Hugo Salinas Price, president of the Mexican Civic Association for Silver, was interviewed for about 20 minutes Friday by Eric King of King World News. They discussed the trauma of currency devaluation, the use of the U.S. dollar as a system of imperial taxation on the world, and the necessity of a means of real settlement of international trade, the dollar not really being one, since so many dollars are used only to purchase more U.S. government debt, which leaves open the obligation to pay. They also discussed Salinas Price’s plan for remonetizing silver in Mexico, the land of silver. You can listen to the interview at the King World News Internet site here:
October 6, 2009
By Robert Fisk
In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading
In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.
Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.
The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.
The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. “Bilateral quarrels and clashes are unavoidable,” he told the Asia and Africa Review. “We cannot lower vigilance against hostility in the Middle East over energy interests and security.”
This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.
The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. “One of the legacies of this crisis may be a recognition of changed economic power relations,” he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China’s extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America’s power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.
Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.
China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.
Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China’s growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China’s reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.
Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America’s trading partners have been left to cope with the impact of Washington’s control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.
The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. “The Russians will eventually bring in the rouble to the basket of currencies,” a prominent Hong Kong broker told The Independent. “The Brits are stuck in the middle and will come into the euro. They have no choice because they won’t be able to use the US dollar.”
Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years’ time. The current deadline for the currency transition is 2018.
The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.
“These plans will change the face of international financial transactions,” one Chinese banker said. “America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate.”
Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.
China pushes silver and gold investment to the masses
A report suggests that the Chinese government is pushing the general public into buying gold and silver bullion, which could have a dramatic effect on the markets.
Author: Lawrence Williams
Posted: Thursday , 03 Sep 2009
LONDON – We are indebted again to Paul Mylchreest’s Thunder Road Report for news that will bring big smiles to gold and silver investors everywhere. Apparently China is pushing the idea of buying gold and silver for investment purposes to the general population in the way that Western television sells soap powder. If 1.3 billion Chinese citizens start buying gold and silver, even in tiny quantities, imagine what that will do to the market!
The report notes that China’s Central Television, the main state-owned television company, has run a news programme letting the public know how easy it is to buy precious metals as an investment. On silver investment the announcer is quoted as saying ” China has introduced its first ever investment opportunity for silver bullion. The bars are available in 500g, 1kg, 2kg and 5kg with a purity of 99.9%. Figures show that gold was fifty times more expensive than silver in 2007, but now that figure has reached over seventy times. Analysts say that silver has been undervalued in recent years. They add that the metal is the right investment for individual investors and could be a good way to cash in.”
What appears to have happened in China is a total relaxation of strictures on holding precious metals by the individual with the government pushing gold and silver as an investment option, seemingly at every opportunity. This is a far cry from the situation only a few years ago where the distribution of gold and silver was strictly controlled. Now, the Thunder Road Report notes that every bank will sell gold and silver bullion bars in four different sizes to individuals and gold related investments are said to be soaring in popularity.
Around a year ago, Leyshon Resources managing director, Paul Atherley, in an investor presentation in London – and no doubt delivered elsewhere in the world too – commented that some employees at the company’s gold mining project in northern China would, on pay day, go to the local bank and buy a small gold bar as an investment and wealth protector. To an extent we put this down at the time to mining company hype – but this seems to be exactly the same phenomenon noted by Thunder Road. The Chinese are being converted from being the lowest per capita gold consumers in the world to a nation of small precious metals investors. Now, by next year, Chinese consumption of gold is likely to exceed that of India, which has been for years the world’s biggest gold market. And one suspects that the potential for gold purchasing by individuals is only in its earliest stages. As more and more Chinese move into the cities and individual wealth grows, this trend is only likely to accelerate.
Paul ends the piece on Chinese gold and silver potential with the following comment: “Simply put, the Chinese government is trying to trigger a national gold craze…and it’s working. The Chinese public now has gold trading platforms on steroids…. …Also, for the first time in history, Chinese investors can even trade gold abroad (in London) with the swipe of a ‘Lucky Gold’ card. I can’t even get Bank of America to open a foreign currency account.”
http://www.mineweb.co.za/mineweb/view/mineweb/en/page33?oid=88452&sn=Detail
China has introduced its first-ever investment opportunity for silver bullion. The bars are available in 500 grams, 1 kilogram, 2 kilograms and 5 kilograms with a purity of 99.9 percent.
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| China has introduced its first-ever investment opportunity for silver bullion. |
Figures show that gold was 50 times more expensive than silver in 2007. But now that figure has reached to over 70 times, the highest in the past five years.
Analysts say that silver has been undervalued in recent years. They add that the metal is a wise investment for individual investors, and could be a good way to cash in.
Wang Chunli, GM of Beijing Caibai Shopping Mall said “We are the first to offer silver bullion as an investment opportunity. The price for the first batch of the bullion is set very low, close to the cost of the raw material. The investment threshold is not high, and is more suitable for the general public. Silver is much cheaper than gold.”
