Saturday, August 28, 2010

Commentary August 28.2010

Good morning Ladies and Gentlemen:
Friday night saw no banks fail as the FDIC gave its staff this last Friday of August off to enjoy the sun.  It will
be very busy for the rest of the year.
Gold closed today at 1:30 pm at 1236.20 even though it touched 1241.00
Silver was up 6 cents to 19.04.
The open interest on the gold comex fell by a tiny 33 contracts to 565,795.
The silver comex OI also fell by 309 contracts to 128,442.
Gold and silver rose nicely on Thursday so it means that there was some short covering here.
I would like to go the Committment of Traders report.  Here is a summary of the gold COT:
COT Gold, Silver and US Dollar Index Report - August 27, 2010

-- Posted Friday, 27 August 2010 | Digg This ArticleDigg It! | Share this article | Source: 

Gold COT Report - Futures

Large Speculators

















Change from Prior Reporting Period


















Small Speculators






Open Interest












  You will note that those large speculators that were long increased those long positions by a rather large 15,290 contracts.
Those that were short reduced their short position by 1673 contracts.
In the commercial sector, those that were long increased those positions by a smallish 198 contracts.
And now for our infamous commercial shorters:
they increased their shorts i.e. supplied the massive unbacked paper by 14928 contracts.
In the small speculator category, those that were long reduced their positions by 1180 contracts, and those that were
short increased those positions by 1053 contracts.
The small specs were not in the game. 
Essentially, it was the long speculators that increased their positions taking on the commercials who supplied the paper.
and now for silver:

Silver COT Report - Futures

Large Speculators

































Small Speculators






Open Interest















non reportable positions

Change from the previous reporting period


COT Silver Report - Positions as of

Tuesday, August 24, 2010


Here we see a completely different kettle of fish.
Those large speculators that were long decreased those positions by 996 contracts.
Those large speculators that were short silver decreased their short positions by 231 contracts.
In the commercial category, those that were long decreased those positions by 2643 contracts.
Strangely, those commercials like JPMorgan etc that were short decreased their position by 5535 contracts.
The small specs that were long in silver reduced their positions by a tiny 50 contracts.
Those small specs that were short added to their short positions by 2077.
I am having no trouble in understanding the COT gold report.  The COT silver report is very bizarre
I am not sure if the data is correct.  However if it is correct, it must be construed as being very bullish
for silver.  Also please remember that this report is basis last Tuesday night, August 24.2010
Let us now go to the all important comex inventories and notices sent;
Here is a chart on the Friday's physical movements:
Withdrawals from Dealers Inventory   zero oz
Withdrawals from customer Inventory  n/a
Deposits to the dealer Inventory n/a
Deposits to the customer Inventory 237,199 oz
No of oz served  (contracts=1 )    zero
No of oz to be served  zero  contracts)  xxxxx
Withdrawals from Dealers Inventory 
Withdrawals from customer Inventory   1,091 oz
Deposits to the dealer Inventory  n/a
Deposits to the customer Inventory  n/a oz
No of oz served (contracts = 72  7200 oz
No of oz to be served (contracts=174  17400 0z
Now for the silver comex movements:
Note that we again had zero oz of silver move into any registered comex vault.
However, we did see again a game of musical chairs as  a massive 237,199 oz
enter the customer inventory.  For 4 straight days we have seen massive volumes either
enter the customer or leave the customer vault.
There was 1 contract served upon a long of unknown  existence. The comex announced in
late July that only 10 option contracts on silver were outstanding for silver.
Thus far 23 contracts have been sent for a total of 115,000 oz of silver, or 3.58 tonnes.
When you see massive volumes of silver enter and leave the customer you can bet
that the folks are having trouble getting physical. 
Now for the gold comex movements:
Note again we are witnessing zero oz enter the dealer registered vaults.  In a delivery month, this is totally unheard of.
The comex officials must be very nervous.  There was a small removal of gold from the customer inventory of 1091 oz.

