purchases by the Fed have offered very low returns, and some would argue negative returns, because many of those mortgage bonds are underwater.  In an exit strategy (tightening monetary policies), the Fed would have to sell those mortgage banks back--at much lower prices.

In other words, in the aftermath of the bank bailouts, the Fed essentially purchased these bonds at par value, when they were actually worth much less.  The balance sheet risk was merely transferred from commercial banks to the Fed.  Essentially, taxpayers own these worthless securities.

The question of whether the Fed will end QE 2.0 at the end of June is becoming much more cloudy.  Tighten too early, and the economy would tank due to rising interest rates.  Continue QE, and we could have runaway inflation, which would have a huge dampening effect on the economy.  The Fed has cornered itself.

The elephant in the room that nobody wants to acknowledge is the US is insolvent, as our debts are unsustainable.  And there is still way too much leverage in financial markets due to over-the-counter derivatives which are still unaccounted for.

Even the language of mainstream Keynesian economists is flawed.  What they refer to as "stimulus" is actually just issuance of more debt.  And massive debt levels are why we're in deep trouble economically in the first place.

Why MIT Is Not Willing To Unleash Real-Time, Dynamic-Purchasing Inventory Control Systems; Or The "Real" Reason For The Culling Of MIT's Billion Prices Project

This is getting really interesting.  Did MIT cease publishing this data due to pressure from the US government (since it calculates inflation data more comprehensively, reliably, and accurately than official BLS numbers <click here>), or is it just because they are too busy?

Will governments confiscate gold?
As concerns mount that there is another financial crisis in the offing and the gold price rises, American investors worry increasingly about whether the US government will confiscate their gold. The precedent was set by President Franklin Delano Roosevelt, who in 1933 forced all of America’s gold owners to sell their bullion to the Federal government at the official price.

However, the situation today is very different from that of 78 years ago. At that time, gold was the primary currency, the dollar being tied to it at $20.67 per ounce. But today, the Fed and European central banks strongly deny that gold has any monetary role at all, and argue instead that it’s just a hangover from the past: “that barbarous relic” as Keynes called it. Its confiscation would be an embarrassing admission that gold, after all, is money.

Nevertheless, as paper currencies continue to lose credibility, the temptation for any government to seize its citizens’ gold to enhance official holdings must be growing. Americans today, however, are unlikely to meekly accept confiscation the way they did under Roosevelt. And nowadays, you may be American, but your gold is not necessarily held at an American bank: it is just as likely to be in London, Zurich or Hong Kong.
The wording of a compulsory order is all-important. Confiscation requires the gold itself to be surrendered, which presumably would be the objective if a government is to add to official holdings. If gold ownership is merely banned, it is a different matter. A bullion bank holding gold in an unallocated account would almost certainly be unable to deliver physical gold if required to do so by the American government, but it would be able to close out the account for cash. And there is the thorny question of derivatives, which hardly existed in the 1930s. All futures and options trading would cease, and contracts for forward delivery would be cancelled, possibly with serious financial consequences.

The international nature of gold would probably require all G10 or even G20 members to agree to similar actions against their own citizens. It seems unlikely that all governments would agree to this, unless they all had their backs hard against the wall.  The G20 also includes China, India, Saudi Arabia and Russia. It is extremely unlikely that these countries will be prepared to confiscate their citizens’ gold to appease the Americans.

Just the mention of these names alerts us to the dangers of a confiscatory move by the US. It would make the Chinese and Indian middle classes instantly wealthier than the average American, measured by gold ownership – an interesting thought when paper currencies are losing credibility. On balance, a repeat of the Roosevelt confiscation seems unlikely. But there is one thing we can be certain of, and that is that the risk of silver confiscation is more remote, so perhaps that is the safer metal to own.

Treasury claims power to seize gold and silver -- and everything else
The U.S. Government has the authority to prohibit the private possession of gold and silver coin and bullion by U.S. citizens during wartime, and, during wartime and declared emergencies, to freeze their ownership of shares of mining companies, the TreasuryDepartment has told the Gold Anti-Trust Action Committee.

But gold and silver advocates shouldn't feel too picked on. For the U.S. Government claims the authority in declared emergencies to seize or freeze just about everything else that might be considered a financial instrument.

The government's authority to interfere with the ownership of gold, silver, and mining shares arises, Thornton wrote, from the Trading With the Enemy Act, which became law in 1917 during World War I and applies during declared wars, and from 1977's International Emergency Economic Powers Act, which can be applied without declared wars.