– Posted 29 June, 2009 | Source: Silver SeekOn June 24, the US Senate Permanent Subcommittee on Investigations issued a 247-page report entitled, “Excessive Speculation in the Wheat Market.” The press release can be found here. The full report here.
This is an important report. It is likely that its recommendations will be implemented. The Subcommittee found that the CFTC failed to uphold commodity law, by allowing large index traders to hold long positions in wheat well above the proscribed speculative position limits of 6,500 contracts. (Index traders represent pools of passive investors, like pension plans that seek to replicate the long term performance of commodities through the purchase of futures contracts. There is little index fund buying of COMEX silver futures). The report indicated that the large long positions of index traders caused the price spike in wheat and other markets last year. It recommended that the CFTC scale back their permission to hold positions above the limits, and lower those limits if necessary.
The issue of the index funds is one I have written about often. http://news.silverseek.com/TedButler/1213126384.php I agree that large futures positions can influence the price of a commodity. If a futures market position grows too large it will affect the underlying cash market. Unfortunately, they only looked at long-side traders, while giving a pass to the short side traders who also hold positions well-above existing position limits. It’s a universal disconnect that only speculators on the long side cause problems. A more balanced finding would have laid some blame on shorts who over-extended themselves and drove prices higher in panic short-covering.
One great thing about this report was that it is right to the point. It lays out the problem and proposes a no-nonsense solution. I don’t ever recall any similar government report this specific. I’d be lying if I said I wasn’t gratified that the report validated most everything I’ve held about silver for the past 25 years. In fact, the report is harshly critical of the CFTC and agrees with me on some recent specific disputes I’ve had with the Commission.
The Senate report contains facts important to any observer wishing to understand the issues of concentration and manipulation. The report was careful not to use those words specifically for a very good reason. Since there are roughly 25 to 30 long index traders operating in the Chicago wheat market at any time, that’s too many to meet the definition of concentration. As I have written often, concentration is required for there to be manipulation. Furthermore, because there is no evidence that the index traders had any intent to influence wheat prices, the word manipulation was avoided. Just as a reminder, the terms concentration and manipulation do apply in silver, because there are so few big short traders and there appears to be clear intent to influence silver prices.
Rather than use the word manipulation, the report consistently refers to “excessive speculation.” Instead of the word concentration, the report describes the dominant position long index traders held as percent of the entire market. So let’s keep this simple and compare wheat and silver in the terms of the Senate report. The only difference is that the excessive speculation and dominance alleged in the report of the wheat market is on the long side, while in the silver market it’s on the short side. According to commodity law, excessive speculation and undue market dominance are not allowed on either the long or short side.
The speculation that the report describes as excessive is the amount held by index traders above what these traders would be allowed to hold had they not been granted exemptions to the existing statutory position limits by the CFTC. (Legitimate position limits in silver is the main issue I have raised with the CFTC and the COMEX, going back 25 years.)
Position Limits
Position limits mean just what the term indicates, namely, a restriction on the number of contracts an individual speculator may hold, long or short. The purpose is simple – prevent a speculator, or a number of speculators from buying or short-selling any commodity in such large quantities that it impacts the price. It’s a time honored and integral part of commodity regulation, going back to 1936. Then what’s the problem? If position limits are sacrosanct, then why is the Senate report harshly criticizing the CFTC over position limits in wheat and why am I criticizing them in silver?
In wheat, the index funds were granted exemptions from existing position limits, on the basis of their operations. The index funds didn’t sneak into the futures markets under the cover of night. They applied for permission, in advance, to hold positions in excess of statutory position limits. Those requests were granted by the CFTC. The Senate report has concluded that was a mistake on the part of the CFTC and is demanding the exemptions be cancelled and that all long traders be restricted by existing position limits, or even lower position limits.
What’s not covered in the report is that there are large short traders, classified as commercials in wheat and all other markets, that hold speculative short positions that are also trading larger quantities than allowed by existing position limits. In fact, this is the dirty little secret of the commodities markets and what enables the big shorts in silver (and gold) to manipulate those markets. Just as the CFTC carelessly granted waivers from position limits for the index funds on the long side of wheat (according to the report), it routinely grants the commercial shorts an exemption from position limits on the short side, even though they are speculating, not hedging. It seems the CFTC is consistently lax when it comes to this commodity law.
Invariably, the key question about position limits comes down to what is the proper level of position limits? The Senate report concludes that in wheat the limit should be no more than (the existing) 6,500 contracts and perhaps 5,000 contracts. How did the report reach this conclusion? Based upon the contents of the report, the authors placed great emphasis on the size of the real wheat crop, both on a domestic and world basis. This is logical, as position limits have to be set relative to something. Since futures are derivatives contracts, they must be gauged relative to the host market from which they are derived. In wheat, paper futures contracts are derived from the physical wheat market, not the other way around. Therefore, position limits in wheat futures should be set relative to the physical wheat market. The Senate report does this.
