Saturday, November 12, 2011

Gold and Silver rise as Risk "off"/MF Global Canada bankrupt/Turmoil continues in Italy

Good morning to you all:

Before we start, let me introduce to you our latest casualty that entered the morgue on Thursday night as the FDIC let their troops off for a long weekend:

Georgia Sees State's 23rd Bank Failure of 2010
 (WABE) - Regulators Thursday seized and closed Community Bank of Rockmart. 

Community Bank of Rockmart will reopen tomorrow as Century Bank of Georgia, which is based in Cartersville. 

The FDIC estimates the bank's failure will cost its Deposit Insurance Fund $14.5 million.

Like most of Georgia's failed banks, Community Bank of Rockmart fell victim to bad real estate loans, says David Oliver, senior vice president of the Georgia Banker's Association. 

"Almost all of them have been related to loans that they made to builders and developers of homes. It wasn't specifically because of their borrowers who were homeowners as individuals... it was more related to builders and developers who were providing those homes." 

The bank - just northwest of metro Atlanta - is the state's 23rd bank failure of the year. Georgia still leads the nation in bank failures since the crisis began three years ago. But, Oliver says, the state is beginning to see stability in its banks.


The price of gold finished the comex session at $1787.50 for a gain of $28.60.
The price of silver also had a stellar day finishing at $34.67 a gain of 58 cents.
The Dow also had a good day as the risk trade was on (dollar down, stock market up, euro up, gold and silver up). We need to see major trading days with gold and silver up and the Dow down as investors only seek gold/silver as save havens.  Anger is still brewing with the MFGlobal scandal as we still do not have the CME giving customers their money back.  MF Global Canada sought bankruptcy protection as the scandal crosses over into Canada.  Turmoil continues in Greece where we still do not see a leader as well as in Italy, where the resignation of Berlusconi has not been officially given.  All of these points will be presented to you but first let us travel to the comex and see how trading fared yesterday.

The total gold comex OI fell exactly 2000 contracts to 464,683 which is extremely small compared to the raid that was orchestrated by the bankers.  I promised you that minimal gold leaves will fall and that was born out yesterday.  The front options exercised month of November saw its OI fall from 38 to 35 for a loss of 3 contracts.  We had 3 delivery notices on Thursday so we neither gained nor lost any gold standing and we also had no cash settlements. The big December delivery month saw its OI fall marginally by 4561 contracts as many rolled to another future month.  We have a little over 2 weeks before first day notice which will occur on Wednesday, Nov 30.2011.
The estimated volume on Friday was very low at 125,269 as the bankers provided no resistance to gold's advance.

The total silver comex OI fell by 2162 contracts yesterday.  Silver held its own on the raid as again we lost few silver leaves to the raid.  The front options expiry month of November saw its OI  fall from 82 to 83 for a loss of 9 contracts.  We had 9 delivery notices filed yesterday so we neither gained nor lost any silver ounces standing and we also had no cash settlements in silver.

Inventory Movements and Delivery Notices for Gold: Nov 12.2011:

Withdrawals from Dealers Inventory in oz
Withdrawals from Customer Inventory in oz
Deposits to the Dealer Inventory in oz

Deposits to the Customer Inventory, in oz
13,792 (Brinks,Scotia)
No of oz served (contracts) today
nil   (0 oz)
No of oz to be served (notices)
35 (3500)
Total monthly oz gold served (contracts) so far this month
434 (43,400)
Total accumulative withdrawal of gold from the Dealers inventory this month
Total accumulative withdrawal of gold from the Customer inventory this month

again no gold entered as a deposit to the dealer and no gold was withdrawn by the dealer. The only transaction was a deposit of gold to the customer:

Deposit to the customer:

1. Into Brinks, 10,886 oz
2. Into Scotia, 2,906 oz

total deposit:  13,792 oz.  
There was no adjustments .
The total registered or dealer gold is now 2.3 million oz.

The CME announced that we had zero notices filed yesterday so the number of gold notices remain at 434 for 43400 oz of gold.  To obtain what is left to be served, I take the OI standing (35) and subtract out Friday deliveries (0)
which leaves us with 35 notices or 3500 oz left to be served upon.