While the Trading With the Enemy Act authorizes the government to interfere with the ownership of gold and silver particularly, it also applies to all forms of currency and all securities. So the Treasury official stressed that it could be applied not just to shares of gold and silver mining companies but to the shares of all companies in which there is a foreign ownership interest. Further, there is no requirement in the law that the targets of the government's interference must have some connection to the declared enemies of the United States, or, really, some connection to foreign ownership. Anything that can be construed as a financial instrument, no matter how innocently it has been used, is subject to seizure under the Trading With the Enemy Act and the International Emergency Economic Powers Act.

Hawaii Average Premium Gas Hits $4.708, As Nationwide Pump Prices Jump By 30 Cents In A Month

I think Obama and his Working Group better bone up on Econ 101 before blaming "speculators" for soaring gas prices.  Instead, they should focus on Blackhawk Ben Bernanke.

Japan GPIF to withdraw $78 bln from assets-Nikkei

And just as I believe the US Treasury bond market is in trouble <click here>, it looks like the implosion of Japanese government bonds (JGB) may win the race into the garbage bin.  I've been predicting the cataclysmic collapse of JGB's for years--and it appears to be coming to fruition, thanks to the natural and man-made disasters accelerating the process.

When an entity is selling "something", it also means it isn't buying that "something" anymore.

China should cap forex reserves at 1.3 trillion U.S. dollars: China banker

China just forced our hand, or more correctly, the Fed's hand.  With Japan about to step away from the US Treasury bond table in order to rebuild their homeland in the wake of the disasters, and now China pledging to be net sellers of USDollars and dollar-denominated assets, the Fed will again have to be the largest buyers of US Treasury debt.  This cannot be good for bond prices, in my opinion.  QE to infinity could very well be a plausible scenario.

If the Chinese follow through on rhetoric of diversifying away from the dollar, interest rates and inflation in the US will rise (not necessarily in that order).  Inflation is already upon us, if anybody who eats food or fills up their gas tank hasn't noticed.  If indeed China, Japan, European and middle Eastern buyers drastically reduce their participation in US Treasury bond auctions, the lights are about to be turned out on America.  Good luck to everyone.

Friday, April 22, 2011

Mainstream Media Puts Good Spin on Bad Real Estate Market

Forlorn Hope

Can't really argue against this article on upcoming Fed actions, since he gives three scenarios.  Having dry powder available--even if still holding core winning positions, is never a bad idea.  If the big dip (in commodities) comes, buy it.

"The Case Against Government Debt - PERIOD"

Nation’s Mood at Lowest Level in Two Years, Poll Shows

This is not a surprise, and something I've blogged about for months, especially with the knowledge that any semblance of an economic recovery has been fictional.  The so-called wealth effect of rising equities markets is being overshadowed by the poverty effect, as unemployment remain frustratingly high.  Add to that record foreclosures, bankruptcies, soaring energy and food prices, and you have a recipe for a consumer-led mini-revolt.

If Obama wants to get re-elected, he'll need to engineer another financial crisis, so Fed Chairman Bernanke can come to the rescue with another massive bailout, this time, of itself.

Silver in cruise missiles

According to this website, each cruise missile has 15 kg of silver content.

There are 32.15 troy oz. per kg X 15 kg = 482.25 troy oz. per cruise missile.

That's almost 500 oz. of silver that will never be recovered.  Oh, and missiles kill people.  This is madness.

What is the difference between forward and futures contracts?

This is an important question, so I thought I'd elaborate on it.  In earlier blogs, I have speculated that JPMorgan has (technically) and will (outright) default on delivery of physical silver.  That's a pretty bold speculation.

What's even bolder is declaring the COMEX, the exchange where futures contracts are transacted, will also default on silver delivery.  A default by the COMEX would announce to the world that something is very wrong if the exchange itself cannot reconcile the default of one of its major members.  The credibility of the largest commodities exchange--and the global financial system, would be under fire should the COMEX default.  It would be a force majeure-type of event, and one the COMEX would have to declare after such an event.

According to Investopedia:
Fundamentally, forward and futures contracts have the same function: both types of contracts allow people to buy or sell a specific type of asset at a specific time at a given price.

However, it is in the specific details that these contracts differ. First of all, futures contracts are exchange-traded and, therefore, are standardized contracts. Forward contracts, on the other hand, are private agreements between two parties and are not as rigid in their stated terms and conditions. Because forward contracts are private agreements, there is always a chance that a party may default on its side of the agreement. Futures contracts have clearing houses that guarantee the transactions, which drastically lowers the probability of default to almost never.

