Thursday, September 29, 2011

OPEN INTEREST FALLS TO LOWEST LEVELS IN YEARS/Sets the stage for gold/silver to rocket higher.

Good evening Ladies and Gentlemen:

The price of gold fell slightly by 80 cents to $1615.60. The price of silver rose by 38 cents to $30.47.
I told you yesterday that all options that have been exercised receives a futures contract and they are thus standing for delivery.  The bankers for the past year have been whacking the precious metals during the last few days of the month trying to discourage the new options holders from taking delivery of metal.  This again is doomed to fail.

Let us head over to the comex and assess trading.

The total gold comex OI fell by a dramatic 12,112 contracts from 465,414 to 453,292.  The increase in margin requirements is surely having an effect on gold investors as leverage dissipates.  Gold leverage is now around 14:1 with silver at 6:1.  The options delivery month of September is now officially off the board in gold.
The new October OI fell from 22,251 to 10,232.  However I still need one more day as this OI is in reality yesterday's OI.  The big December contract saw its OI fall slightly from 288,400 to 287,343.  The estimated volume today was rather large at 203,743 and yesterday's confirmed volume came in at 245,292 contracts.

It seems that we are getting more and more high frequency traders entering the trading floor in silver and gold.

The total silver comex continues to obliterate.  Today it fell 1370 contracts to 100,578 from yesterday's level of 102,014.  The 6th increase in margin requirements has delivered the silver comex as a physical market as leverage is basically gone.  The options expiry month of October in silver saw its OI finish at 468.  The November contract already has 74 contracts standing.  The big December contract saw its OI fall from 63,033 to 60,847.  The estimated volume today was on the low side at 57,035.  The confirmed volume at the silver comex yesterday was 68,833.

Inventory Movements and Delivery Notices for Gold: Sept 29.2011:
Final for Sept. 

Withdrawals from Dealers Inventory in oz
Withdrawals fromCustomer Inventory in oz
64,050 (Manfra, scotia)
Deposits to the Dealer Inventory in oz:   nil
Deposits to the Customer Inventory, in oz
64,470 (HSBC,MANFRA)
No of oz served (contracts) today
1000 (10)
No of oz to be served (notices)
month complete
Total monthly oz gold served (contracts) so far this month
293,800 (2938)
Total accumulative withdrawal of gold from the Dealers inventory this month
9000 oz
Total accumulative withdrawal of gold from the Customer inventory this month

Considerable action in the gold vaults today but only with the customer.
The dealer had no deposits and no withdrawals.

The customer had this deposit:

1.  Into HSBC:   45,864 oz
2. Into Scotia:     18,606 oz

total deposit:   64,470 oz.

We had the following customer withdrawal:

1  From Manfra:  64 oz
2. From  Scotia:  63,986 oz.

total withdrawal by customer:  64,050 oz

we also had the following adjustment:

99,928 oz was adjusted out of the customer and into the dealer in a lease arrangement.(3.1 tonnes of gold)

The registered gold now advances to 2.033 million oz.

The CME notified us that a total of 10 notices were filed last night (even though 9 were standing)
for a total of 1000 oz of gold.  There are no more gold ounces to be served as the month is now complete.

The total number of gold oz that stood and will receive metal is as follows:

293,800 oz of gold.  or 9.138 tonnes.
This is a huge amount of metal delivered in a non delivery month.

I would expect tomorrow afternoon to have about 5000 contracts standing or 500,000 oz (15 tonnes of gold)
October is generally a very weak delivery month.

Let us go to silver.

First the chart:

Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory18,040 (Brinks,Delaware,HSBC)
Deposits to theDealer Inventorynil
Deposits to the Customer Inventory335,236 (Brinks,Delaware)
No of oz served (contracts)  85,000 (66)
No of oz to be served (notices)month now complete
Total monthly oz silver served (contracts)6,570,000 (1314)
Total accumulative withdrawal of silver from the Dealersinventory this month782,837
Total accumulative withdrawal of silver from the Customerinventory this month
The silver vaults were a little quieter than usual.
The dealer had no deposits of silver and no withdrawal.

The customer had this deposit in silver:

1.  330,280 oz into Brinks
2.  4956 oz into Delaware.

total:  335,256 oz.