The 6,500 contract position limit in wheat is equal to 32.5 million bushels (5,000 bushels per contract). The total US annual wheat crop is 2 billion bushels. World annual wheat production is ten times that, at over 20 billion bushels. Therefore, the position limit of 6,500 futures contracts represents 1.6% of the total US wheat crop (32.5 million bushels vs. 2 billion bushels). Relative to the total world wheat crop, the 6,500 position limit represents 0.16% of the total 20 billion bushel crop. This ratio of wheat position limits to actual production is broadly similar in other important commodities, like corn or soybeans. And please remember, the Senate report is leaning towards reducing the position limit to 5.000 bushels in wheat. What about silver?
In silver, there are no hard position limits in force. There used to be, but the CFTC allowed the COMEX to replace hard position limits many years ago. Instead, now there is an “accountability limit” of 6,000 contracts. This limit is regularly exceeded by the big silver shorts, but rarely by the longs. Since there are 5,000 ounces in a COMEX futures contract, the accountability limit is equal to 30 million ounces. Whereas the position limit in wheat was 1.6% of the US crop, the accountability limit in COMEX silver is almost 52 times larger, at more that 83% of total US mine production (estimated at 36 million oz by the USGS). While the position limit in wheat was 0.16% of the world wheat crop, the COMEX accountability limit is 28 times larger, at 4.5% of the world silver mine production (660 million oz. per the US Geological Survey). Just to keep the record straight, the US is the 4th largest producing country in wheat and the 7th largest in silver.
What this demonstrates is that there are no effective position limits in COMEX silver. The limits are set so high as to not have any impact. It’s like setting the speed limit in a school zone at 100 MPH. In silver it’s made worse because the absurdly high limit isn’t observed. More correctly, the limits are observed by the longs, just not by the shorts. CFTC data show that the 4 largest shorts currently hold an average position of almost 12,500 contracts each, while the 4 largest longs hold an average long position of just over 3500 contracts each.
The facts are clear. While the Senate report has concluded there should be no exemptions to position limits in wheat, the position limits in silver (if you can call them that), are 52 and 28 times larger, in terms of real US and world production.
Here’s a graphic representation showing the difference in position limits relative to US and world production of a few commodities.
So why no Senate report on silver? That’s simple. It has to do with the dirty little secret. Only those holding long positions can be guilty of excessive speculation. It’s not possible for the shorts to sell excessively, especially if they happen to be US banks. Put limits on the longs, but look the other way when it comes to the shorts. It’s the new un-American rule of law, as dispensed by the regulators.
In the keeping with the Senate report, let me offer a specific and simple remedy to the problem of silver position limits that are so large as to limit no one. Lower the position limit in silver to 1500 contracts (7.5 million ounces), all months combined. In keeping with commodity law, bona fide hedge exemptions can be granted upon request. But please remember, there are only about 20 or so mining companies in the world with production greater than 7.5 million ounces a year. These are the natural hedgers on the short side. Since very few of them, less than 5 or so, hedge their silver production, there will be very few requests for exemptions from the 1500 contract position limit. This should make it easy for the CFTC to track exemptions.
Market Share
The Senate report emphasized the impact that the index funds had on wheat prices, due to the large percentage of the market they held. The report stated that the index funds held between 35% to 50% of all wheat contracts on the Chicago exchange. Quoting from the press release,
“The Subcommittee investigation uncovered substantial and persuasive evidence that, by purchasing so many futures contracts, commodity index traders, in the aggregate, pushed up futures prices …”
Since 35% to 50% represents a significant share of any market, the report is correct to point to the price impact of such a dominant position. However, because of the number of index fund traders, between 25 to 30 traders, no one can label the large market share as being concentrated. To be concentrated, such a large market share would have to be held by one or a very few traders
CFTC data has shown this to be the case in silver. Not only do the large short silver traders hold as significant a market share as the long wheat index traders, the position in silver is concentrated beyond debate. The current Commitment of Traders Report (COT) for positions held as of June 23, indicate the 4 largest traders as holding a net short position of 47.2% of all COMEX futures contracts, as well as almost 38% of equivalent world silver production. Over the last year, the CFTC has reported, via its Bank Participation Report, that 1 or 2 US banks have held a net short position of more than 33% of all COMEX futures contracts and 25% of world production.
The CFTC data clearly show that the large silver shorts have as dominant a market share as the long wheat index traders, but the silver shorts are concentrated to boot. That makes it doubly wrong and proves manipulation, a word the Senate report does not utter. By any reasonable and objective standard, there’s more of a problem in silver than there is in wheat. If the significant market share of the index traders pushed up wheat prices, then the significant and concentrated market share of the COMEX shorts pushed down silver prices.