Probably this exodus was by a nervous nelly. 
The comex folk sent out notices totalling 72 contracts or 7200 oz of gold.
The total number of notices sent out so far this month total 7110 or 711,000 oz of gold.
We have a total of 174 notices left to be served or 17400oz of gold.
The total number of oz of gold standing this delivery month is as follows:
711,000 oz (notices served) + 17400 oz (to be served) + 90,000 (options exercised) =   818,400 or  25.5 tonnes of gold.
There was 360 notices left to be served upon on Thursday night.  A total of 72 notices were served.
The resultant OI should have been 288 and instead we got 174 for a difference of 114 contracts or 11400 oz of gold.
It is almost impossible that at this late stage of the delivery process to have these guys leave the scene unless they
received a handsome premium reward to roll to a December or October contract.
The open interest for the front month of silver is really stunning:
13,880 contracts or 69.4 million oz.
On Monday night all monies must be in on the front silver month as delivery notices can be sent out on the 31st of August
(first day notice).  I will also get a pretty good look at the total number of oz that will be standing.
If the total of 22 notices remain the same at the end of the month, I will use 115,000 oz of silver in my amt of oz standing for
delivery in September, together with the new longs that wish to take physical metal and not roll.
Now we shall proceed with the big economic stories of the day:
I am going to include this important commentary from Dave Kranzler as the most important story:
In the article there are 3 essential discoveries:
1. GLD director states in a Canadian interview that he holds physical gold and some mining shares.  The information from the 10K reveals that he and other directors own zero GLD shares.
2. The director discusses that GLD does an audit on their physical inventory once a year and "audits" its gold holdings twice a year. They DO NOT audit gold held at its subcustodians.
3. He states that the GLD at the HSBC vault holds the gold in allocated form and can be redeemed by shareholders.  However gold outside the HSBC are held in unallocated form
    and if HSBC blows up then the trust is an unsecured creditor. 
Here is this startling development and then I will comment on this:


GLD Managing Director Jason Toussaint Does Not Own ANY GLD Shares...

BUT he owns physical gold and mining stocks. Greg in Chicago alerted me to a blog post by Jeff Nielson on It regards an interview of Toussaint on Canada's Business News Network (BNN). As Nielson points out, Touissant admits at the end of the interview that he owns physical gold but does not mention that he owns any GLD. Here is the link to interview - I've linked part 2: Toussaint = The Big Whiff The relevant comment starts at the 5:44 mark. The 10-K I've linked below confirms that Toussaint indeed does not own ANY GLD shares.

But there's so much more if you listen to both parts of the interview. Let's get the basics out of the way.  Jason Touissant is the Managing Director the GLD Trust and a principle executive officer of the World Gold Trust Services, the sponsor of the GLD Trust.  All of this information can be gleaned from the GLD 10-K, which I've linked here:  GLD 10-K

Note that on page 76, as Jeff Nielson picked up on from the BNN interview, that NO officers and directors of the World Gold Council or of the GLD Trust own ANY shares.  No insiders own shares.  Why would that be the case?  If GLD is as good as owing physical gold, and is fully backed by physical gold, why would Toussaint admit to owning his own physical gold, but not express confidence in the fund that he oversees by owning some the stock in GLD?  We would NEVER own any mining stocks in our fund in which insiders did not own a meaningful amount of shares.  In fact, with our junior mining stock holdings, insiders typically own 10-20% of the company.

Now let's get to other interesting aspects of the interview that Nielson did not cover.  At the 4:25 mark in Part 2, Toussaint makes the statement that the bar auditor of GLD audits the bars twice a year and physically handles each of the bars once per year.  HOWEVER, the auditor, Inspectorate, only looks at the bars in the HSBC vault.  As per the prospectus, HSBC has subcustodians with which there is no formal contractual agreement and the prospectus specifically states that no one can have access legally to the subcustodian vaults.  Here is the latest inspection report from Inspectorate, the inspection firm:  LINK  This particular report describes the semi-annual random sample audit.  

This is great that an inspection firm goes into the HSBC vault and samples the bars for authenticity and serial numbers, but what about the bars that are at the subcustodians?  And you are asking me to believe that Inspectorate counts all 104,325 bars (the number of bars that would be in the vault as of 8/26) and verifies serial numbers and stamps and reconciles them with the Custodian's records?  I refuse to believe that. I would bet that the annual audit is another statistical sample BECAUSE no one is allowed to have access to the subcustodian vaults.  In fact, now that I think about it, there have been articles in the recent past which have demonstrated dozens of inconsistencies at GLD and SLV between the actual serial numbers on many of the bars and records kept by the Custodian of each Trust.