The customer had this withdrawal:

1.  From Brinks:  1949 oz
2. From Delaware:  2902
3. From HSBC:  13,189 oz.

total withdrawal:  18,040 oz
no adjustments.

The total registered silver (dealer)   remains at 31.09
The total of all silver raises to 107.22 million oz.

The CME notified us that we had two delivery notices:

1.  64 contracts last night
2.  2 contracts this morning.
total:  66 or 330,000 oz

we had 65 notices left to be served upon so we got 66.
The total number of silver notices filed this month total 1380 for
6,900,000 oz.  This is the final number standing for the month of September.

On Saturday I will now report strictly on October deliveries.

Let us now proceed to our ETF's SLV and GLD and then our physical gold and silver funds:

Sprott and Central Fund of Canada.

The two ETF's that I follow are the GLD and SLV. You must be very careful in trading these vehicles as these funds do not have any beneficial gold or silver behind them. They probably have only paper claims and when the dust settles, on a collapse, there will be countless class action lawsuits trying to recover your lost investment.
There is now evidence that the GLD and SLV are paper settling on the comex.
Thus a default at either of the LBMA, or Comex will trigger a catastrophic event.

Total Gold in Trust: sept 29.2011

Tonnes: 1,231.93
Value US$:

Sept 28.2011:

Tonnes: 1,241.92
Value US$:

we lost a dramatic 9.99 tonnes of gold from GLD.  This gold moved from the cubby hole registered to GLD at the Bank of England and out of the B. of E as this gold probably bailed out someone who was in great need of metal.

Now let us see inventory movements in the SLV: Sept 29.2011:

Ounces of Silver in Trust323,753,501.100
Tonnes of Silver in Trust Tonnes of Silver in Trust10,069.86

sept  28.2011:

Ounces of Silver in Trust323,753,501.100
Tonnes of Silver in Trust Tonnes of Silver in Trust10,069.86

we lost zero oz of silver in the SLV.

1. Central Fund of Canada: traded to a positive 4.5 percent to NAV in usa funds and a positive 4.5  % to NAV for Cdn funds. ( sept 29.2011).
2. Sprott silver fund (PSLV): Premium to NAV fell to a   positive 19.36%to NAV sept 29.2011
3. Sprott gold fund (PHYS): premium to NAV rose  to a 3.18% to NAV sept 29.2011).


Let us now see the stories which will shape the price of gold and silver:

As most of you know, the German parliament approved the leveraged plan of the Troika
using the EFSF and leverage the money with the EIB bank.  Here is Peter Tchir commenting on this today:

Premature Speculation

Tyler Durden's picture

Via Peter Tchir of TF Market Advisors
Monday afternoon the markets shot straight up after taking a dose of CNBCialis. CNBC was the first to break the story about letting EFSF use leverage or turning the EIB into a vehicle to increase the potency of the EFSF funds.  That was followed up by more leaks to other news sources.
Stocks went higher quite happily but failed to drag the credit markets with it to a large degree.  Any analysis of the various plans all lead to the same conclusion - no matter how complex or convoluted the plan, the only way it works is for Germany and France to risk their credit ratings to support everyone else, or to print money.  No miracle solution was at work.  Plans may yet be put in place, but it is clear all they do if shuffle the deck chairs and obfuscate who is picking up the tab, but solve nothing.  It is clear that if it gets implemented, any further problems would become far worse as there would be no Eurozone country strong enough to support the rest.  What wasn't clear, is whether the downgrades would occur even before the plans were launched.
Germany has been staunchly opposed to the plan since it was first announced.  During the entire 18 months that this slow death of Greece has been playing out, no plan that had any chance of becoming reality was ever launched without Germany's involvement.  I wonder if the plans had been proposed and shot down, and some excitable ministry of finance official tried to get it approved via the back-door by leaking it to the media and hoping it got so much positive momentum that the people who had rejected it out of hand would have to reconsider?
I read a great piece yesterday titled "Take The Loss".  I continue to believe that the best solution for Europe is to allow Greece to default and then protect all the banks and institutions that can be protected.  Provide liquidity and capital at a fair price and finally move on.  All the banks trade well below "book value" because everyone knows "book value" is just a garbage number.  Let book value decrease by taking the appropriate write-offs.  The market may have priced in a lot of what is out there already.  HSBC has shed over $20 billion in market cap over the past 12 months.  SocGen and BBVA both over $15 billion, DB close to $10 billion.  A big part of these losses in share price is attributable to their PIIGS exposure.  Let Greece default, let the banks take the hit, let's see what other dominos drop, address those with either more defaults, write-downs, or capital, and repeat the process and very quickly we will have a much stronger residual Eurozone.  I doubt that more than 3 countries take debt haircuts and probably 20 to 30 weak/mid-size banks need to be shut.  Painful, YES!  But this is do-able.  The market caps of these banks has been hit hard already, the politicians are likely too afraid of the consequences of default.  Much is already priced in.  What isn't priced in, is a system not spending each and every day worrying about Greece, and a world where politicians can govern, rather than attempting to manipulate markets they don't understand.  Removing those uncertainties may help more than we realize - possible unintended consequences that are positive.
Government support shouldn't be forced on anyone, and it should be priced fairly.  BofA and Buffett showed everyone the fair price of raising capital.  Governments should charge no less, and if a bank can't handle that cost and can't live without an injection, and can't get a better deal from the private sector, well that's just too bad.
As I wrote earlier, I will change my view of the market when something real comes out to make me change it.  I also really believe that in the near term, after a Greek default, SPX is likely to move in a range of 1000-1150, and the next big move will be if the global economies can resurrect growth.
German bailout vote: Merkel's authority survivesHumiliation sailed close to Angela Merkel today.
If four more members of her coalition had voted against the bill to expand the powers of the main bailout fund she would have had to rely on the opposition and her authority would have been weakened.
There was a brief smile of relief when Chancellor Merkel walked across the floor of the Bundestag and studied the voting figures as assembled by her chief whip.
Even during the debate - which she didn't speak in - she had been active - seeking out MPs who might be potential waverers.
The Coming Euro Bail
Financial volatility and political incoherence have been the order of the day on the continent.  However, with the German vote today there are distinct signs that a political consensus has taken shape in Europe. Now the job is to create a TARP like facility to stabilize the banking system and the sovereign debt crisis. As we see things, it looks likely that trillions of Euros will be injected into recapitalization of weak European banks.  Funds would also be earmarked for buying the government debt of the three weakest countries ― Greece, and perhaps Ireland and Portugal ― for probably about 50 percent of the face value. Private owners, primarily the banks, would take the losses.  One major goal of the plan is to try and keep contagion away from Spain and Italy, which would be massively expensive to bail out. 
Cash for the bailout would be funneled through instrumentalities such as the European Central Bank, the European Financial Stability Facility fund, and the European Investment Bank. 
This development is to be welcomed. Until recently, many authorities in Europe have been acting as if their heads are stuck in the sand. They have tried to assure the markets about the health of European banks and that no bailout was needed by for Europe’s weakest members. The pretend game has been absurd, and market participants have long been aware of the charade. Politicians lie to suit their own needs but financial markets know better and by and large ignore the foolishness.  The public, in Europe and globally, is learning to do the same.
Information has been leaked out to the financial markets in recent days indicative of a credible and large (2+ trillion Euro) plan.  Should this materialize, as we think it will, you can expect rallies in global stock markets and in gold.  From our side, we will try to determine when this will happen, and communicate our findings to you.
Bernanke says Fed would act if inflation fallsBy Kim Palmer