Passive Versus Active
Another significant difference between the long index fund wheat traders and the big short silver traders is that the index funds are primarily passive, while the silver traders are active. The index traders do not actively trade the market. They do adjust positions due to index formula changes, investor money flows and the rolling of contracts as expiration approaches, but they are usually “buy and hold” traders. They are in it for the long term and don’t generally respond to price changes. In wheat, and other markets in which index traders operated, they bought and held their positions before the big explosion in prices last year and held them through the decline. The Senate report is not accusing the index traders of buying and adding to positions as prices rose sharply. Therefore, no one can point to any action by the index traders to actively “goose” prices higher by their trading.
In contrast, the large silver shorts, in addition to holding a dominant and concentrated market share, are among the most active of all traders. In fact, they have come to be regarded as “market makers,” although no such provision exists under commodity law granting them that privilege. The regulated futures markets are supposed to be an open auction-type market, not a specialist or market making operation, like the New York Stock Exchange. Yet when any significant buying or selling emerges in the silver market, it is assumed and expected that the large silver shorts will take the other side of the transaction. This is basically how they assembled their extraordinary short position to begin with.
Because there are more natural buyers of silver at the current depressed price than there are natural sellers, any new buying that emerges requires the big silver shorts to sell additional contracts short. That’s why their market share and concentration has grown over the years. If they didn’t cap and manipulate the silver market, it would be much higher. The big shorts can only buy back contracts when they engineer sell-offs. Unlike the long index fund traders in wheat who are passive, the big silver shorts must remain vigilant and active, at all times, lest the free market take over and determine prices.
Personal Validation
The Senate report validated a number of recent analytical conclusions I have made in silver. One, involves a recent public disagreement between myself and the CFTC. Regular readers know that I have often made the point that, in order to correctly calculate the true net percentage and degree of concentration in any market, one must remove all spread positions in order to drill down to the true number of contracts outstanding in any market. When this calculation is performed in silver, for instance, the true net concentration of the 4 largest short traders jumps from roughly 47% of the market to over 71%. This increase of 50% in the true net percentage of concentration is based on data in the COT of June 23, 2009.
Recently, Commissioner Bart Chilton, in an email to all who wrote to him, took issue with my analysis. He wrote that, “There was no real economic justification for subtracting out the spread positions from the total open interest over than to inflate the reported concentration ratio.” I strongly disagreed and you can find all the details here, including a link to Commissioner Chilton’s entire email. http://news.silverseek.com/TedButler/1238529622.php
The Senate report would appear to settle the matter. On page 121 of the report, it describes how spread traders should be excluded for the very reasons I have explained. In fact, they even include a chart (Figure 29) which shows the degree of market share of the index traders in four commodities net of spreads. Of course, even with spreads removed, the level of market share held by the four largest shorts in COMEX silver is much greater than the market share held by the 25 to 30 index traders in each of the four markets depicted in the Senate report.
In that same section (page 122), the Senate report highlights another analytical point I have made often, namely, comparing the aggregate size of the largest longs relative to the aggregate size of the largest shorts. The Senate report states that it was somewhat unusual and telling that there were times when the aggregate long position of the index traders exceeded that of the commercial shorts, as normally there was a balance between the relative size of the largest longs versus the largest shorts. This “balance” that the Senate report refers to is the same point I have made in the past.
In silver, however, the balance is more lopsided than in any commodity. The situation, however, is completely reversed. The big silver shorts have held an aggregate net short position 4 times larger than what the big longs held. I think the authors of the Senate report would have fainted had the index longs held a position 4 times larger than the big shorts. My point is that the Senate report confirmed my contention that “unbalanced” aggregate positions of the big longs compared to big shorts are cause for concern and must be investigated.
Conclusion
The Senate report is a wake-up call for the CFTC. The report pinpoints where the CFTC has dropped the ball, specifically in allowing a dominant market share to be held by index traders in wheat futures (and other markets), causing disruptive pricing. The report zeros in on the culprit, the granting of exemptions to position limits, and recommends a clear solution, eliminate the exemptions.
The same situation exists in silver on the short side, except to a greater degree, due to the existence of a concentration and the intent to manipulate. The solution in silver is as simple as the Senate’s solution in wheat – have the CFTC enforce existing commodity law and impose legitimate position limits.
The problem is that there is a double standard when it comes to manipulation or excessive speculation. Most have grown to view the long side as the only side that can be manipulated. That’s not true nor is it how the law is structured. However, it is how most people think, especially politicians and regulators. That’s the problem in silver (and gold).