Finally, Toussaint makes the statement that the bars are held in allocated form, meaning that within HSBC's vault, all of the GLD bars are placed in a separate holding area and the shareholders of GLD have direct claim to those bars.  If HSBC blows up, something that is within the realm of possibilities, the GLD Trust gold is not part of HSBC's asset/liability list.  HOWEVER, the prospectus specifically states that gold which is being transported in and out of the vault and the gold which is being held for redemption by an authorized participant exchaning a minumum of 10,000 shares for bars in the Trust, sit in unallocated form.  And the bars at the subcustodian are in unallocated form.  

The significance of this is that if HSBC blows up, any unallocated bars become part of the claim of the general creditors to the HSBC bankruptcy proceedings, and the GLD Trust has to stand in line with all of the other unsecured creditors to receive payment, if any, on its claims.  The Prospectus specifically states that, in the event of an HSBC bankruptcy, unallocated bullion bars could result in material loss to the Trust.  

Perhaps this is why no World Gold Council officers and directors, and specifically Jason Toussaint, the Managing Director of the GLD Trust for the WGC, do not own any personal shares of GLD.  They know the Golden Truth.

ON many previous commentaries I have stated that it is my contention that the GLD is a fraudulent vehicle. The GLD folk originally got its gold from the Bank of England in exchange for paper
dollar swaps.  The BofE can and will demand its gold back when its clients lose confidence that something is amiss over there.  I can assure you that rumblings that the LBMA is out of gold
will certainly be one of those confidence crumbling scenarios. The LBMA deals with the Bank of England as well as the GLD.
I can visualize massive lawsuits pile up as to who are the official owners of gold at the LBMA and Bank of England.  However it is very newsworthy that all the subcostodial gold is unallocated
and thus not existant to GLD shareholders.
During the week, I highlighted that Viet Nam was a major importer of gold into their small economy.  In 2009 they imported 73 tonnes of gold and with only 86 million people they are the largest
hoarders of gold per capita.  Indian citizens are on tap to import 540 tonnes of gold.  When you couple this with the strong importing of gold from China and Russia, you can imagine the plight that the LBMA is in
as it has to supply a very decreasing supply of gold to all of these folks whether it is an an official level or at the private citizenry level.
This is a great article for you to read and to help you understand the demand side of the equation:

Gold Demand to Soar in Vietnam as `Shelter' From Devaluations, Stock Slump

Gold demand in Vietnam, which consumes more of the precious metal per head than India and China, is set to surge as the third devaluation in the past year and a stock-market slump combine to spur sales.

"People will switch to gold as a shelter," said Le Xuan Nghia, vice chairman of the National Financial Supervision Commission, which advises Prime Minister Nguyen Tan Dung. "The current situation with the dong will spur people to increase their gold holdings."

The government devalued last week to boost exports and shore up the nation's trade deficit, driving the dong to a record low. Vietnam's benchmark stock index has slumped into a so-called bear market, plunging by more than 20 percent from a May high. Gold priced in dollars reached a record in June on concern that the global recovery may falter.

"Gold and strong foreign currencies, like U.S. dollars, will draw investment from Vietnamese people, especially with the recent declines in the stock market and the devaluation of the dong," said Nguyen Hoang, a Hanoi-based analyst at Vietnam Gold Business, which trades the metal for banks and companies.

Immediate-delivery gold surged to an all-time high of $1,265.30 an ounce on June 21 on concern that the economic recoveries in the U.S. and Europe were losing momentum. The metal was at $1,235.90 at 3:17 p.m. in Singapore today and is set for a 10th annual gain, buoyed by central-bank buying and increased investor holdings in exchange-traded funds.

'Money in Gold'

"The dong's depreciation, which has been about 5 percent already this year, plus declines in stocks and uncertainty in the property market, will prompt investors to put their money in gold," said Dinh Nho Bang, Hanoi-based chairman of Vietnam Gold Traders' Association, which has more than 100 members. "We've seen some economic growth, but it's still not certain enough."

