Are JPM's COMEX Silver Positions Only A Hedge Against Physical in the Warehouse?

And now the rebuttal on whether JPMorgan truly has enough physical silver to cover their paper shorts.

http://www.roadtoroota.com/public/1013.cfm

Gold: The hedge against political stupidity

http://money.cnn.com/2011/11/03/markets/thebuzz/index.htm?iid=HP_LN 

One correction in the article:  GLD is the ETF that attempts to track the price of spot gold (and allegedly is partially backed by physical gold bullion).  GDX is the ETF that is an index of gold mining company shares.  The article mistakenly says this about influential hedge fund manager David Einhorn:

He said his firm has shifted some money into the Market Vectors Gold Miners ETF (GLD), adding that he expected gold prices to continue to rise.

That can't be true.  He either bought GLD or GDX, which is the Market Vectors Gold Miners ETF.  See http://finance.yahoo.com/q?s=gdx&ql=1

So take it from me--your trusted source about everything related to precious metals.  Even the "experts" can get it wrong.

'Not Owning Gold is a Form of Insanity': Chartist

http://www.cnbc.com//id/40997445

Gold will eventually rally exponentially and investors who don't own the precious metal are "insane," and may be showing "masochistic tendencies," Robin Griffiths, technical strategist at Cazenove Capital, told CNBC.

"I think not owning gold is a form of insanity, it may even show unhealthy masochistic tendencies, which might need medical attention," Griffiths said.

Gold, along with other metals such as copper, has been making new all time highs, which is a strong buying signal, according to Griffiths.

"Although it's been a top performer for each of the last ten years, it's still in a linear trend. Eventually it will go exponential and make more in the last little bit than the whole of the ten year trend," he said.

Griffiths said that any short-term declines in the price of gold represent a buying opportunity and the asset is still not an "over-owned trade".

"Real assets hedge paper money being printed into oblivion, so you've got to own gold and you've got to own other commodity-related investments still,"  he said.

As gold [XAU=X  1380.45    6.00  (+0.44%)   ] is likely to continue its rise, the value of the dollar [.DXY  80.93    0.05  (+0.06%)   ] is likely to remain in a long-term downtrend against other major currencies as the Federal Reserve maintains its policy of quantitative easing to stimulate the economy, according to Griffiths.

"The downward trend in the dollar is awesomely powerful. It's vital to get yourself out of the dollar long-term on any significant rally. Continuing to own a currency that is going to be printed virtually into oblivion … is crazy," he said.

Gold is the final refuge against universal currency debasement

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8026324/Gold-is-the-final-refuge-against-universal-currency-debasement.html

Convoluted logic

After European finance ministers unveiled a $1 trillion bailout plan for Greece and other indebted nations, gold immediately crashed almost $30. Why did it crash if:

1) quantitative easing (money creation) is inflationary, and
2) gold is a hedge against inflation?

The answer is while gold is an effective hedge against inflation, it is an even better hedge against financial crisis (and eventual collapse). In light of the Club Med countries' fiscal problems, gold prices have been rising, as the possibility of bond defaults has become very real. Hence the correct flight to gold as a safety valve, and the incorrect flight to the USDollar as a long-term safe haven (I would agree the dollar may rise nominally in the short term--until the market figures out the USdollar is an impaired currency).

With the announcement of a bailout for indebted European countries, the markets perceive the possibility of a default has been taken off the table. Hence, the fear of a financial crisis subsided temporarily last night in Asian overseas trading. However, sober speculators realized quantitative easing is also inflationary, and subsequently drove the price of precious metals back up. Long-term, precious metals bulls will ultimately profit--whether inflation or financial crises occurs, probably both.

The Euro bailout is a precursor to more bailouts about to occur in the US. Attempts from both sides of the pond to normalize economic recovery will fail, as the bailouts are merely debt bandaids to major debt problems. I expect the Fed to "rescue" bankrupt states and municipalities, including currency swaps and quantitative easing as part of their monetary arsenal. The Fed certainly can't reduce short-term interest rates any further--we are already at zero.

In a related matter, European Central Bank (ECB) President Trichet last week declared the ECB would not resort to purchasing junk bonds from Greece, Spain or Portugal, in attempting to prop up the Euro currency. In a huge reversal last night, the ECB agreed to purchase said bonds. Talk about head fakes. In the process, the ECB slaughtered the bond vigilantes who were betting on the Euro collapsing, as well as the countries whose governments and citizens have been living beyond their means for decades. Ultimately, those bond vigilantes will be proven right, as the ECB has indeed extended the Euro zone life line, but they have done nothing to structurally resolve their debt problems. These bailouts merely delay the inevitable collapse; they do nothing to address the debt problems--if anything, they make them worse.