Let’s be realistic. There will never be a Senate report on silver, at least not until after the manipulation is terminated. That’s because there is no political will behind a call for higher silver prices, which an end to the current manipulation would surely cause. But it does not mean you have to tolerate something that is wrong or a violation of the rule of law. It doesn’t mean you have to sit there and accept it. The CFTC knows the silver (and gold) manipulation is in place. The manipulators know what they are doing is illegal. The authors of this Senate report can draw the parallels between wheat and silver. But unless you press them all, they’ll pretend the manipulation does not exist. This is not a matter of changing the law or determining what is right or wrong. It is a matter of changing a perspective that is wrong. |
Out of bullion. From their website:
Quote:
| American Eagle Gold Uncirculated CoinsProduction of United States Mint American Eagle Gold Proof and Uncirculated Coins has been temporarily suspended because of unprecedented demand for American Eagle Gold Bullion Coins. Currently, all available 22-karat gold blanks are being allocated to the American Eagle Gold Bullion Coin Program, as the United States Mint is required by Public Law 99-185 to produce these coins “in quantities sufficient to meet public demand . . . .” The United States Mint will resume the American Eagle Gold Proof and Uncirculated Coin Programs once sufficient inventories of gold bullion blanks can be acquired to meet market demand for all three American Eagle Gold Coin products. Additionally, as a result of the recent numismatic product portfolio analysis, fractional sizes of American Eagle Gold Uncirculated Coins will no longer be produced. |
And now the Silver Eagle page….
Quote:
| American Eagle Silver Uncirculated CoinProduction of United States Mint American Eagle Silver Proof and Uncirculated Coins has been temporarily suspended because of unprecedented demand for American Eagle Silver Bullion Coins. Currently, all available silver bullion blanks are being allocated to the American Eagle Silver Bullion Coin Program, as the United States Mint is required by Public Law 99-61 to produce these coins “in quantities sufficient to meet public demand . . . .” The United States Mint will resume the American Eagle Silver Proof and Uncirculated Coin Programs once sufficient inventories of silver bullion blanks can be acquired to meet market demand for all three American Eagle Silver Coin products. |
All the more reason for people to rely on quality private sources such as those mentioned in our WHERE TO BUY section.
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– Posted 19 June, 2009 Silver has endured a rather tough June so far. After peaking just under $16 on the 2nd, this white precious metal plunged 12% to just over $14 by the 15th. This is certainly a significant decline for less than 2 weeks, so silver traders are anxiously wondering what it portends. Will silver languish in the summer doldrums again this year?
Perhaps, only time will tell. But I suspect this year silver will buck its typical lackluster summer trend and prove exceptionally bullish. Due to the wildly volatile market behavior of the past year, silver happens to be in a very unique position today. It remains seriously undervalued relative to gold. The ongoing rectification of this anomaly alone should lead to silver buying on balance in the coming months.
Provocatively, the gold-price trends are the single most important driver of the silver price. The reason is simple. Silver investors and speculators all watch the gold price as well, it is the primary ingredient coloring their sentiment. So when gold is looking strong, they flood into silver and bid it up rapidly. And when gold weakens, many are quick to exit silver. The technical results of this behavior are striking.
A couple years ago I did a comprehensive study of the interrelationship between silver and gold since 1971. As the 7 comparative charts in that essay revealed, silver has almost always followed gold’s lead throughout our entire modern era. Where gold goes, silver follows. History is crystal clear on this. I like to joke about this nearly-ironclad relationship by calling silver “gold’s lapdog”. It irritates some folks.
This quip is certainly not intended to denigrate silver, but to illustrate a very profitable technical truth for traders. I am a long-time silver investor and speculator. I started recommending physical silver coins as investments back in late 2001 when this metal languished just above $4. Some of our best-performing long-term investments today are elite silver stocks we recommended way back in 2002. I’ve been long silver, very profitably, since before the great majority of today’s investors ever considered owning it.
And over this secular silver bull’s span, I’ve learned that gold is often the key to gaming silver’s short-term trends. To trade the white metal successfully, you have to understand the dominating role gold plays in shaping silver-trader psychology. While silver may temporarily decouple from gold in rare extreme situations, over time it will always revert back to following its far-larger and more-important cousin.
This is exactly why silver has more potential to rise this summer than in any other I’ve witnessed in this bull. During last autumn’s stock panic, silver traders panicked with the rest of the world and aggressively dumped the metal. Since silver is such a tiny and hyper-volatile market, this intense selling drove it down much faster and farther than gold was falling. The resulting unprecedented anomaly persists to this day.
This peculiar episode is easiest to understand when illustrated visually with a chart. The blue line is silver, superimposed over gold in red. Both metals are rendered on zeroed axes so there is no visual distortion. I ran the data back several years or so before the panic, so the baseline behavior of silver relative to gold can be established before the wild and crazy events of late 2008.
Before the Great Stock Panic of 2008, silver tracked gold beautifully. When gold was rallying, traders would flood into silver forcing it to surge higher and faster than gold. When gold was correcting, silver selling would drive outsized declines relative to gold. Silver was doing just what it always had, amplifying and leveraging underlying moves in gold. And this relationship is mathematical, not just visual.
Between January 2005 and August 2008, a long-term pre-panic span, silver had a correlation r-square with gold of 94.7%! This is stellar, unbelievably high as any statistician will tell you. It means that nearly 95% of the daily price action in silver was statistically explainable by gold’s own daily price action. We traded this relationship to much success, studying gold to figure out when a new upleg was probable and then buying silver and silver stocks to leverage gold’s run higher. It was great fun.