Vietnam's central bank set the daily reference rate for the dong 2 percent lower at 18,932 per dollar on Aug. 18. The currency traded at a low of 19,500 per dollar today, according to Bloomberg data, while the so-called black market rate at money changers was as low as 19,520 per dollar, according to a telephone-information service known as 1080 run by state-owned Vietnam Posts & Telecommunications.

Local gold prices jumped to a record 29.95 million dong per tael on Aug. 25, Thanh Nien reported yesterday, referring to the unit that is about 1.2 ounces. Today's prices ranged from 28.86 million to 28.96 million dong per tael at gold shops in Ho Chi Minh City, according to the 1080 service.

"The Vietnamese public will continue to conserve and protect their assets by hoarding gold tael bars," Albert Cheng, managing director for the Far East at the World Gold Council, wrote in an e-mail.

Three Devaluations

"They've been hit by three devaluations in the last year and no one can be certain there won't be more," Tim Condon, Singapore-based chief Asian economist at ING Groep NV, said by phone. "Gold buying is an alternative to U.S. dollar buying."

Vietnam's gold offtake last year was 73.3 metric tons, with per capita consumption of 0.8544 gram and average income of $2,900, according to the Gold Council's Cheng, citing data from GFMS Ltd., the International Monetary Fund and the World Bank.

India, the world's biggest gold user, took 578.5 tons, or 0.4874 gram per head, and had average income of $3,100. China's figures were 457.8 tons, 0.3418 gram, and $6,600, Cheng wrote.

For almost the same level of income per capita, Vietnam consumed almost twice as much gold as India, Cheng wrote in the e-mail. Compared with China, Vietnam's demand relative to income was about five times higher, he wrote.

Increased Holdings

"People will increase their gold holdings, definitely," said Lam Minh Chanh, chief executive officer of Ho Chi Minh City-based Vang The Gioi (World Gold) Co. Ltd. "Gold prices will continue to rise in Vietnam."

The VN Index, the local stock benchmark, has lost more than 20 percent from this year's high on May 6, and Nguyen Duc Hai, head of research at Vietcombank Securities, said Aug. 24 there's "no sign of a bottom." The index rose 0.5 percent today.

The trade deficit narrowed to $900 million in August from $978 million in July, according to preliminary figures from the General Statistics Office in Hanoi. The economy expanded 6.4 percent in the second quarter, after advancing 5.8 percent during the first three months. Inflation is 8.18 percent.

Gold in dollars may reach at least $1,300 this year as investors seek a shield against financial turmoil, GFMS Chief Executive Officer Paul Walker said. "Prices are going to ratchet up," Walker said in an interview.

On Thursday  I told you of the big economic conference at Jackson Hole Wy.  We surmised that Bernanke would announce new stimulative measures to get the economy
going and not a  LIGHT QE2.  What caused the Dow to rise over 160 points was that Bernanke was going to use unconventional methods to get the economy going:
Here are some of the commentaries from JIM Sinclair:

Bernanke Signals Stepped-Up Efforts to Spur Economy 
Published: August 27, 2010

JACKSON HOLE, Wyo. — The Federal Reserve chairman, Ben S. Bernanke, said Friday that the central bank was determined to prevent the economy from slipping into a cycle of falling prices, even as he emphasized that he believed growth would continue in the second half of the year, "albeit at a relatively modest pace."

To help sustain the economy, Mr. Bernanke gave his strongest indication yet that the Fed was ready to resume its large purchases of longer-term debt if the economy worsened, a move that would add to the Fed's already substantial holdings.

"We have come a long way, but there is still some way to travel," Mr. Bernanke said.

"I believe that additional purchases of longer-term securities, should the F.O.M.C. choose to take them, would be effective in further easing financial conditions," Mr. Bernanke told a Fed policy symposium here. He was referring to the Federal Open Market Committee, the panel that sets interest rates, which Mr. Bernanke leads; some members have expressed unease over the prospect of the Fed pursuing any further monetary accommodation.

"Central bankers alone cannot solve the world's economic problems," he said.


and this

Jim Sinclair's Commentary

QE to infinity is the reality of our current economic situation.

Gold will go to $1650.

Bernanke: Fed will take action if economy falters 

JACKSON, Wyo. — Federal Reserve Chairman Ben Bernanke said Friday that the Fed will consider making another large-scale purchase of securities if the slowing economy were to deteriorate significantly and signs of deflation were to flare.