While current group think among economists, politicians, and academia have distorted Keynesian economics into its current monstrous from of government manipulation in markets, John Maynard Keynes for whom those economic theories have been named after, was absolutely correct with this comment:

"Markets can remain irrational far longer than you or I can remain solvent."

In other words, perfectly efficient markets with rational price discovery mechanisms are mythical in a world where markets are rigged and gamed to the advantage of a powerful few. I should correct myself: gold is not only a hedge against inflation and financial crisis, it also hedges an individual against a corrupt and reckless government money printing press. When one takes possession of physical gold, there are no counterparty risks. Thousands of banks have collapsed over the course of modern banking history. Thus, depositors and holders of derivatives have lost capital in our fiat currency financial system, unlike holders of gold, which have retained their store of value for thousands of years. With gold ownership, there are no other claims against it, and you won't get zeroed out.

The only way to be dispossessed is if the government confiscates it, which is exactly what Franklin Delano Roosevelt did by Presidential Executive Order 6102 in 1933:

http://www.wellsfargonevadagold.com/confiscation-order.pdf

See disclaimers on side bar.

Disclosure: long physical gold and silver, long precious metals mining shares.

The Fear trade

Most pundits believe the USDollar and the price of gold (priced in dollars) have an inverse relationship. As the USDollar weakens, the price of gold rises--with the inference that it takes more dollars to buy that same ounce of gold. Likewise, as the USDollar gains strength, the price of gold should naturally decline. Hence, gold is an apt hedge against a weakening dollar--and rising price inflation. Gold keeps its monetary value even while paper currencies decline. We're seeing that in Europe and the United Kingdom, as the Euro is sinking faster than the USDollar, due to the spreading fiscal problems in Greece, Portugal, Spain, and other European countries. Priced in the sterling pound and the Euro, gold prices are at an all-time high (priced in USDollars, gold is currently 5% below it's all-time peak).

Generally, in normal times, this gold/USDollar inverse relationship is intact.

However, in periods of financial crisis, when trust in government finances is low, the relationship between gold and the USDollar can be linear. In other words, even though the USDollar can gain in strength (as measured by the USDollar Index), gold can also rise in tandem, as both may be considered safe harbors for scared capital.

However, the inverse relationship may return if fear in the USDollar returns, which would be even more bullish for gold. Markets remain nervous and tenuous, and currently, markets are betting on a worldwide economic recovery. Increasing risk exposure (and attempting to increase returns) is back in vogue. Hence, the carry trade (borrowing USDollars, investing the proceeds in higher-risk trades) will have a dampening effect on the dollar, which is bullish for precious metals.

But the next crisis-triggering event will cause a return flight to the dollar, which could temporarily put a damper on gold's rally. But once cooler heads prevail, gold will resume its rightful place as a hedge against not only inflation, but also against financial crisis and currency debasement. We saw this in late 2008, after the Lehman blow up, when gold and silver prices collapsed briefly, but have both resumed their decade-long rally ever since.

See disclaimers on sidebar.

Disclosure: long physical gold and silver, and long gold and silver mining shares.

The crack spread

I posted a blog entry on January 19 on the increasingly uneconomical industry of petroleum refining in the US. A consequence of refineries moving offshore due to shrinking profit margin are higher prices across the energy complex.

According to the Energy Information Administration's (EIA) "Derivatives and Risk Management in the Petroleum, Natural Gas, and Electricity" publication, a "crack spread" is the following:

Refiners’ profits are tied directly to the spread, or difference, between the price of crude oil and the prices of refined products. Because refiners can reliably predict their costs other than crude oil, the spread is their major uncertainty. One way in which a refiner could ensure a given spread would be to buy crude oil futures and sell product futures. Another would be to buy crude oil call options and sell product put options. Both of those strategies are complex, however, and they require the hedger to tie up funds in margin accounts. To ease this burden, NYMEX in 1994 launched the crack spread contract. NYMEX treats crack spread purchases or sales of multiple futures as a single trade for the purposes of establishing margin requirements. The crack spread contract helps refiners to lock-in a crude oil price and heating oil and unleaded gasoline prices simultaneously in order to establish a fixed refining margin. One type of crack spread contract bundles the purchase of three crude oil futures (30,000 barrels) with the sale a month later of two unleaded gasoline futures (20,000 barrels) and one heating oil future (10,000 barrels). The 3-2-1 ratio approximates the real-world ratio of refinery output—2 barrels of unleaded gasoline and 1 barrel of heating oil from 3 barrels of crude oil. Buyers and sellers concern themselves only with the margin requirements for the crack spread contract. They do not deal with individual margins for the underlying trades.