But during last autumn’s brutal stock panic, the first in 101 years, silver’s very tight correlation with gold suddenly vanished. Silver actually decoupled from gold, something I never thought I’d witness. While startling, the reasons behind this extraordinarily peculiar event offer excellent insight into the perceived nature of gold and silver among traders today.
The stock panic terrified speculators. When the S&P 500 plummeted 27% in less than 4 weeks in October, traders rushed to liquidate all risky assets. They sold absolutely everything, fundamentals be damned, in a desperate rush to raise cash and end the intense financial pain. Silver has always been a risky speculation and it was treated accordingly. It plunged 25% to the very days of that October stock selloff. Provocatively it even bottomed on the same days as the stock markets in October and November!
Gold too was hit in this maelstrom of fear, but to a much lesser extent. Gold is a classic safe-haven play, a place to protect capital in financial crises. While the enormous deluge of capital surging into the US dollar (cash) weighed on gold, it still weathered the panic better than almost everything else but the dollar. Traders weren’t as quick to liquidate their gold as their silver, as it was still perceived as a refuge in the storm.
The results of silver being treated as a speculation during the fear bubble, while gold generally wasn’t, are clear above. When the dust settled, gold had only been driven down to a 14-month low. But silver, which even long-time contrarians weren’t excited about holding in the hyper-fearful panic environment, plummeted to a 34-month low. The intense fear had driven silver to decouple from gold, an incredible anomaly.
Silver’s mathematical correlation with gold was even broken during the panic, it tended to move with the general stock markets instead. Universally all speculators were watching the plunging stock markets for trading cues, so all risky assets including silver mirrored the S&P 500. Between September and December last year, the months that encompassed the stock panic, silver’s r-square with gold plummeted to 52.5%. Gold’s influence had faded dramatically, gold no longer dominated silver traders’ sentiment.
Since those crazy events, silver has been recovering. Its post-panic r-square with gold is rising again, up to 81.8%, as gold’s psychological influence is once again starting to override the stock markets’. But although gold was soon bid back up to pre-panic levels, silver has lagged far behind. So many silver traders were hurt so badly during the stock panic that they are in no hurry to redeploy their remaining capital. Their reluctance to return has created big opportunities for us today.
As this chart illustrates, based on pre-panic history silver should be trading between $18 and $19 or so given today’s prevailing gold levels. This is about a third higher from where it was trading earlier this week. As time continues to dull the psychological wounds from the panic, as the fear continues to fade, I have no doubt that silver will reestablish its decades-old historical relationship with gold. Traders today can ride this reversion higher in silver itself and the companies that mine it.
A more precise way of measuring the relationship between silver and gold is the Silver/Gold Ratio. The SGR simply divides the daily silver close by the daily gold close. But since the result is a hard-to-digest tiny decimal (0.0152 this week), I prefer to use the inverse of this SGR. Also known as the Gold/Silver Ratio, it yields numbers that are easier to follow mentally (65.7 this week). In other words, an ounce of silver is worth 1/66th an ounce of gold.
But charting the GSR natively is misleading when analyzing silver, because when silver rises this ratio falls. So I prefer to invert the GSR axis and call it an SGR (which it effectively is at that point), thus a rising ratio logically indicates relative strength in silver compared to gold and a falling one relative weakness. When this blue SGR-proxy line below is rising, silver is outperforming gold. When it is falling, gold is outperforming silver.
For at least several years prior to the stock panic, the SGR averaged 54.9. An ounce of silver was worth 1/55th of an ounce of gold. And this average was derived from a pretty tight relationship as the SGR line above shows. The 55 SGR average wasn’t skewed by a few radical extremes, but driven by a longstanding trading range with relatively mild deviations from the mean. It was this bull’s pre-panic norm.
But when speculators panicked last autumn, the SGR plummeted. It shattered a rising secular support line that had held for years. By the time the stock panic bottomed in late November, and hence silver bottomed that very same day because that’s when fear was the most intense, silver had hit its worst levels relative to gold of its entire secular bull. Silver was trading under $9 while gold was around $745, a huge disconnect.
That day at silver’s nadir, the SGR fell to 83.5. An ounce of silver was merely worth 1/84th of an ounce of gold! And during the final 4 months of 2008 which encompassed the stock panic, the SGR averaged 75.8. These were just stupid-low levels that made no sense at all, like most prices late in the panic. Extreme fear had driven such intense selling that prices totally decoupled from their underlying fundamental realities.
But extreme emotions never last for long, their very intensity soon burns itself out. And to hardcore students of the markets, even in the very heart of the panic it was crystal clear that such cheap silver levels relative to gold couldn’t be sustainable. So we did the only thing good contrarians can do in a panic, we bought aggressively and recommended our subscribers do the same. They’ve been richly rewarded.