The Fed chief offered his most extensive thoughts yet on how to pull the U.S. economy out of a deepening slump. His remarks came 90 minutes after the government said the economy slowed sharply in the second quarter to a 1.6 percent pace.

Fears are growing that the country could lapse back into a recession. Bernanke described the economic outlook as "inherently uncertain" and said the economy "remains vulnerable to unexpected developments."

Bernanke stopped short of committing to any specific action. But he raised the prospect of another Fed purchase of securities, most likely government debt or mortgage securities, to drive down rates on mortgages and other debt to spur more spending by Americans.

"I believe that additional purchases of longer-term securities should the FOMC choose to undertake them, would be effective in further easing financial conditions." he said. The FOMC stands for the Federal Open Market Committee, the group of Fed policymakers that makes decisions on interest rates and other steps to aid the economy.


However it is this commentary by Pimco`s Erian that highlights the real plight on the economy:

El-Erian Says `Alarming' Data Show U.S. Economy Slowing 
By Wes Goodman – Aug 27, 2010 3:03 AM MT

PIMCO CEO Mohamed A. El-Erian, seen here, wrote, "Current policy approaches here and abroad are unlikely to deliver a durable and robust U.S. recovery." U.S. economic data are "alarming," signaling the recovery is losing momentum, Mohamed A. El-Erian, Pacific Investment Management Co.'s chief executive officer, wrote in an opinion piece in the Washington Post.

Unemployment is high, consumer credit is shrinking and small companies are having trouble obtaining bank lines of credit, wrote El-Erian, who is also co-chief investment officer at Pimco, which runs the world's largest bond fund. Increased government spending and additional debt purchases from the Federal Reserve are unlikely to spur a rebound, he wrote.


The second big announcement was the contraction in GDP.  In July we got the preliminary GDP number and it was 3.6%.  They have
revised the number down to 1.6% as inventory buildup as stopped and imports have grown exponentially.
The large rise in imports substracts growth from GDP. 
However we should be mindful that the entire 1.6% growth was due to government spending and not the private sector.
Now that the states are having budget problems, we will see massive contraction in spending from this sector.
Here is a commentary on the GLD number: (from JIm Sinclair commentary:

GDP seen revised down on imports and inventories 

U.S. economic growth likely was much weaker than initially thought between April and June, hurt by surging imports and as rebuilding of business inventories softened, a government report is expected to show on Friday.

Gross domestic product now is estimated to have grown at a 1.4 percent annual rate during the second quarter, rather than the 2.4 percent estimated in the government's first reading last month, according to a Reuters survey.

While cracks in the fa├žade of big consumption and government are beginning to show, the economic and financial structures that maintain it are still in place. As long as Americans consume more than they produce, they must issue debt (paper claims against future production) to balance the shortfall.


Personal Consumption Expenditures (PCE) As A %GDP and Personal Consumption Expenditures As A %GDP Average from 1947: 


Government Consumption Expenditures and Gross Investment (GCEI) As A %GDP Average from 1947: 

The more debt America issues, the more devaluation of the U.S. dollar will be consequence of most, if not all, policy responses.



Next month we will see the 3rd revision of the GDP number and it will be the final accurate number of 2nd quarter growth.
Expect the final number to be .3% or less.  This economy is in serious trouble.
Here is a great Greg Hunter account on the lousy housing numbers and what havoc it is playing on the economy:
or at this site:/

Housing is Dragging the Economy to Hell 

A little more than two months ago, banking analyst Meredith Whitney said on CNBC, "Unequivocally, I see a double-dip in housing. There's no doubt about it . . . prices are going down again."

Housing, an asset that depreciates over time, is a function of demographics, leverage, and access to credit (emphasis on access to credit in recent years). Once the credit machine shutdown in late 2008, housing began to revert to its unleveraged, supply and demand driven mean price. The virtuous cycle, positive reinforcing credit on the upside, had turned vicious by negatively reinforcing credit and home prices on the downside. I suggest that once currency devaluation is removed, no discernable "bounce" can be recognized from which a dip could materialize. The steep and largely uninterrupted down trend in the U.S. median home price (MHP) to gold since 2005 illustrates this point. 