Secondly, the specific details concerning settlement and delivery are quite distinct. For forward contracts, settlement of the contract occurs at the end of the contract. Futures contracts are marked-to-market daily, which means that daily changes are settled day by day until the end of the contract. Furthermore, settlement for futures contracts can occur over a range of dates. Forward contracts, on the other hand, only possess one settlement date

Lastly, because futures contracts are quite frequently employed by speculators, who bet on the direction in which an asset's price will move, they are usually closed out prior to maturity and delivery usually never happens. On the other hand, forward contracts are mostly used by hedgers that want to eliminate the volatility of an asset's price, and delivery of the asset or cash settlement will usually take place.
One can see in the bold-faced segment that the major difference between a forward and futures contract is that the latter is conducted in a clearinghouse or exchange, which in this case is the COMEX.  In a forward contract, either party may default, even if it is rare.

With futures markets, a default between two parties is even rarer because members need to pass minimum capitalization criteria, and because the COMEX has always stepped in and guaranteed the transactions, should one of the parties default.  But should the COMEX in turn default in delivery of said inventory (i.e. the buyer refuses cash settlement), the credibility of the COMEX itself would be in jeopardy, which would cause panic in commodities markets worldwide.

So a declaration that the COMEX could default should not be taken lightly.  It would be a major event.

COMEX warehouse registered silver ounces

Click on image to enlarge.

I did an accounting of silver ounces in COMEX depositories earlier <click here>.  The chart above shows a rapidly declining inventory of silver in COMEX warehouses.  With inventory running low, the multiple paper claims on each ounce of physical bullion is causing a short squeeze on silver.  Buyers are demanding physical delivery on their futures contracts, and JPMorgan is allegedly settling contracts with cash, offering premiums of up to 80% because they can't deliver the physical bullion.  To me, when a seller cannot deliver physical inventory, that is technically a default.

JPMorgan's vaults are empty, hence, they are naked shorting silver.  I've believed and blogged this for several years, and it's getting increasingly difficult to argue against this contention.

Global silver supply and demand

Click on image to enlarge.

Jurassic Park toilet scene

According to Jesse's Cafe Americain's website,
Metal's breaking out. Timmy's at the wheel, with Jamie and Blythe in the back seat. Ben is the goat.

The Comex is headed for a default unless they can secure a large new supply of silver and increase their inventories.   Or allow the price to climb higher until the market finally clears and existing supply re-enters the market.

Killer Combo of High Gas, Food Prices at Key Tipping Point

Even the government mouthpieces at CNBC get it:  inflation is spiralling out of control, despite Bernanke declaring inflation is tepid and "transitory".  Where are all the deflationists now?  In the fetal position in the corner of the their Princeton University office, that's where...

Thursday, April 21, 2011

BlackRock Issues Refutation Of SLV Fraud Allegations; Is It Time To Panic For SLV Holders?

Usually when there is an official denial of something, beware of that something.
In the case of SLV there are multiple safeguards in place.  For one, it’s structured as a grantor trust, which means the trust (on behalf of its shareholders) has the legal right of ownership to the silver it holds.  JPMorgan Chase Bank, N.A., London branch, provides custodial services for storing the silver, but has no legal rights to SLV’s silver holdings.
Umm, Mr. Feldman, we already understand that.  In fact, that is what concerns us "conspiracy theorists" the most.  Has there been an independent audit of JPMorgan's vaults in London?  No?  We didn't think so.

And since when did custodial banks follow the letter of the law?  Ya ever heard of the subprime mortgage crisis?  Or how about Morgan Stanley purchasing (allegedly) physical gold for their clients, charging them a storage fee for years, and when the clients demanded delivery, Morgan Stanley didn't have any gold in their vaults?  <click here>

See disclaimers in the side bar.

Disclosure:  no position in SLV.  In fact, hell no.

Obama, Holder Declare War On Oil Traders, "Speculators"

Like clockwork, Obama decides to target the "speculators" for the surge in oil prices.  See my prediction in an earlier blog <click here>.  Let us not blame the Chinese for cutting off oil exports.  Let us not blame the middle eastern and north African (MENA) civil unrest.  Let us not blame peak oil and the fact that while we may not be running out of oil, we're running out of cheap oil.  Let us not blame US energy "policy" which bans offshore and land drilling.  And last but not least, let us not blame Ben Bernanke's inflationary monetary policies causing aforementioned social unrest.  Let's just blame the speculators.

See you at $200 a barrel crude oil.

Blythe Masters of JP Morgue Rides The Silver Rocket

Pictures are worth a trillion dollars.

Monex Silver American Eagles Pass $50/Ounce

Blythe Masters' silver balls are getting squeezed--and she's naked.