CLEVELAND | Thu Sep 29, 2011 7:49am EDT
CLEVELAND (Reuters) - Federal Reserve Chairman Ben Bernanke said on Wednesday the central bank might need to ease monetary policy further if inflation or inflation expectations fall significantly.
In his first public remarks since the Fed launched a fresh measure aimed at keeping down long-term borrowing costs, Bernanke indicated a willingness to push deeper into the realm of unconventional policy if economic growth remains anemic.
"It is something that we're going to be watching very carefully," Bernanke said in response to questions from the audience at a forum sponsored by the Cleveland Fed.
"If inflation falls too low or inflation expectations fall too low, that would be something we have to respond to because we do not want deflation," Bernanke said.
The comment was made in response to a question about a recent decline in market-based inflation expectations, which policymakers see as a good gauge of future inflation trends.
The gap between yields on 10-year Treasury notes and their inflation-protected counterparts fell to 1.70 percent last week, the lowest since September 2010. It has edged up slightly since then and last stood at 1.86 percent.
In an effort to stanch the deepest recession in generations and help the recovery, the Fed not only slashed benchmark interest rates to effectively zero, but also more than tripled its balance sheet to around $2.9 trillion.
Despite these measures, growth has remained quite soft, averaging less than 1 percent on an annual basis in the first half of the year. Bernanke signaled he remains concerned about risks to the economy, which the Fed described as "significant" in its September policy statement.
"We have a lot of problems both in terms of recovery and in terms of longer-term growth," he said.
Last week, the Fed said it will sell $400 billion in short-term Treasury securities and invest them into longer-dated ones to try to put downward pressure on borrowing costs over a longer period.
Investors have dubbed the program Operation Twist after a similar measure undertaken by the Fed in the 1960s. The central bank will also renew its help to the housing finance sector by reinvesting maturing mortgage bonds in its portfolio back into that market.
Bernanke called for the U.S. government to beef up its assistance to the ailing housing sector, the epicenter of the 2008 financial meltdown.
"Some strong housing policies to help the housing market recovery would clearly be very useful and would allow the monetary policy actions of the Fed ... to have more effect and to help the economy recovery more strongly," Bernanke said.
Asked about the fate of fallen mortgage giants Fannie Mae and Freddie Mac, Bernanke reiterated his view that the mortgage market remains too weak to allow the government to try to privatize the government-sponsored entities.
The Fed's latest monetary easing did not have unanimous support within the Federal Open Market Committee, which sets monetary policy.
Three regional central bank presidents dissented against the move. Kansas City Fed President Thomas Hoenig, who does not have a vote on the committee this year but has been a vocal opponent of the Fed's unconventional policies, took a parting shot at the central bank's actions on Wednesday.
"When you encourage consumption by inhibiting your interest rates from rising to their equilibrium level, you will in fact buy problems, and we have, in fact, bought problems," said Hoenig, who is due to retire on October 1, in his last speech in office.

USA house prices continue to falter:  (courtesy Dow Jones)

US Home Sales Index Declines To Lowest In Four MonthsWASHINGTON (Dow Jones)--A gauge of future home sales fell in August to the lowest level in four months, underscoring the challenges to an industry trying to heal as a weak economy discourages some Americans from buying homes.
The National Association of Realtors' seasonally adjusted index for pending sales of existing homes decreased 1.2% on a monthly basis to 88.6, the industry group said Thursday.
The decrease was the second in a row, following a 1.3% drop to 89.7 in July, and it carried the index to the lowest point since April. Economists surveyed by Dow Jones Newswires had expected pending home sales would fall by 2.0% in August.
The gauge, however, is 7.7% above its level in August 2010.
For the month of August, pending sales fell in three of four regions.
The index tracks agreements to purchase homes. A sale is considered pending when the contract has been signed but the transaction hasn't closed. Pending sales typically close within one or two months of signing.
The NAR blamed tight credit conditions for the decline in the index. "The unnecessarily restrictive mortgage underwriting standards are attenuating the housing recovery and are a risk factor for the overall economy," NAR economist Lawrence Yun said.
Sales of previously occupied homes in the U.S. rose in August but remained weak from a historical perspective. Sales of new homes, which tend to cost more, fell.
Unemployment in the U.S. is high and wages aren't growing much. With the economy so weak, people are holding tightly to their wallets, and the lack of vigor in spending is preventing the economy from gaining much traction.

US Confidence levels hit rock bottom:

U.S. Consumer Confidence Hits Second-Weakest on Record in Bloomberg IndexThu Sep 29 13:45:00 GMT 2011Consumer confidence in the U.S. slumped last week to the second-lowest level on record as Americans grew more concerned with their financial situation and the buying climate worsened.
The Bloomberg Consumer Comfort Index dropped to minus 53 in the period ended Sept. 25 from minus 52.1 the prior week. Similar readings were reached three times in first half of 2009 and surpassed only by all-time lows of -54 plumbed in November 2008 and again in January 2009.
Ninety-three percent of those surveyed had a negative opinion of the economy as companies remain reluctant to hire and wages fail to keep pace with inflation. An ailing housing market and a decline in stock prices this year have taken a toll on household wealth, helping explain why Americans as limiting their spending.
"The discontent among the public across demographic and income groups strongly suggests that the problems in the labor market are extracting a powerful toll," said Joseph Brusuelas, a senior economist at Bloomberg LP in New York. "The flat labor market and decline in real earnings will likely erode plans to spend heading into the critical holiday shopping season."
Sentiment among homeowners and part-time workers fell to the lowest in record dating back to 1990, while married Americans were the gloomiest in 19 years.
A Labor Department report today showed jobless claims fell more than forecast last week as an atypical calendar alignment made it more difficult for the government to adjust the data for seasonal variations. Applications for benefits dropped by 37,000 to 391,000, the fewest since April. An agency official said the data probably reflected a "slight mistiming" in the seasonal factors used to modify the figures.