 Here is a great article which highlights the major problems in banking over at the UK.  You can imagine that
the strange accounting flaws is highlighted by the complete disappearance of physical gold from  the LBMA vaults.:

UK bank accounting rules 'fatally flawed', warns influential watchdog


The Government has been warned of a "regulatory fiasco" in which British banks have apparently adhered to flawed reporting standards for more than five years.

Tom Bush writes of the IFRS accounting rules: 'The UK had the first failing bank, Northern Rock, which only the month earlier appeared to have so much capital it applied to reduce it. IFRS merely reports the train crash rather than prevents it.' Photo: GETTY

An influential watchdog has written to the Department of Business listing a catalogue of staggering regulatory errors that allegedly contributed to the collapse of several banks in 2008 – and still threatens the system today.

While reviewing the proposed expansion of the International Financial Reporting Standards for accounting, Tim Bush, a member of the "Urgent Issues Task Force" that scrutinises the work of the Accounting Standards Board (ASB), claims to have uncovered "fatal" and "dangerous" flaws in the system.

The City veteran has argued that applied to banks, the standards "produced false profits and overstated capital" which have "misled creditors, misled shareholders, the Bank of England, FSA and others".

In a devastating assessment, Mr Bush alleges the regulations, and specifically the way they have been implemented in the UK and Ireland, have led to "mistakes [being made] of such severity that it is difficult to overstate".

His letter, written on August 19 and sent to the BIS as well as the ASB and other accounting bodies, claims:

* The ASB has "not fully understood" the IFRS accounting standards and implemented them in a way that even contravenes the Companies Act. As a result, UK and Irish banks have wrongly relied on a different – and flawed – financial reporting system from the rest of Europe.

* The application distorted bank's company accounts, giving "false assurances", and hampered the directors and regulators from seeing the build-up of leverage and other risks.

* The system is still "causing direct business risk" in the banks and will do the same if applied to other companies too.

* The dangers are set to spread to small and medium-sized businesses under proposals to roll-out the accounting system further.

According to Mr Bush, who was formerly a fund manager at Hermes, the root of the "fatal flaw" lies in the adoption of the new IFRS accounting system to work alongside the Companies Act, whose rules had applied to financial reporting in Britain since 1879.

Although the IFRS system was introduced in the wake of the Enron scandal to combat accounting fraud, it has been widely criticised by accounting experts across Europe.

Mr Bush has argued that the standards preclude the principle of "prudence", or the likelihood of money being repaid, disguising, for instance, a bad loan until it actually fails. But Mr Bush has claimed that while European banks applied the standard at group level, Britain's ASB said that all bank units and subsidiaries should use the same measures, too.

The standards also applied to the Republic of Ireland, where the ASB is one of the last remaining British bodies to have any jurisdiction.

In his letter, Mr Bush wrote: "Although IFRS had been rolled out across the EU, the UK and Ireland implemented it so extensively that the impact was different. It has been a 'double dose' to the extent of being a deadly dose, by removing what had underpinned banking solvency for over 120 years."

He said the system produced figures that hid instability in banks, so that directors and regulators of the banks could look at the audited figures and conclude that banks were not just solvent but had excess cash.

As for banks in the lead-up to the financial crisis: "They did not have the capital that they presented, and they were not going concerns. The true situation was that business models were loss-making and actually consuming capital."

Mr Bush wrote: "In engineering terms it was like a signalman sending a train down the wrong track. The UK had the first failing bank, Northern Rock, which only the month earlier appeared to have so much capital it applied to reduce it. IFRS merely reports the train crash rather than prevents it."

He said the system is still flawed and urged the Government to scrap plans to extend the standards. "In my view, the direction that the ASB took, and is still taking, is… causing direct business risk."

He added: "The proposed further roll-out of full IFRS and the IFRS for SMEs has the same fundamental flaws as what has gone so badly wrong in the banks, a level of apparent compliance that undershoots what the law requires. It is difficult in the extreme to envisage Parliament knowingly assenting to a model of company accounts that dilutes the responsibilities of auditors at the same time as offering less for directors, creditors and the wider public interest."

The ASB could not be reached for comment.

I will be off to Ireland tomorrow to see my good friend Dr Molloy
I will be using his computer to send my commentaries
So, those of you who are receiving my emails of the commentary, I urge you to go to
all the best

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