Traders are profiting from the closure of American refineries, as the crack spread is widening. However, the bottom line to US consumers and businesses are higher energy prices going forward.

http://www.bloomberg.com/apps/news?pid=20601109&sid=amg1Ou18W4wY&pos=15

IT infrastructure investments

Information technology (IT) infrastructure investments by Wall Street investment firms are approaching $3.6 billion annually. By contrast, the U.S. Commodities Future Trading Commission (CFTC) has an annual IT budget of $23 million--which makes it difficult for them to monitor and regulate derivatives trading. Their servers, bandwidth pipes, storage, and overall IT infrastructures are slow, old, inadequate, and obsolete.

It's analogous to highway patrol squad cars having a top speed of 160 mph, rendering them impotent to catch speeders averaging 1000 mph. The software algorithms and quantitative analysis investment firms perform are fast enough (and getting faster) to stay ahead of the watchdogs.

Financial derivatives are useful in hedging strategies and increasing potential returns on investment, but they can also be weapons of massive financial destruction when leverage is abused. And algorithms can spin out of control when asset bubbles burst. The race to be ahead of everyone else sometimes causes the mutual destruction of algorithms gone bad, as self-fulfilling negative outcomes beget other larger losses.

The regulatory path has become increasingly futile as Wall Street computing capabilities increase geometrically with Moore's Law.

Free market proponents epouse minimum regulation, with a mantra of caveat emptor, but cases of fraud and market manipulation should be regulated and prosecuted to the full extent of the law. Rigged markets and lack of transparency hurt markets long-term, as investor distrust of manipulated markets cause participants to stop trading. Without investors, markets disappear.

Barrick accelerates unhedging its gold positions

Barrick Gold, the world's largest gold producer, announced last month it was removing its hedge positions over the next year, as the hedges were dampening profitability in an environment of higher gold prices. In a Bloomberg interview, Barrick's CFO said it plans to accelerate the de-hedging strategy, buying back gold bullion and closing out short positions.

http://www.reuters.com/article/basicMaterialsSector/idUSL272564320091102

Translation: one the world's biggest gold shorts (at least they produce gold, instead of naked shorting it) is not just walking away, but RUNNING FOR THE EXITS, in anticipation of higher gold prices.

I wonder what the naked shorts at JPMorgan and HSBC are thinking right now. Hint: expect open interest (new short contracts) to explode over the next several days, as the shorts double down in an attempt to surreptitiously suppress COMEX gold and silver.

Either that, or the shorts will get trampled, which is an eventuality. A COMEX "failure to deliver" will occur within the next few years, but these IMF gold sales may ultimately leak back into the open market, causing a temporary decline. But there are just too many institutional and retail buyers worldwide to sustain a meaningful correction. The secular bullish trends in gold and silver are still intact.

Good luck to all.

The gold put option

The European Central Bank (ECB) extended the cap on gold sales, only this time limiting sales to 400 metric tons, instead of the current limit of 500 tons.

http://www.bloomberg.com/apps/news?pid=20601068&sid=a5S1sSNJDGvc

This is bullish for the price of gold, as central banks cannot indiscriminately dump gold into the market, causing the price of gold to sink. By my own deduction, the first 5-year cap instituted 10 years ago catalyzed the impressive run up in the price of gold. In that time span, gold has almost quadrupled in price, while equities have languished in negative territory. Reality is setting in--central bankers can print currencies ad nauseum in an effort to stimulate their domestic economies, but they cannot print gold. Gold has to be mined, and it is only being added to existing world supplies by 0.5% per year. By contrast, central bankers are increasing the money supply by double digits.

This is a direct consequence of easy money policies enacted by central banks worldwide, including the Federal Reserve. With money supply increases come price inflation of real assets--including precious metals.

Using back-of-the-envelope calculations, we can establish a floor for the price of gold. Last year's panic selling of all liquid assets to honor hedge fund redemptions depressed pricing of all asset classes--including gold and gold ETF's, which are liquid. The 2008 bottom was $660/ounce. Factor in a 20% reduction in potential gold sales from ECB sales, and we arrive at an adjusted bottom of $825. Thus, that is an effective put option for the price of gold.