Economic Growth

The economy grew at a 1.3 percent annual rate in the second quarter, faster than last month’s estimate and helped by exports and spending on services, a report from the Commerce Department also showed.
The revised rise in gross domestic product compares with a 1 percent gain previously calculated. The median forecast of economists surveyed by Bloomberg News was 1.2 percent, following a 0.4 percent increase in the first three months of the year.
Stocks climbed after Germany approved changes to a Europe bailout fund. The Standard & Poor’s 500 Index rose 1.7 percent to 1,170.87 at 9:40 a.m. in New York.
Two of the comfort index’s three components declined. The measure of personal finances fell to minus 11.6 from minus 7.5. The buying climate index was minus 61, the lowest level since the aftermath of the Lehman Brothers Holdings Inc. bankruptcy in October 2008, compared with minus 59.9 the prior week. The gauge of American’s views on the economy rose to minus 86.4 from minus 88.9.

Less Than Minus 40

The Bloomberg consumer comfort gauge, which began in December 1985, has been stuck below minus 40 -- the level associated with recessions or their aftermath -- since the end of February. It has averaged minus 45.8 this year, compared with minus 45.7 for 2010 and minus 47.9 in 2009.
Confidence among part-time workers plunged 9.9 points to minus 72.2. The so-called underemployment rate, which includes workers who’d prefer a full-time position and people who want to work but have given up looking, rose to 16.2 in August, matching June as the highest reading this year, Labor Department figures show.
Homeowner sentiment also dropped to the lowest ever, falling to minus 49.5 from minus 47.1. Earlier this week, the S&P/Case-Shiller index of property values in 20 cities fell 4.1 percent in July from the same month in 2010. The home-price barometer has dropped for 10 consecutive months.

Stocks Last Week

Europe’s sovereign debt crisis and recent data showing a weakening U.S. recovery have also fueled deteriorating sentiment and sent equity markets lower. The Dow Jones Industrial Average dropped 6.4 percent last week, the worst loss since October 2008.
"Plenty of factors inform the public’s sour economic views, from gyrations in the stock market, the still-flattened housing market and declining real incomes to Washington’s games of chicken over economic remedies," Gary Langer, president of Langer Research Associates LLC in New York, which compiles the index for Bloomberg, said in a statement. "But the chief irritant is the jobs market."
On the political front, the outlook among registered independent voters fell to the lowest level since October 2009. Republicans’ confidence also slumped, while Democrats became less pessimistic.

Job Plan

President Barack Obama has been traveling the country this week to promote his $447 billion job creation plan. Speaking in Denver on Sept. 27, Obama said the nation needs to reset its priorities to assure future growth.
The president’s package includes tax cuts and spending aimed at spurring hiring to trim the nation’s 9.1 percent unemployment rate, which has restrained consumers’ spending and darkened their outlooks.
Other gauges of confidence parallel Bloomberg’s gauge. The Conference Board’s sentiment index was little changed at 45.4 in September from a revised 45.2 reading in August that was the lowest since April 2009, when the economy was in a recession.
"Economic conditions have not improved as some expected and in fact have worsened for many families," Family Dollar Stores Inc. (FDO) Chief Executive Officer Howard Levine said yesterday in a call with analysts. "It is tough out there and what we have seen particularly with the low-income consumer is they have really retracted their purchase in some of the discretionary categories and really focused on basic needs."

Sample Size

The Bloomberg Consumer Comfort Index is based on responses to telephone interviews with a random sample of 1,000 consumers aged 18 and over. Each week, 250 respondents are asked for their views on the economy, personal finances and buying climate; the percentage of negative responses is subtracted from the share of positive views and divided by three. The most recent reading is based on the average of responses over the previous four weeks.
The comfort index can range from 100, indicating every participant in the survey had a positive response to all three components, to minus 100, signaling all views were negative. The margin of error for the headline reading is 3 percentage points.