China's Sinopec cuts off oil exports: state media


Here's a related article:

I'm sure the US media and government will blame higher oil prices on the speculators.  Hint:  the US government owes the Chinese over $1 trillion.  The Chinese don't particularly like us.  China will do what's best for China, period.

"Five Sigma" Evidence Of Japanese Repatriation: Meet The Country That Sold The World

1) in the world of statistics and probabilities, a five standard deviation event is extremely rare--an outlier with 0.xxxxxxx1% likelihood, with x = a lot of zero's.  I'm being mathematically blunt to make a point.
2) the Japanese Central bank will no longer be buying foreign sovereign bonds (including US Treasuries) as they will be selling assets from their reserves in order to fund the reconstruction of their country after the earthquake, tsunami, and nuclear meltdown disasters.
3) Japanese selling (vs. buying) of US Treasury bonds (they hold approximately $900 billion) will put selling pressure on US Treasuries, which will reduce demand for said bonds, driving yields and interest rates up.
4) item (3) above will undermine the Fed's QE program, which was implemented to reduce interest rates in the US.  Rising rates will be exacerbated when the Fed stops monetizing US Treasury debt in June.
4) Steve Liesman, the government shill on CNBC, will deny all of the aforementioned.

Silver Surges Over $46.25/oz as Rumours of a Short Squeeze and Cornering Market Gain Credence; Speculators Smell Blood
Gold and silver have surged to new record nominal highs in dollar terms (all time and 31 year) with the dollar falling sharply on international markets. Silver has continued to surge in all currencies and has surged to a new record nominal high of $46.25/oz (£27.85/oz and €31.54/oz) on growing rumours of a short squeeze involving a billionaire or state interest attempting to corner the silver market.

Traders and technically minded investors are firmly focused on silver’s record nominal high of $50.35/oz. Some with a longer term fundamental focus continue to see silver in triple digits if it is to match the real record highs of $130/oz seen in 1980. The inflation adjusted silver chart puts the present sharp rise in the all important historical context.

The massive concentrated short positions of some Wall Street banks have incurred serious losses and a desperate attempt to close their futures positions due to the tight physical marketplace may be leading to a short squeeze. This is something that GoldCore and a few other analysts have warned of for some time.
We have long said that the very small silver market was ripe for cornering by private or state interests and that appears to be happening on some level. However, there are an increasingly large number of silver buyers who realize the market can be cornered and they are buying in anticipation of this event.
The blogosphere has again been ahead of the curve and dismissal of much circumstantial evidence of silver manipulation, a short squeeze etc. as “conspiracy theories” is becoming less easy to do. It looks like many investors internationally and one or a few private individuals and states are cornering the silver market.
I'll take the comment about being part of the "blogosphere" as a compliment.

Clashes erupt in Shanghai as truck drivers strike near port

Despite official GDP growth of approximately 10%, things aren't so rosy in China either.  Why?  Currency debasement-induced inflation by the Fed.

Wednesday, April 20, 2011

PBOC governor says foreign reserves excessive

I guess that means the Chinese central bank will continue to buy gold for their reserves--in lieu of the USDollar or US Treasury bonds.

25% Of Scotia Mocatta's Silver Transferred From "Registered" To "Eligible" Status: A 45% Reduction In "Physical"

A huge transfer of COMEX silver from "registered" to "eligible" could signal a seller of physical silver getting cold feet, and thus pulling their offer.

Eric Sprott: "Expect The Gold To Silver Ratio To Hit Single Digits"

A plummeting gold-to-silver ratio, as gold rises, means silver will slingshot even higher, faster.

Wednesday Wow

Military choppers startle downtown Miami
Residents in the neighborhood saw and heard several military-style, “pitch-black” helicopters flying around and hovering on top of Brickell buildings Tuesday night and early Wednesday morning.

Turns out that it was a training exercize by Miami-Dade police’s SE Regional Domestic Security Task Force. In other words, a Homeland Security operation, that few other authorities apparently knew about, including the U.S. Coast Guard.

A Miami police spokesman said the helicopters were conducting an “operational” training drill. He was not allowed to comment on details of the drill.

On Tuesday, Miami police officers in Brickell said that it was all part of a planned Homeland Security exercise, but confusion about the helicopters was rampant about 6 a.m. Wednesday.  "Three choppers just dropped a group of men on top of the Bank of America building in Brickell," tweeted a man identified as Ianik Drouin, about 9:45 p.m.

