Thursday, August 2, 2012

Central Bank Monkey Business

The thing about the Fed non-action is that every meeting they don't do something increases the likelihood they'll HAVE to do something at a subsequent meeting.  - Dave in Denver
We wouldn't have the extreme volatility in the markets that surrounds Central Bank policy-decision meetings if analysts and traders bothered to think through the process of what happens if the Fed, ECB and Bank of England do not start the printing presses back up in a major way.  I don't know of anyone, who if asked point blank how the western world solves its debt problem without extreme currency devaluation either by printing or default - and printing is in fact a de facto default - doesn't come to understand that the likely solution will be more printing.  And a lot of it, quite frankly.

Hell, even yesterday it didn't take a painstaking syllable by syllable dissection of the FOMC statement released to realize that the Fed is firmly on track to print a lot more if the economy doesn't recover.  Recover?  LOL.  On a real inflation-adjusted basis, the GDP never climbed out of a recession.  Just ask the millions of people who have either gone on social security disability or took down student loans and went back to "school" since 2008.

At any rate, I wanted to share some thoughts on why many of us believe that the precious metals market is getting ready to take off again based on looking at the technical data embedded in the weekly Commitment of Traders report and daily open interest reports.

To review quickly, it is now well known and accepted by everyone who trades and analyzes the gold and silver trading on the Comex that a couple key large banks - JP Morgan and HSBC, primarily; Scotia, Barclays and Deutsche Bank secondarily - manipulate the trading in gold and silver by engaging in massive short-selling of futures on the Comex.

In fact, there has been no other market in history in which the ratio of the short interest position in the futures contract exceeds the available supply of the underlying commodity by the degree to which the short position in gold/silver futures exceeds the readily deliverable availability of physical gold and silver.  In gold and silver the paper short positions on the Comex exceed not only the actual physical metal readily available for delivery in Comex vaults by several multiples, but it also exceeds any reasonable time measure of days of mining production globally of gold and silver.  It's actually become absurd to the point at which most of us who understand the truth of the situation now wonder if the CFTC, SEC and Justice Department are in reality staffed and run by a group of Helen Kellers (deaf, dumb, blind).

To further review, when the net short position in gold and silver taken on by the large banks reaches a relatively high level - in the context of a relatively high overall gold/silver open interest - the market inexplicably corrects in a violent and abrupt fashion, as the large banks who are short begin to offer an avalanche of paper contracts for sale and use the obvious "technical" levels on the chart to trigger large-scale selling by the large hedge funds.  The latter being the "investor" group who has taken the other side of the big bank short position.

Well, we've had one of the larger, longer corrections in the metals during the 11 year+ bull market in the metals.  Not surprisingly, the COT metrics have reached statistically extreme low levels. The net short position of the big bank manipulators is at an "outlier" low level. Concomitantly, the net long position of the large hedge funds is also at an an "outlier" low level.  Here's some thoughts I shared with a colleague earlier today:
The gold o/i dropped another large 6,626 yesterday.  It's now under 400,000. Over 6,073 of the overall drop in the last 3 days can be explained by deliveries.  This is on the heavy side for the number of deliveries in the first few days.  I think the rest of the o/i drop yesterday - some in December 2012 and some in April 2013 can be explained by hedge funds getting out of the way of the Central Bank absurdity this week.

Since 9/1/09, the gold o/i has dropped below 400k only once and that was 4/24/2012. Based on this, I'm not sure the banks stand to benefit much from more o/i liquidation and there's a massive amount of room for the hedge funds to pile in once the Central Banks start printing in earnest again. The o/i hit an all-time high of 650,000 on 11/9/2010.

Silver o/i actually increased yesterday. It's been increasing in the context of an extraordinarily low net short position held by the big banks, the swap dealers net long and the large spec hedge funds holding an extraordinarily low net long position.

During the metals bull market, extreme low net positions by the banks and low net long positions by the hedge funds have preceded large moves higher in gold and silver.
So that's where things stand in the precious metals market from the Commitment of Traders/open interest perspective.  Throughout the duration of this bull market, and especially when the open interest "run-off" is part of an unusually large correction, the precious metals have subsequently made an extended run up to new all-time highs.