Here is a terrific commentary on the plight of the Greek economy as the citizens in the public sector rebel.
The plan is to move almost 700,000 people in the private sector at 60% of former salary base.  It seems that many public sector employees enjoy the gravy train and do not want to get off.  You will enjoy this article by
Wolf Richter (testosteronepit) /Zero Hedge.

Reform Rebellion In Greece

testosteronepit's picture

By Wolf Richter
Just as another avalanche of demands and new plans to bailout Greece rolls over the Eurozone, Greek society is digging in its heels. The bailout Troika (E.U. Commission, European Central Bank, and IMF) stipulated that Greece reform its government sector as condition for further bailout payments. Giorgos Papandreou, the prime minister, and his finance minister, Evangelos Venizelos, promised to do so, and parliament passed some laws to that effect. But now the ministries pulled the rug out from under them.
The government sector dominates the economy with 151 ministries and money-losing state-owned enterprises that employ 1.3 million people. But inefficiencies and corruption have made it a drag on economic growth and development. And it's a money suck with high salaries, overstaffing, early and well-paid retirement, and a host of other issues. During the initial phase of the reforms, 10% of the 700,000 civil servants and 600,000 employees should be transitioned from their jobs into a paid (60% of salary) retraining program and finally into the private sector. Long term, reductions of several hundred thousand people would be needed to accomplish meaningful results.
As condition for the next installment of €8 billion in bailout money, Venizelos should have delivered to the Troika a list with names of people to be transitioned into the private sector—30,000 people by the end of 2011, a first step. But Greek ministries and state-owned companies have ignored the directives by parliament to come up with those lists and cut their budgets (Welt, article in German). And, get this, instead of delivering lists of employees to be cut, they submitted letters demanding that additional positions be created.
This institutional refusal to get off the gravy train that huge government deficits had made possible for so long is systemic. There is resistance on all sides, with constant lobbying, political maneuvering, ministerial refusals, strikes, demonstrations, and civil unrest.
Strikes wreak havoc on the already damaged Greek economy. For example, in Athens subway employees, train engineers, and bus drivers went on strike simultaneously; they saw their rich pay and benefit packages threatened. Result: public transportation in Athens came to a standstill. Even Taxi drivers were on strike that day to prevent reforms that would liberalize the taxi market and open it up to competition. The day before, there were street battles between police and demonstrators. Now, the police union has called for a strike to protest salary cuts.
The Troika's deadlines are constantly missed. None of the promised privatizations have occurred, and none are being worked on seriously, though the first €5 billion in proceeds were supposed to arrive by year end. They are being counted on to keep Greece out of default. Any efforts to institute a functional tax collection system are immediately torpedoed. And Papandreou's promises have been broken without fail since the first bailout negotiations in 2010. No surprise that creditors have lost all trust.
The missing list of employees to be cut was one of the reasons the Troika inspectors left Greece angry in mid September. Now the dance starts again as the inspectors are supposed to return to Greece (only to depart angry).
That this will never work is clear. The Troika should instead initiate and encourage public discussions across the Eurozone about the two realistic options: either keep Greece on the dole, or allow it to default, exit the eurozone, and start over again in a manner Greek society sees fit.
For more: "We're not doing this for the Greeks, but for us," said Angela Merkel. France Simmers In Its Own Juices, Germany Frets
Wolf Richter


I will leave you tonight with this great article by Julian Phillips of the Austrian School of Economics
Here he talks about the Greece rescue plan, the confidence in curriencies and the bank crisis and its effect on gold and silver:   (courtesy

Greek Default, Eurozone/Bank Crisis and the Effect on the Gold, Silver prices
By: Julian D. W. Phillips, - 