Truckers Strike in Shanghai

University Of Texas Fund CEO Shares His Views On Gold, Explains Why He Took Delivery Of $1 Billion In The Precious Metal

Please watch this video, because I can assure other multi-billion dollar pension fund, mutual fund, and endowment fund managers are, and they will come to the same conclusion:  protect your purchasing power against a government hell-bent on destroying it.  And when da boyz buy in, they will move the needle a lot further north than you will.  The question one has to ask oneself is this:  should one buy now before the big boys buy tons of it, or should one wait, hoping to buy in at a lower price, but risk missing the train if prices soar instead?  No one can answer that question for you with certainty, as prices do fluctuate.  Connect the dots and come to your own conclusions.

A couple notes:

1) CNBC has been anti-gold during this entire decade-long bull market in precious metals.  Meanwhile, CNBC has continually advocated real estate and equities while followers have been crushed by the real estate bubble and TWO stock market crashes in the last decade.
2) The "undisclosed location, underground in New York" where the UT endowment fund took delivery of their physical gold bullion is actually in HSBC's vaults.  As stated in earlier blogs, if I was Zimmerman, I would get a bunch of Texas Rangers to literally take delivery of their bullion and transport it into their own depository--in Austin, Texas.  Because when the crap hits the fan, HSBC may just declare force majeure, and renege, at which point, Texas would start another Civil War.

See disclaimers in the side bar.

Disclosure:  long precious metals mining shares.  As for physical gold and silver:  none of your business.

Fed Chairman Ben Bernanke lies

I've posted several video blogs of Ben Bernanke's lies.  Time to put it down in words.  Amerika:  wake the **** up.
  • (November 15, 2005) "With respect to their safety, derivatives, for the most part, are traded among very sophisticated financial institutions and individuals who have considerable incentive to understand them and to use them properly."
  • (July, 2005) "We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though."
  • (October 31, 2007) "It is not the responsibility of the Federal Reserve – nor would it be appropriate – to protect lenders and investors from the consequences of their financial decisions."
  • (November 21, 2002) "The U.S. government has a technology, called a printing press (or today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at no cost."
  • "The money supply is not changing in any significant way. What we’re doing is lowering interest rates by buying Treasury securities."
  • "One myth that’s out there is that what we’re doing is printing money. We’re not printing money."
  • (When asked directly during a congressional hearing if the Federal Reserve would monetize U.S. government debt) "The Federal Reserve will not monetize the debt." 

US DOLLAR very close to an accelerating decline
There is only one way to describe what is occuring to the US Dollar; its future as the global reserve currency is in serious danger of disappearing forever. Under the "leadership" of the US Federal Reserve, and thanks also to the reckless and incredibly short-sighted spending occuring at the Federal level, the Dollar has run out of friends.

It's decline this morning has opened the door for gold to push past $1500 and silver into what looks to me like the beginning of a "MELT UP" mode. It has also send further speculative money flows into the commodity sector with the result that the CCI, the Continuous Commodity Index, is within a whisker of matching its all time high.

What many of us have feared could happen but were hoping to see avoided, is becoming increasingly likely the further the Dollar descends into this abyss.

Marc Faber: Future Value of US Dollar Will Be Zero
Faber thinks we’re in a contest for the ugliest currency. He says a huge overhang of US dollars exists globally, and suggests gold and silver as the best currencies. Faber believes the US dollar could rebound in the short term, but maintains his long term prediction that the value of the US dollar will drop to zero.

Buffett vs. gold

Click on image to enlarge.

Chemist Explains Why Precious Metals Are Money

A Day Made of Glass... Made possible by Corning.

Tuesday, April 19, 2011

S&P downgrades outlook on US debt to negative--in Chinese

States see biggest revenue drop in 60 years
In a sign of the sluggish economy’s devastating impact, state government revenue across the country dropped by nearly one third in 2009 - the sharpest decline in 60 years, the Census Bureau said in a new report.

States saw record-breaking losses to their pension funds and in their tax revenues, as the recession wreaked havoc on payrolls and investments.

Revenues plummeted by 30.8 percent, from $1.6 trillion in 2008 to $1.1 trillion in 2009, according to the report.

It was the most dramatic drop the Census Bureau has seen since it began collecting state revenue data in 1951.

And the worst may still be to come.

Fiscal 2012 “will actually be the most difficult budget year for states ever,” said Nicholas Johnson, director of the state fiscal project at the Center on Budget and Policy Priorities, in an interview with The Washington Post.

The center reported last month that states will see budget shortfalls totaling more than $140 billion next year as they continue to wrestle with depressed revenue levels while federal stimulus dollars and reserves run out.

Bernanke May Sustain Stimulus to Avoid ‘Cold Turkey’ End to Aid

The $64 trillion question of whether to extend QE is starting to heat up--again.