What makes this time around even more interesting and compelling in terms of trying to judge how high "high" will be is the extraordinary and ongoing accumulation of large quantities of physical bullion by several Central Banks (China, Russian, South Korea, Mexico, Iran, etc) and the extraordinarily deteriorated financial and economic condition of the United States (at the Federal and State levels), the EU and England.  The former will place extreme stress on the paper short positions in gold and silver and the latter will soon compel a massive amount of paper money to be printed.

I will not put a time frame or price target out here publicly, but I will say that the next move higher in the metals has a high probability of shocking everyone except the most ardently perceptive observers.


  1. If you ask a politician how the debt problem will be solved they will say "growth." Nobody in power is facing reality yet and they won't until the fish slaps them in the face.

  2. Great post Dave - you do such a great service to the Sheeple by explaining things like bullion bank manipulation in such clear detail, rather than assuming everyone knows what you are talking about. Very, Very interesting action in the Gold miners today.. with Gold down, and the stock market down hard... some of the miners .. MY MINERS.. are on fire. SA, VGZ... flying man! These often lead the way... and I think you are pointing out what is to come... know that I will be on that train. I am about 50% invested... and hope and plan to be 100% (between miners and PSLV/PHYS) by the time the market finally understands that QE3 is on the way. 1Kg lunar dragon (and not just a few Buffalos).

  3. Greece supposedly still has 111 tons of gold, no doubt held in London and New York. Do you know if their gold is tied to any of their debt? If so, I don't think the price of gold will rise take off until they default on any such bonds and the ownership transfer of the gold takes place. It wouldn't do to have the collateral backing the debt inconveniently rise in value before it's time....

  4. Great post, however, I would have used Tommies instead of Helen Keller for your reference. That deaf dumb blind kid sure plays the mean pinball!


    1. LOL. I could but a lot of people don't know the reference to Tommy.

  5. Dave I still have 90% + of our $$$ in two IRA's. In those IRA's I have mining shares of producers with their production domiciled in the USA or Canada.

    I do not own GTU or PHYS. Mining shares have shown a bit of positive divergence as of late. You see a positive path for well chosen mining shares going forward or only GTU or PHYS?

    1. Honestly, I would cash out at least 1/2 your IRA money and pay the 10% penalty and buy 1 oz. gold philharmonics (lowest premium to spot or gold maple leafs if you can't find philharmonics at a cheap premium) and 1 oz. silver eagles. Get your wealth OUT of the system before either Obama or Wall Street confiscates it. I'm dead serious about this.

      Mining stocks are going to do a moonshot at some point. I'm posting a great chart tomorrow that will blow your mind.

  6. Dave:
    Thank you for your thoughts and insights. I really appreciate your sharing your expertise with us.

    I have heeded your advise for many years and hope to ride out the GFC with some metal wealth. However, getting the word out to family and friends is near impossible. They think gold & silver are barbaric relics and aren't real money. I tell them that physical gold & silver are insurance against inflation and the dollar collapsing. They usually scoff at the thought, think the government will step in or think I want to tell them what to do with their money. Most of them tell me I am crazy and "you can't eat gold!" I guess you can eat fiat paper with enough catsup and mustard on it. And as a side benefit, the paper dollar has a high fiber content.

    Yes, I know you can't save everyone and that most Americans are sleepwalkers, focused on the Red/Blue paradigm, but what can one do?

    When the financial markets and the dollar go batshit, which could easily happen this month, it will be too late.