 Posted Thursday, 29 September 2011 | Share this article

We agree with Professor Rogoff that Greece should have defaulted some time ago. Despite all the current efforts, Greece will default and that contagion will result in a global, banking crisis. Even if we’re wrong, the mountains of money that will be created and poured into the debt hole will benefit the gold and silver prices. The Greek debt crisis is about stemming the spread of bank runs, the breakdown of the other PIIGS countries debt situation, and potentially the fragmentation of the Eurozone. We’re on the brink.
In the last week, we have seen global market confidence buckle in the face of slowing growth and what may already be a recession. This is not the time that poorer nations can use falling cash flow to repay mountains of debt. Talk of a 50% haircut on Greek debt should be lifted to as high as 60% to 70% for the Greeks to be able to manage its remaining debt in light of future, Greek cash flows.
To get a handle on the Eurozone debt crisis we have to imagine that each nation is an individual. If an individual is bankrupt an offer of compromise is made that usually is 50% for the debt to be written off. It’s not a ‘haircut’ of 50% of the debt with the remaining balance to still be repaid. But such a haircut is a ‘managed default’. The banks that have to take a haircut see their balance sheets drop by this amount, often making the ratios by which it has to maintain too. This reduces the amount it can lend and often puts it in a dubious financial position, bringing its own creditors down upon it. With the global banking system so interwoven, the spread of such fears reaches far and wide. We saw this last week in the downgrade of Societe Generale and Credit Agricole, two of France’s largest banks, because of their exposure to Greek debt. If the Eurozone crisis finds other nations following Greece, then expect much more of this type of downgrade. 

What’s happening to Confidence in Currencies?
At this stage it doesn’t matter which way the crises go. Confidence has fallen worldwide in government debt situations and the banking industry, with fears of more to come. The very fact that the developed world is in the financial state it is, has caused the fall in confidence. If the Greek situation leads to a convincing bailout, the weaknesses in the Eurozone will still remain. Confidence in the euro has fallen and won’t return to the previous year’s levels. With money fleeing the Eurozone, it only found the dollar as an alternative. The Swiss Franc and the Yen have ceased to be safe-havens because their central banks have intervened to weaken those currencies. This left the ‘tree trunk’ of the currency system, the U.S. dollar, as the only really liquid place to go. This was not because of any value that could be retrieved, but because it’s the only remaining currency that remains standing under pressure. Right now the euro is gaining against it, as the world hopes that Greece will get a sufficient bailout. But tomorrow it could weaken again. As to the dollar, its debt crisis is more severe, but not as immediate. 
Now stand back a pace and ask…
“Can we have confidence in the value of the Dollar, the Euro, the Yen, the Swiss Franc or the British Pound?” 
We all appreciate that their values have fallen, but we have to use them as the only available way of paying for things. Do we believe that the governments of these countries are capable of restoring any inherent value in these currencies? Are their structures and that of national balance sheets solid enough to want us to hold our wealth in them? If your answer was not as positive as it was four years ago, you have a measure of how their values have suffered. Looking forward, do you believe that your confidence in these stores of wealth will grow to the extent you want to hold them, or will you do so with a careful eye on them, preferring an alternative, but not being so certain where to go?
What has floated to the top of national priorities for currencies is a global need to have international prices –for the exports of goods from those nations—retain their global competitiveness. This means a persistent weakening with the rest of the world’s currencies following the weakest. In itself this guarantees dropping values for all global currencies. There’s nothing to be gained through a strong currency over time. This structural shape of currencies is not likely to change. In fact, it’s likely to produce more and more financial discord in foreign exchanges. Price competition through exchange rates has to destroy value slowly, but surely.

Debt and Bank Crises
We may be tempted to see the debt crises as a short-term problem, but as the world’s leaders agree, they’re scaring the world and threatening global financial stability. So this isn’t a case of the passing flu; it describes a congenital weakness that needs a structural solution. Nowhere can we see evidence of structural reforms likely to shore up confidence and repair the global financial system. The system is flawed and most expect such crises to persist for the foreseeable future.
So why not just write off the entire world’s toxic debt, print the equivalent amount of money to fill the holes and start all over again? After all if you look back at the Fed’s QE exercise, doesn’t that amount to the same thing? Well, almost. Now add to that a good dose of inflation, and debt diminishes in value and asset values rise. Well, that would destroy all confidence in the Capitalist system and money itself, wouldn’t it? No, the world is locked into resolving these problems and ensuring the continued working of the global economy in such a way as to retain confidence. We’ve not seen such a dire financial scene since the Second World War, (according to the outgoing head of the European Central Bank) and close to the scene seen in the early 1930s.   Then the answer was to massively expand the global money supply, through the devaluation of the U.S. dollar against gold by 75%.
We have no doubt in our minds that the global, financial authorities want a similar expansion of money for the purpose of diminishing the impact of the current crises. But they have to do it in such a way as to convince people everywhere that the system remains viable and healthy, despite such a debauching of money. They cannot do it without convincing people that money has become cheaper and less reliable. This favors precious metals.