Monday, April 18, 2011

Gold and silver are under-owned by retirement funds

As of December 31, 2010, retirement asset values had climbed to $17.5 trillion.  <Click here>

As of April 15, 2011, there were a total of 11,083,478 troy ounces of gold bullion in the COMEX warehouse and depository, of which 2,354,041 ounces were registered, and 8,729,437 ounces were eligible for delivery.

As of April 15, 2011, there were a total of 102,820,120 troy ounces of silver bullion in the COMEX warehouse and depository, of which 41,039,056 ounces were registered, and  61,781,064 ounces were eligible for delivery.

Scroll down to the bottom of this NYMEX Daily Reports page, and click on Gold Stocks and Silver Stocks, respectively to verify the numbers:

As anyone with a pulse knows by now, the University of Texas endowment fund announced they took delivery on $1 billion worth of gold bullion, representing approximately 5% of assets under management (total asset value of $19.9 billion). <click here>

I've posited this will open the floodgates for pensions, endowments, and other institutional fund managers to diversify some of their assets into gold and silver to provide protection against a debased USDollar.

5% of $17.5 trillion is $875 billion.

COMEX gold inventory is 11,083,478 oz. X $1490/oz. = $16.5 billion approximately.

COMEX silver inventory is 102,820,120 oz. X $43/oz. = $4.4 billion approximately.

Hence, if retirement funds allocate just 5% of their assets to gold and silver, their total purchasing power is $875 billion.  Those funds will be chasing assets that are now only worth $20.9 billion (at today's prices).  Hot money will pile into asset classes that are scarce.  Surely, something has to give, and when there are more dollars chasing fewer gold and silver bars, this can only mean one thing for the prices of both gold, and especially silver.

Of course, many reputable, conservative money managers recommend up to 10% ownership in the precious metals sector, at which point the purchasing power of the retirement funds is now $1.75 trillion.  In order to solve that equation, $20 billion has to appreciate to $1,750 billion, while inventories are not rising (mining output for gold is increasing a minuscule 1.3% annually, while supplies for silver are plunging due to surging industrial and investment demand).

Does this imply that gold and silver prices have to appreciate 100-fold to satisfy demand?  Perhaps not, but it definitely refutes the notion that gold and silver at current prices ($1490 for gold and $43 for silver) are too richly valued.  Do not confuse price with value.

See disclaimers in the side bar.

Disclosure:  long precious metals equities.

A Golden Tipping Point: University of Texas Takes Delivery Of $1 Billion In Physical Gold

In case it didn't dawn upon readers the significance of the University of Texas endowment fund taking delivery of $1 billion of gold bullion, this is the 3rd blog I'm posting on it, since Zero Hedge has a good angle on the tipping point this represents.  Physical gold is now a legitimate asset to hold for institutional investors.  Expect other pension and endowment funds to follow suit, which is of course, bullish for gold.

Again, the Bloomberg article doesn't address the counterparty risk by having the gold stored in HSBC's vault, but the comments from Zero Hedge readers certainly acknowledge the risks.

Debunking Anti-Gold Propaganda

U.S. Is Bankrupt and We Don’t Even Know It: Laurence Kotlikoff

I blogged about this LAST YEAR <click here>, so yes, today's S & P "surprising" negative outlook on US debt was not surprising to some of us.  Far from it--in fact, we've been pounding the table.

Budget Cuts are Meaningless Without Fed Transparency

The worst advice I’ve seen in years
Putting its money where its mouth is, Dagong has a long-standing, negative outlook on US debt that doesn’t pull any punches. From its November 2010 report:

“In essence the depreciation of the U.S. dollar adopted by the U.S. government indicates that its solvency is on the brink of collapse, therefore it wants to cut its debt through the act of devaluation with the national will; such a move has severely harmed the interests of creditors.”

Following suit, S&P stunned financial markets this morning by revising its US outlook to ‘negative’, citing politicians’ inability to address medium-term and long-term challenges.

In total contrast, US News and World Report published an article a few days ago entitled Why you should buy U.S. Treasuries,” which amounts to the worst advice I’ve seen in years. 

The article is devoid of any clear analysis which could support loaning our hard-earned savings to the most indebted nation in the history of the world in a rapidly depreciating currency at rates which have little chance of keeping up with inflation; instead, the author relies solely on patriotism:

“It has always been a bad idea to bet against America and our ability to prosper even against overwhelming difficulties. America will cut back its spending, innovate, and pay off its debts. We will earn our way out. It’s just how we do it…”

A more accurate statement would have been, “that’s how we used to do it…” Fact is, America’s economic problems are deep-seeded and neither political party can put forth a viable strategy for righting the ship. Even S&P is starting to realize this.