As of the latest Zeal Intelligence, a new long-term investment in an elite silver stock made in the bowels of the panic had already nearly tripled. In Zeal Speculator we bought the silver ETF when silver was still under $10. We’ve since added more successful silver trades in both our monthly and weekly newsletters. Trading this mean reversion in the SGR has already been very profitable, and it is not over yet.
Back in early February when I wrote the original essay in this series, the SGR was running near 72 which wasn’t much above the panic average. Today, about 4.5 months later, it is near 65. Since silver was radically more oversold than gold during the stock panic, it is rallying much faster than gold emerging out of the panic. So before this year is out the SGR should again converge with its 55 historical average.
This means even if gold does nothing, which is highly unlikely given the coming inflation scare, silver has plenty of room to run higher this summer. Despite recovering considerably already, it still remains way too cheap relative to gold. At $925, $950, $975, and $1000 gold, the long-term 54.9 average SGR yields near-term silver target prices of $16.85, $17.30, $17.76, and $18.21. All of these are nice gains over today.
But for a variety of reasons I doubt the SGR will conveniently stop at its average. First, note the SGR’s rising secular support line above that was broken by the panic. It showed a long-term tendency for silver to rise a bit faster than gold. And this makes sense since silver is such a small market. If investor interest and capital deployed in gold and silver each grow by a similar amount, silver will rise faster. If you extend that SGR support line, it hits 50 now and about 48 by the end of 2009. Let’s call it 49.
At 49 SGR secular support, at $925, $950, $975, and $1000 gold, silver would trade at $18.88, $19.39, $19.90, and $20.41. These prices are obviously even more attractive and much higher than today’s. But even this is nowhere close to the best-case scenario. Even with flat gold, the SGR could very well shoot a lot higher than 49, at least temporarily.
Once a long-standing equilibrium (a 55 SGR) is disrupted in the markets, there is usually a countermove in opposing proportion to the original disruption. Visualize a playground swing. Hanging straight down is equilibrium. If you pull the swing 1 foot in your direction and let it go, it will initially swing about 1 foot in the opposite direction before normalizing. But if you pull it 10 feet in your direction, a bigger disruption, the counterswing will be proportionally larger. The SGR was dragged far off equilibrium by the panic.
So it would not surprise me one bit to temporarily see the SGR swing proportionally in the opposite direction. Silver was so beaten down in the panic that the return of silver speculators will probably drive it far higher than gold would suggest is prudent. I don’t know how high the SGR could go in such a silver greed spike, but examine the chart above and make a guess. We could be in for a major silver spike before SGR equilibrium is restored, which would be wildly profitable for those long silver.
But perhaps the most bullish thing of all about this SGR reversion is that all my analysis so far assumes gold merely stays flat. But this is very unlikely. Not only are the yellow metal’s fundamentals very bullish today, but the Fed’s recent doubling of the US monetary base will soon stoke the biggest inflation fears since the 1970s. When mainstream investors start reallocating capital into gold, all bets are off the table on how high silver could go. Gold is the big silver wildcard right now, and it is an exceedingly bullish one.
While I own lots of physical silver, and am still trading the silver ETF, I believe the biggest opportunities by far in this SGR reversion are in the elite silver stocks. While silver was sold off far more aggressively than gold warranted during the panic, silver stocks were in turn dumped even more aggressively than the dismal silver prices warranted. Silver stocks, still recovering, remain too cheap relative to silver today.
Thus we could easily see a doubling to quadrupling of most great silver stocks’ prices, from here, by the time this SGR reversion fully runs its course. Add in the first inflation scare of the modern era, and the gains could be even bigger. Silver stocks are a minuscule specialized sector with a trivial total market capitalization relative to not only the broader stock markets but even gold stocks (which themselves are a tiny sector).
At Zeal we’ve been trading this SGR anomaly since the heart of the panic. But the panic was so damaging to silver companies’ abilities to raise capital to finance their endeavors that we needed to figure out which silver stocks could survive and thrive in this tough environment. So back in March we launched a comprehensive 3-month fundamental-research project to find our favorite 12 post-panic silver stocks.
Our initial screens turned up nearly 100 primary silver stocks trading in the US and Canada. Provocatively, back in late March they had a collective market cap of just $6.8b. This is astoundingly small! At the end of March the gold stocks of the flagship HUI index had a collective market cap of $144.1b. And the S&P 500’s ran $7217.8b. So if anyone gets interested in silver, these stocks are going to skyrocket. They are just too small to absorb any meaningful capital inflows.
My business partner Scott Wright, one of the best commodities-stock analysts in the world, painstakingly whittled down this universe of primary silver stocks until we had our favorite dozen. He then wrote an outstanding new 33-page report analyzing each of these fantastic silver companies’ fundamentals in depth. It is a fascinating, educational, and entertaining read, a vast array of research and analysis condensed into a highly-valuable summary. It is these elite silver stocks we will trade going forward.