Thus the total number of gold ounces standing in this non delivery month is as follows:

43400 (oz served)  +  3500 oz to be served =  46,900 oz or 1.458 tonnes of gold.  (same as Thursday's reading)

And now for silver 

First the chart: November 12th

Withdrawals from Dealers Inventorynil
Withdrawals fromCustomer Inventory150,089(Brinks,)
Deposits to theDealer Inventorynil
Deposits to the Customer Inventorynil
No of oz served (contracts)36  (180,000)
No of oz to be served (notices)37  (185,000)
Total monthly oz silver served (contracts)252 (1,260,000)
Total accumulative withdrawal of silver from the Dealersinventory this month308,850
Total accumulative withdrawal of silver from the Customer inventory this month2,176,188

again no silver entered the dealer as a deposit and no silver left.

The customer received no silver as the only transaction was a withdrawal of 150,089 oz from the customer at Brinks.
We also had another adjustment of 187,193 oz as the customer leased silver to the dealer.  The total registered silver rises to 32.086 million oz and the total of all silver in the vaults lowers to 107.852 million oz.

The CME notified us that we had 36 delivery notices on Friday for 180,000 oz of silver.  The total number of silver notices rises to 252.  (I accidently used 252 notices on Thursday night as they already released Friday's notices.  Thursday's total should have been 216 total notices for 1,080,000 oz)
The correct number of notices filed for silver is thus 252 for 1,260,000 oz.
To obtain what is left to be served, I take the OI standing (73) and subtract out Friday delivery notices (36) which leaves us with 37 notices to be served upon or 185,000 oz.

Thus the total number of silver oz served this month is as follows:

1,260,000 (served)  +  185,000 (0z to be served)  =  1,445,000 oz.


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.

Nov 12.2011:

Total Gold in Trust



Value US$:72,286,804,384.93

Nov 10.2011:




Value US$:71,594,183,614.08

we neither gained nor lost any gold at the GLD

And now for the SLV for Nov 12;2011

Ounces of Silver in Trust314,553,561.600
Tonnes of Silver in Trust Tonnes of Silver in Trust9,783.71

Nov 10.2011:

Ounces of Silver in Trust314,553,561.600
Tonnes of Silver in Trust Tonnes of Silver in Trust9,783.71
no additions or subtractions from the SLV.

And now for our premiums to NAV for the funds I follow:

1. Central Fund of Canada: traded to a positive 5.6 percent to NAV in usa funds and a positive  4.8% to NAV for Cdn funds. ( Nov12.2011).
2. Sprott silver fund (PSLV): Premium to NAV rose to a   positive 18.54%to NAV Nov 12/2011
3. Sprott gold fund (PHYS): premium to NAV lowered to a 3.09% positive to NAV Nov 12.2011).

it looks like central fund of Canada is finally seeing positives to their NAV.
The Sprott funds continue to demonstrate strong positives in silver and good NAV's with respect to gold.

Because of the Memorial day holiday, the CME did not release the COT report.  It will be released on Monday.


The big story of the week no doubt is the huge MFGlobal bankruptcy in which customers collateral monies have been re-deposited in some unknown entity.  MFGlobal used customer accounts to collateralize their purchases of PIIGS bonds.  When MFGlobal had a margin call and could not come up with the money, these dollars were seized with the probable counterparty being JPMorgan.  They refuse to give up these dollars as they probably say that they have proper agreements as to the collateral provided for the lending of money of MFGlobal to purchase the sovereign debt.  Nobody wants to give up their positions.  The CME should immediately replace the missing money but so far they refuse to do so.  Here is Ted Butler on this issue:

(courtesy Ted Butler)

An Unmitigated Disaster 

By: Theodore Butler

-- Posted 11 November, 2011 | Share this article | Discuss This Article - Comments: 4 