This is essentially the same strategy the Japanese government has executed on its own citizens for over two decades:  jam Japanese government bonds down their throats, and encourage them to accept 0% returns on their hard-earned savings in exchange for feelings of patriotism.

The Reason For Geithner's Weekend Media Whirlwind Tour: White House Learned About S&P Downgrade On Friday

Where was my Friday call, Timmy?  I guess Lloyd, Jamie, and Bill were higher on the priority list.  By the way, I believe that allowed the primary dealers to front-run the market, which is highly unethical, if not outright illegal.  But hey, it's all just policy, right?

The Onerous Compliance Cost of the Internal Revenue Code

Thanks to Brian for finding this video in reinforcing my point in one of my earlier debates with some friends.  You all know how I hate debates.  :-)

Greek 2 Year Bond Yield Passes 20%

As Greece burns (again), <click here> Greek bonds implode as bond yields rates soar above 20%, a historic high.  The Greeks have already defaulted, and the Euro community imposed austerity measures last year in an attempt to restructure Greece.  With credit spreads widening, expect the revival efforts to fail.  As many consumers and debtors already know, when interest rates rise north of 20%, it is virtually impossible to pay down the debt, without a huge increase in income growth.

Texas University Takes Cue From Kyle Bass to Hold $1 Billion in Gold Bars
“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” Bass said yesterday in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”

I blogged about this last week, but wanted to reiterate that the University of Texas Endowment fund took delivery on $1 billion of physical gold bullion--not an ETF, for reasons I've blogged about many times.  Use the Search function in this blog and enter "GLD" and "SLV" on why it makes sense to avoid those precious metals-based ETF's for gold and silver, respectively.

In a nutshell, those ETF's are good proxies for spot prices of gold and silver UNDER NORMAL MARKET CONDITIONS.  But under distressed conditions, or in the case of a default in the physical markets (i.e. the custodians don't have enough physical inventory to meet their obligations), the physical spot prices will decouple from the ETF prices.  In other words, owning GLD and SLV are merely paper claims to precious metals that may or may not exist in the custodian vaults.  In the case of a shortage, the spot price may soar, while holders of GLD and SLV will be left with owning empty claims.  There's nothing worse than betting in the right direction, and still losing everything.

This is the reason why Kyle Bass advised the University of Texas endowment fund to take physical delivery of their gold bullion, removing counterparty risk.  But there is one detail they did not account for.  Since HSBC is now the custodian for the endowment fund's gold (with serial numbers of gold bars on every certificate), HSBC becomes the counterparty risk, as bullion banks have been rumored and even prosecuted for charging storage fees to clients even though their clients' inventory is no longer in their vaults.  In other words, their clients' gold had been swapped, sold, or leased out--without knowledge and consent from the client!  I'm not suggesting HSBC has been guilty of this in the past, but it has happened.  <click here>
In June of 2007, Morgan Stanley agreed to pay $4.4 million to settle a class-action lawsuit with brokerage clients who bought precious metals and paid storage fees, when in fact it was alleged that Morgan Stanley wasn't physically storing their gold and silver at all. NIA believes we may now have an epidemic of banks selling gold/silver they don't have. If this isn't exposed immediately, it could bring down the world's financial system.

See disclaimers in the side bar.

Disclosure:  long precious metals shares, no position in GLD, no position in SLV.

Gold Explodes On S&P Downgrade Warning
Who would have thunk that the one beneficiary of an insolvent US (with both bonds and stock futures plunging) would be gold. Oh wait...


This S & P potential downgrade of US government debt alone confirms US Treasury Secretary Tim Geithner lied when he declared "the US will never lose its AAA credit rating" <click here>.

This is the same Standard & Poor's, like their peers, which totally missed the mortgage industry implosion--and were deservedly criticized for being asleep at the wheel after blessing toxic subprime mortgage-backed securities with a AAA rating as well.  I guess S & P got tired of the criticism and decided to do their job of dispensing the truth after all.

Sunday, April 17, 2011

Anarchy erupts in Greece as austerity bites

The Greek debt crisis was so last year, with the middle east, north Africa, and Japan garnering the headlines.  Surprise--Greece is burning again.  As with most sovereign debt crises--they don't go away.  They get worse as credit ratings plunge, debt-servicing costs soar, and insolvency rears its ugly head again.

NATO Runs Short of Munitions in Libya

This is what happens when bankrupt countries mount a war.  But hey, we need the oil.
NATO is running short of precision bombs and other munitions in its Libyan operation against the forces of Libyan leader Moammar Gadhafi, The Washington Post reported April 15.