Effect on Gold, Silver Prices
Investors were shocked when gold dropped from $1,850 to below $1,600 in an almost straight line. When they saw silver drop from $40 to $28 they were even more shocked. After all, since 2005 gold has come from $300+ and silver from $6+, so a $250 drop and a $12 drop seemed to be huge. Since then we have seen the silver price recover $4 in one day and the gold price $60 in a day, with more recovery to come. In percentage terms, when compared to other markets, we see similar falls there and in similar percentages, but not the same vigor in recovery. The big picture confirms that falls, in most markets, were investors raising liquidity to lower leverage and protect against the falls, just as we saw in 2008. This is something market observers cannot see ahead of time. They accompany major shifts in investor perceptions about the structure of global financial markets.  

Just as we saw in 2009 and onwards, the loss of confidence in global financial markets doesn’t recover. In the gold market, since the pullback from $1,200 to $1,000, we’ve seen gold rise to $1,910 and silver to mid-$40 area, a tremendous gain since then. What’s there to prevent a similar shape to the precious metal markets going forward?

Take a look at the function of gold and silver. Gold, in particular, is an international asset and international cash. It can be used when all else fails. We saw that in the recent falls. Investors could liquidate holdings quickly and take good profits to cover losses, loans, and margin calls in other markets. Once there’s a moderate stabilizing of markets, that lesson is remembered. Investment house strategists factor that into their policy decisions, realizing that in bad times, future profits lie in precious metals.  

In the emerging world, the fall in precious metal prices is seen as speculators getting out of the market and giving them an opportunity to buy at prices they feel will allow for certain rises. Their faith in gold and silver remains completely unshaken by the falls, which they see as part of the ongoing suspicions about the developed world banking system and markets speculation. To them the value of gold and silver remains untouched and certain. Falls are seen as an opportunity to buy cheaply into the precious metals.

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I will see you on Saturday.



MichaelBrady said...

Thanks Harvey!

sierra_hpbt said...

Thanks Harvey,
Much appreciated. The next 3 weeks are going to be very interesting.

Anonymous said...

New Exchanges for SPOT physical opening shortly.

1) SE Asia
2) Ausie.

mainstreeteconomist said...

"Let us head over to the comex and assess trading."

Thanks Harvey LOL. That and Friday put a smile on my face :)

Anonymous said...

Why do some claim the silver market is manipulated and then proceed to do technical analysis?

Can someone explain that?

Isn't that's like saying, "I'm going to lie to you" and then continuing on with a conversation about making plans for the future.

Anonymous said...

It is clear that the tremendous increase in margins has reduced speculation and thus Open Interest. However contrary to your opening statement, a smaller OI makes it only EASIER for manipulation to occur. The CFTC should not be this blind.

Harvey Organ said...

To all:

this is important:

on first day notice in gold, the number of notices filed in gold: 2781 or 278100 oz of gold (8.65 tonnes)

in silver: (surprisingly high) 450

or 2,250,000 oz)

i will wait for the OI this afternoon to get a good idea of what total oz are standing.

of course Blythe will be busy handing out fiat to those standing and who have not been hit yet.

Harvey Organ said...

anonymous: they are not blind

the regulators think that their bosses are the banks/and government officials and that they are fulfilling their duty that way instead of their fiduciary duty to the public to which they have sworn to uphold.


Harvey Organ said...

To those that think that China can bail out the USA/Europe economies...

check this out:

China CDS Soars On Continued Hard Landing Concerns
Submitted by Tyler Durden on 09/30/2011 05:02 -0400

CDS China CPI Gross Domestic Product

Update: CDS now over 200 bps, or over 7 bps since this artice was posted.

Don said...

Although it seems probable that feral High Frequency Traders helped burn longs this go round those wild and crazy guys may very well burn the commercials when the worm turns. The latter scenario ought to offer up entertainment in the form of watching the CME choose between Mammon's High Frequency commissions and the commercial's price suppression mandate.

"No man can serve two masters." - Jesus.

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