    1. Give it up, goldini (trying to get others around you to see the coming shitstorm, that is). I've tried for what seems like forever to explain to those around me, at least those who appeared intelligent enough to grasp the concept of central banking and fiat money creation, that gold and silver may present better means of preserving and growing wealth, and the responses I've received generally fall into one of several categories, some of those being: 1)you're insane 2) the Fed is a vital and necessary component of government and has our best interests at heart 3)I don't know how to buy physical, or I don't have the money or the time to do it 4)everything is the Republicans fault, socialism is the answer 5)gold/silver is not money, etc. Personally, I'm tired of it (others' eyes glazing over like donuts) and I will not go out of my way to help anyone unless they earnestly and honestly seek out my opinion on the matter, which is not that difficult to do since those around me are aware that I have an interest in such matters. In fact, the only guy I've been able to reach is someone who is a recent immigrant from India and who understands gold. The rest of them (the general public, that is)? Tough noogies, look out for yourself (and besides, maybe I really am some moonbat who should be locked up in the nearest rubber room; perhaps the system as it currently stands around us will endure for scores of years to come and the solution is to elect progressively more socialist governments; heck, anything is possible).

    2. Roosevelt: “To Dissolve the Unholy Alliance Between Corrupt Business and Corrupt Politics is the First Task”

      A Fight Both Liberals and Conservatives Can Rally Around …
      Liberals love Franklin Delano Roosevelt … and conservatives hate him.

      But both liberals and conservatives are inspired by the wise, non-partisan words of the supreme ass-kicker Teddy Roosevelt:

      Political parties exist to secure responsible government and to execute the will of the people. From these great tasks both of the old parties have turned aside. Instead of instruments to promote the general welfare they have become the tools of corrupt interests, which use them impartially to serve their selfish purposes. Behind the ostensible government sits enthroned an invisible government owing no allegiance and acknowledging no responsibility to the people. To destroy this invisible government, to dissolve the unholy alliance between corrupt business and corrupt politics, is the first task of the statesmanship of the day.

      Roosevelt is exactly right: the root problem is not big business (which liberals blame) or big government (which conservatives blame). It is the unholy alliance between corrupt business and corrupt politicians which is the core problem (read this for details).

    3. Secret Government
      Key clips from Bill Moyer's classic broadcast on the secret government (24 min)

  7. Thanks Dave. Will convert half or more to GTU or and PHYS.

    Looking forward to your ideas regarding this.

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  9. LIBOR, Lies and Derivatives

    Three weeks, ago, I wrote LIBOR was a criminal conspiracy from the start. An avalanche of articles have been written on LIBOR since, and I think an update is in order, which also gives me a chance to delve a little further into the bold statement in that title.

    It's not that I'm a big fan of using terms like conspiracy, not at all, but then again, neither am I a fan of constantly being lied to.

    The average Joe and Jane and Jack and Jill in the street should be able to rely on the fact that those who they vote in office represent them and their interests; it's the very definition of the essence of our democratic systems. What they get instead, and increasingly so, are lawmakers and regulators who collude with private industries, which due to their size have grabbed an enormously bloated hold on political power. In the US, the UK and EU the actual say a voter gets to exercise from the ballot box has been reduced to something that fast approaches the freezing point.

    The story of LIBOR is an excellent example of the inner workings of this process, and of the consequences that follow. Of course, when I label it criminal, I make a moral judgment, knowing full well at the same time that it's the lawmakers themselves who in the end define what's legal or not, and what's criminal or not.

    There is no segment of private industry that has grabbed more power than the banking industry. Indeed, it would be hard to find any lawmaker or regulator left at all in the western world willing to stand up to it in more than fleeting soundbites. We will see this exemplified in the upcoming procedures in the LIBOR rigging scandal.

    Let's be bluntly honest here, why don't we: both Geithner and King are simply lying. And even if we can't prove they are lying, we can certainly state that their words lack all plausibility. That is because LIBOR is arguably the most important number in the financial industry of the past two decades, and people who reach positions such as the ones Geithner and King hold, MUST have known for a long time what was going on with LIBOR.
    There are reports on plans to change LIBOR into a better, reality-based, standard. But these plans are once again being drawn up by the same people who have for years at best maintained a see no evil hear no evil attitude. If we want a real turnaround, if we want the lies to stop, the last thing we should do is to allow the same old same old crowd of politicians, regulators and bankers, to even come within a mile of negotiations for a new standard. The problem there is of course that there's no one else left. The rot has spread to all corners of the industry that count. Innocence exists in name only.