Should we experience another liquidity crisis when stock markets tank, and commodity prices also plummet, if the price of gold approaches $825 (gold currently hovers at $960), I would accumulate more gold-related assets. Gold is a prudent hedge against monetary inflation with no counter-party risk, as it has been accepted as a monetary store of value for centuries.

I don't believe gold will correct to that level--if anything, it will elevate its price, as the threat of selling pressure has largely been removed.

Another bullish indicator for gold is the increased interest in gold purchases by Chinese and Russian sovereign funds, as they diversify away from USDollar-denominated securities, mainly Treasuries. Monetary inflation debases the dollar, causing their holdings in reserve accounts to sink in value. Exporters no longer wish to be paid in devalued USDollars.

Despite rhetoric from Fed Chairman Bernanke and Treasury Secretary Geithner that the US advocates a strong dollar policy, their actions are contrary to their claims. Sovereign fund managers and foreign finance ministers already know that is a lie. Unfortunately, American consumers will be the last to figure it out, as their purchasing power and standard of living become progressively diminished.

Answers to your questions

Some of you have asked some key questions, so I will answer them to the best of my knowledge. This is not financial advice, but strategies I have either deployed or considered for my own portfolio:

1) Buy gold bullion, either in 10 or 100 ounce bars. This will have the lowest premium, but then you need to take delivery, store it and secure it. There will be a serial number attached to each bar. Check to make sure the dealers are reputable, or you can take delivery on the COMEX futures exchange.

2) Buy gold coins (stick to South African Krugerrands, Canadian Maple Leafs, U.S. Eagles). Since coins are smaller, these are more transferable than bullion, but you pay a higher premium above delivery price. Wait until the premiums are in the single digits, as demand has exceeded supply. If you're lucky, you can buy them from the U.S. mint (they are allocated due to high demand) or through a reputable dealer.

3) For potential extra returns, I have also purchased rare gold and silver coins. The St. Gaudens $20 double eagles (about 100 years old) are valued by numismatic collectors due to their beauty and liquidity. Morgan Silver dollars are also liquid (coined in the late 1800's). Obviously, coins in better condition are rare and command a higher premium. Visit a reputable coin dealer with reliable grading services.

4) Buy the gold exchange traded fund (ETF), which tracks the price of gold, and trades like a stock. I cannot give specific recommendations so Google it.

5) Buy individual gold mining shares. These companies usually give you greater leverage than the actual price of gold. They offer greater reward, but also greater risk. However, not all gold mining companies are created equal, as some are mature, leading producers, while some are junior companies with even higher potential for appreciation. They may be less liquid to trade and inherently riskier. Either way, you must perform due diligence as the company's prospects are not just dependent on the price of gold, but also other factors like geopolitical risk, environmentalist risk, production risk, labor risk, earnings risk, etc. just like other sector equities.

6) Buy a gold mining share ETF, which is a basket of various gold mining share companies. Again, it tracks the shares of these companies and trades like a stock.

When purchasing items (4), (5), and (6) above, you must put in mental trailing stop-loss thresholds. While equities and ETF's offer liquidity and convenience, they also are more volatile. To limit losses, you should keep a mental trailing stop, but do NOT indicate this stop loss to your broker. Because these stocks are volatile, unscrupulous market manipulators can drive the price down artificially to your threshold, stopping you out of the trade, guaranteeing your loss, perhaps 20% or 25%, or whatever you choose. Since these shares are volatile, do not keep your stop-loss too tight, as you will be stopped out too often. Volatility invites higher reward and risk, so you have to widen your stop-loss limits.

If you are risk-adverse, stick to bullion and coins.

And the reason why you want to have a trailing-stop is because as gold and/or gold share prices rise, you want to lock in profits along the way. For instance, I rode ABX from $19 up to $38/share. However, if it drops to $29, I am stopped out of the trade, as I put in a sell order (25% below the $38 level). I've locked in a $10/share profit. However, if it continues to rise to $50, I'm still in the trade, increasing my profits.

Remember: when placing buy or sell orders, use limit orders, not market orders.

7) You can do all of the above with silver as well. In fact, silver may have more upside as the gold/silver ratio is at the higher end of its historical range.

In summary, don't view gold as a vehicle to get rich quick. History has shown that in times of financial crisis, that certainly can happen, but think of using gold or gold mining shares as a diversification away from financial and paper assets (stocks, bonds, currencies, real estate). Gold has historically held its purchasing power for thousands of years, so treat it as a hedge against inflation, as well as a hedge against uncertainty in markets.

Good luck to us all.