Just days ago, we published this brand-new silver-stock report. At just $95 ($75 for Zeal subscribers), it is an amazing value. Even if you are an accomplished silver-stock analyst, it would take you hundreds of hours to attempt to replicate this research. And if you haven’t already spent many years wading through SEC reports, company releases, and many other arcane sources of information, you’d never be able to undertake such a complex project. So if you are interested in elite silver stocks, buy our new report today!
As always we’ll continue to analyze and trade silver and the silver stocks going forward in our acclaimed monthly and weekly subscription newsletters. While these popular free web essays outline some of our basic research, it is only in our newsletters where we tie everything together and launch high-potential stock trades for the good folks who finance our hard work. Subscribe today and see what you are missing!
The bottom line is silver remains way too cheap relative to prevailing gold prices. And history strongly suggests this anomaly, driven by the stock panic, will not persist. Silver needs to rise considerably to normalize with gold even if the latter stays flat, which is unlikely. The gigantic money-supply growth and coming inflation scare should drive incredible mainstream interest in deploying capital in gold and silver.
While silver itself will see nice gains in this inevitable SGR reversion, the gains in the best silver stocks will dwarf silver’s. Not only is this sector tiny, but investors and speculators largely abandoned it during the panic. As they return, and traders new to silver stocks join them, we will see elite silver stocks multiply in value. The still-unwinding panic aftermath should lead to a far-from-typical summer for silver.
Adam Hamilton, CPA
June 19, 2009 |
TED BUTLER COMMENTARY
June 16, 2009
Making The Case
(This essay was written by silver analyst Theodore Butler, an independent consultant. Investment Rarities does not necessarily endorse these views, which may or may not prove to be correct.)
In trying to explain the ongoing silver (and gold) manipulation, I normally rely upon a straight text approach, using words to convey my premise. Today, I’m going to alter that a bit and rely more on visual and audible tools. Thanks to Carl Loeb, I will present two graphs depicting the concentrated short position of the US banks in all commodities, as compiled by the CFTC. Also, thanks to Eric King of King World News, here’s a link you can click on to hear my interview on the topic
Interview
The following two charts attempt to put the size of the concentrated short position in COMEX silver and gold into some perspective. It’s one thing to say the short positions in silver and gold are out of line with all other commodities, and quite another to represent that graphically. All source data are from the CFTC itself, taken from their most recent Bank Participation Report for positions held as of June 2, 2009. Bank Participation Report
As the name indicates, this report is designed to measure the extent of bank holdings in all US regulated futures markets, with a distinction between domestic and foreign banks. I have intentionally focused on US banks and only their short positions for a number of reasons. If there is a manipulation on the short side of silver and gold, as I allege, it can only be perpetrated by US banks, since the foreign banks’ short holdings are not large enough. In addition, I am not referencing the long side, for the simple reason that banks have plenty of money and could conceivably finance and take delivery of any long position they hold. Delivering against short contracts is not always a simple case of having enough money. In real commodities, it often comes down to owning the real material, not a cash equivalent. For this reason, I have only included “real” commodities in the graphs. I have excluded all financial and currency futures and all swaps of all types.
The first graph depicts the percentage of the entire futures market that US banks hold gross on the short side. The data is taken, without alteration, directly from the Bank Participation Report. In doing so, the graph severely understates the true percentage held short in the silver and gold markets by the US banks, because it includes all spread positions. If all spreads were removed, as they should be, the percentage of concentration held by US banks in silver and gold would be 50% larger (half again) of the amounts shown.
The second graph takes the number of contracts listed in the Bank Participation Report, converts them to standard units of trade and then compares them to world annual production
These graphs should raise the question as to why are so few US banks short such large amounts of silver and gold? It wasn’t always this way. Less than a year ago, in the July 2008 Bank Participation Report, the big US banks held a short position in silver less than a quarter of the size of their current short position. In gold, their current gross short position is 16 times greater than what it was then. In fact, the big US banks were actually net long gold in July 2008. In other words, the big US banks went from being net long gold in July 2008 to their largest short position in history.
I know that the CFTC will say that this is all due to JPMorgan taking over Bear Stearns. But what the heck was Bear Stearns doing with the big short positions in the first place? More importantly, the takeover doesn’t excuse the additional shorting put on since the merger was completed. Given the record of US banks in overall financial matters, that a small number of them are so heavily short silver and gold, is very troubling. If there are reasonable explanations for the data coming from the CFTC, they should be forthcoming.
The manipulation in silver and gold continues. It will continue as long as the concentrated short position exists. Since neither the banks involved, nor the CFTC appear willing to deal with this, we must pressure them. Broad new regulatory reforms are being proposed, including a systemic risk council. The concentrated short positions in silver and gold held by one or two US banks are the definition of systemic risk. Please convey this to your elected representatives and the regulators.
Ggensler@cftc.gov
Mdunn@cftc.gov
Wlukken@cftc.gov
Bchilton@cftc.gov
Jsommers@cftc.gov
Sobie@cftc.gov
Alavik@cftc.gov
Jamie.dimon@jpmchase.com
Dean.Payton@cmegroup.com