Citing unnamed senior NATO and U.S. officials, the newspaper said the shortage highlights the limitations of Britain, France and other European countries in sustaining even a relatively small military action.

The shortage of European munitions, along with the limited number of aircraft available, has raised doubts among some officials about whether the United States can continue to avoid returning to the air campaign, the report said.

Anatomy of a short squeeze

A short squeeze is one of the reasons my long-term price targets for gold is $6300 and for silver is $400.  The calculations were based on trough-to-peak valuations of other asset bubbles, including the 1970's bull market in precious metals, housing stocks, and internet equities.  Other variables include money supply metrics (M1, M2, M3) relative to above-ground gold reserves.  For silver, the gold/silver ratio falling to normal ranges was the overarching factor.

Of course, if the USDollar collapses, all bets are off, and these seemingly outlandish mental price targets will be proven conservative.
Silver offers the closer parallel with the London Bridge example. There are a few banks with large short positions in silver on the US futures market in quantities that simply cannot be covered by physical stock. The outstanding obligations are far larger than the stock available. The lesson from the London Bridge example is that prices in a bear squeeze can go far higher than anyone reasonably thinks possible. The short position in gold is less visible, being mainly in the unallocated accounts of the bullion banks operating in the LBMA market. But it is there nonetheless, and the bullion banks’ obligations to their bullion-unallocated account holders are far greater than the bullion they actually hold.

But there is one vital difference between my example from the property market of 1974 and gold and silver today. The bear who got caught short of London Bridge Securities was right in principal, because LBS went bust shortly afterwards; but in the case of gold and silver, the acceleration of monetary inflation is underwriting rising prices for both metals, making the position of the bears increasingly exposed as time marches on.

Perhaps the most important lesson we can learn from the LBS situation – and highly applicable to the situation today in precious metals, which could be developing into the largest short squeeze in history – is that very few other people in the investment community actually understand what is happening. This is something to bear in mind when taking investment advice.

See disclaimers in the side bar.  Any price targets are of the opinion of the author only, and should not be used as investment guidelines.

Disclosure:  long precious metals mining shares.

China Property Softening Fuels Gold Demand-JPMorgan

I blogged about the Chinese commercial real estate bubble last year, specifically about this empty shopping mall, the world's largest:

Watch the full episode. See more POV.

Today's headline:

Saturday, April 16, 2011

FRAUD: Federal Reserve Is Selling Put Options On Treasury Bonds To Drive Down Yields

The enclosed video is a long, but good explanation of how the Fed is committing fraud, causing the US government to default on its debt.  The Fed is selling put options against its own debt in order to suppress long-expiry US Treasury bond yields.  Keeping interest rates low is necessary to keep the government's borrowing costs low, and to stimulate the economy, as low rates encourage borrowing and consumption.  Manipulating markets is not only fraudulent, it is also perilous to global financial market stability.  The Fed is taking the wrong side of the bet, hoping interest rates won't rise in the future.  If I was 99% certain the US government will default on its obligations, I am 99.9% certain now after watching the video.

Tragically, this manipulation of interest rates will backfire, causing yields at the long end of the curve to eventually soar.  The Fed can control short-term interest rates (they are currently pinning them down to nearly zero), but cannot control longer-dated bond yields, which move in tandem with market expectations on inflation.  In other words, as inflation rises, so do bond yields, and inversely, bond prices drop.  Rising bond yields (interest rates) will result in the US government defaulting on its debt, which will cause the global financial system to collapse.

Banks became insolvent after making outsized bets that turned sour.  They took on too much leverage, and needed a bailout in 2008 in order to avert bankruptcy.  AIG similarly was over-leveraged and under-capitalized based on the amount of default insurance they wrote (in the form of credit default swaps).  Many hedge funds were liquidated due to insufficient hedging.

Hedging infers risk mitigation against a bet that goes the wrong way.  Many hedge funds, the too-big-to-fail banks, and AIG were insufficiently hedged.  In fact, they INCREASED their risk profile, instead of decreasing their exposure.  Instead of hedging, they levered up to obscene levels, which increased their returns when they bet right, but caused massive losses when they bet wrong.  Not only were the players in the casino losing, but the casinos themselves on Wall Street were losing big, betting on a perpetually rising housing market.

The bank bailouts merely transferred the toxic balance sheets of the failed banks into the Fed's balance sheet, which meant the Fed was now over-leveraged.  Just like home prices can't appreciate forever, interest rates can't drop forever.  And when interest rates do rise, the debt the Fed carries will implode, much like mortgage-backed securities did in 2008.  But this time, there will nobody left standing to bail out the Fed.