Oftentimes, the significance of truly historic events is not fully appreciated at the time they occur. I think we are at one of those times with the bankruptcy of MF Global. There’s no question that the news and overall circumstances of the demise of the large commodities brokerage is widely known, but the significance of the event is not yet fully understood. While I would classify the event as an unmitigated disaster on many levels, I have hope that it might result in some long-overdue and necessary changes in the commodities regulatory structure.
The disaster is that for the first time in modern financial history, the main guarantee of the clearinghouse system has completely failed its most important constituent – the customer base. The underlying promise to every participant in the futures market is that your money and open positions are safe from theft and default. This is the very glue that holds the future market together, namely, that all market participants can depend upon strict regulation and oversight to safeguard against fraud and theft. That’s what has made the US organized futures exchange system the envy of the world. Until now.  For more than a week, almost all of the 50,000 commodity customers of MF Global are in limbo as to the access and status of their funds on deposit and open positions. This is unprecedented and beyond bad. For these 50,000 customers, it’s the equivalent of discovering your bank just went out of business and there is no assurance all your funds will be returned. (In the interest of full disclosure, my background is in futures, having started as a commodity broker at Merrill Lynch some 40 years ago. But I have not traded futures for years and am no way personally involved in the MF Global mess; I’m strictly an outside observer and independent analyst).
Let me cut to the chase here and pinpoint the real problem – the CME Group. I know I have continuously criticized the CME, even calling it a criminal enterprise on many occasions, but in truth I may have understated the case. Yes, I would agree that the immediate cause of the MF Global bankruptcy was MF Global itself; but what turned it into a disaster of unprecedented proportions was the CME Group. The CME Group was the front line regulator for MFG, responsible for auditing and insuring the safety of customer funds and for guaranteeing those funds in a worst case scenario. The CME failed at every turn. Not only did its auditing fail miserably, the CME failed to step up to the plate to safeguard customer funds after it was discovered that $600 million was missing. This is like a case of paying premiums for years on an insurance policy only to be denied coverage when presenting a claim for the first time. I know that the federal commodity regulator, the CFTC, has been negligent in the case of MF Global as well, but that does not mitigate the CME’s failures.
Of the twin failures by the CME in the MF Global bankruptcy, clearly of more significance is its failure to stand up and guarantee that all MFG customers would be immediately made whole by the clearinghouse system run by the CME. The clearinghouse system, a consortium of financial firms whose collective finances stand behind every trade, has been the main backstop to all futures trading for many decades. It was widely understood by all market participants that if a clearing member failed, all the other clearing members and the exchange itself would step in to guarantee customer funds and prevent contract default. TheCME boasts on its web site that anywhere from $8 billion to $100 billion in protection is available in the event of a clearing member failure. If it was telling the truth, it would seem $600 million should be no problem.
Instead, we all have a very big problem, thanks to the CME Group. Our financial and credit systems are based upon trust and belief. The word credit itself comes from the Latin word “credere” or to believe. What the CME Group has done by not immediately guaranteeing all MF Global customers and positions is to undermine belief in the futures market clearing system. So important is this issue that I am at a loss to explain how the CFTC hasn’t yet mandated that the CME do the right thing. And I have been somewhat dumbfounded that the analytical community and media haven’t been all over this, but there was an article in today’s NY Times that discusses the CME’s failures for the first time.  In addition, there was a well-written article on the Internet that did describe the problem and the CME’s role.  Please pay particular attention to the comments submitted on both articles.
Worst of all, even MF Global customers who held no open futures positions and only cash and unencumbered assets, like registered warehouse receipts for silver, gold and other commodities, have found those assets under the control of the bankruptcy trustee. If you do own warehouse receipts on silver or other commodities that are tied up in the MF Global bankruptcy, you must run, not walk, to a securities attorney to secure your legal rights to your property. This is not a matter of what is right or wrong, as the unauthorized appropriation of private property is never correct. This is a matter of law, which sometimes is not the same as what seems right or wrong. Please don’t delay. The CME is to blame for all of this, but blame must be saved for later.
If there is any good that might come from this whole sordid affair it is that it may shine the light on what needs to be done. What needs to be done is that the CME Group must be stripped of any regulatory powers it has. As I have long contended, there is a clear conflict of interest in having a for-profit entity set its own rules and regulations, especially an entity that shows nothing but contempt for its own members at large and its customers. The CME Group spends all of its energies encouraging artificial trading schemes, like High Frequency Trading, designed to increase trading fee revenue and not on market integrity and customer protection. The CME Group has just demonstrated to the world its contempt with its failure to stand behind MF Global customers even though it promised to do so beforehand. Next time you watch the CME Group commercial that runs incessantly on financial TV that proclaims how farmers and airlines come to the exchange to hedge their price risks, please keep in mind that the CME just abandoned those farmers and airline customers who were MF Global clients.
One other small bonus that has emerged from this disaster is that the event has revealed as a lie all the nonsense that CME leaders have publicly proclaimed about the integrity of their markets. For the past few years, the smug and arrogant leaders of the CME have testified publicly before congress and the media about how the exchange’s clearinghouse system withstood and avoided the failures of the non-clearinghouse financial system as typified by AIG. CME officials trumpeted the advantages of it being a Self-Regulatory Organization (SRO), quite capable of handling regulatory matters without the need for further government regulation. Unfortunately, even high officials of the CFTC were apparently sucked in by the appearance of financial strength and integrity portrayed by the CME’s clearinghouse system of guarantees and the wisdom of letting it continue to regulate itself. That has now all been shown to be a lie. What good are guarantees if they are not honored when need be? What good is self-regulation if it leads to the wholesale abandonment of the customers’ financial interest?
Fortunately, there is a simple remedy to the calamity of distrust growing in our market system as a result of the CME’s failures. The CFTC must immediately force or persuade the CME Group to do what it has promised and should have done on its own, namely, immediately guarantee that all customers of MF Global are made whole. Let the lawyers battle it out as to who is ultimately liable after all the customers have been made whole. That the CFTC hasn’t done this yet is bizarre. If the Commission delays longer what is now clearly a primary failure at the CME will soon become primarily a CFTC problem. We need adult supervision right now. Clearly the CME Group is not up to the task. If the CFTC doesn’t take over responsibility and force the CME to do the right thing, God help us all.
Another thought in closing. The CFTC’s recent official affirmation that it is continuing its three year old silver investigation shines another spotlight on the CME.  The investigation of silver by the CFTC clearly involves the CME, as the world’s leading marketplace for silver is the COMEX, owned by the CME for the past three years. Yet the CME has never said one word about the ongoing silver investigation as it has been content to hide behind the CFTC and pretend there are no allegations of a silver manipulation. I guess that is to be expected from an entity that regulates itself.
I’m purposely confining my comments to the emergency at hand. There is no change in the silver outlook. It is still a crooked market destined to go much higher in the long run. The sooner the CFTC cracks down on the CME and then addresses the silver manipulation, the sooner those higher prices will come.
Ted Butler
November 10, 2011
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The MFGlobal bankruptcy crossed over into Canada yesterday:

MF Global Canada Declared  Bankrupt

The Canadian Investor Protection Fund, the investment industry’s  customer compensation agency, has obtained a bankruptcy order in the  Ontario Superior Court against MF Global Canada, the Canadian  subsidiary of MF Global Holdings which sought Chapter 11 protection  in New York last week. KPMG Inc. has been appointed as trustee  in bankruptcy for MF Global Canada.

The Investment Industry  Regulatory Organization of Canada, whose dealer members support the  CIPF, had previously obtained an order requiring MF Global Canada to  cease dealings with the public.

The IIROC said: “The  [bankruptcy] order is designed to ensure the fair and orderly  management of customer accounts and the financial affairs of MF  Global Canada Co.”

Mr. Justice Colin Campbell of the Ontario  Superior Court of Justice granted the bankruptcy order on November 4  in the wake of protective action taken by the Securities Investor  Protection Corporation, CIPF’s counterpart in the United States.  Among its other liabilities, MF Global was exposed to about $6  billion worth of sovereign debt and had only about $1 billion in  equity.

In a joint statement, the IIROC and CIPF said they  "are committed to taking available measures to protect the interests  of all MF Global Canada Co. customers and to preserve account value  in an expedited manner.”
KPMG will work in  consultation with CIPF and in collaboration with the IIROC, MF  Global Canada and third-party organizations, such as clearing  organizations and custodians, to verify all customer accounts and to  determine the financial position of the firm.

The trustee’s  task has been complicated, however, by the appearance of recent  articles in the media describing the transfer of some MFGC accounts  to future commission merchants in the US.

KPMG says that it  “understands that all of these transfers were subsequently reversed,  “adding that “these transfers occurred without [its] knowledge or  approval.”

KPMG is in the process of confirming that all of  these client positions are recorded in the records of MFGC and says  the US custodian for these accounts has confirmed that the  collateral supporting these accounts is in its possession for the  account of MFGC.

The outcome of MF Global’s Chapter 11  proceedings in the US is highly uncertain. Normally, the intended  purpose of such proceedings is to provide an opportunity to  reorganize a business, not liquidate its assets.

In an  article published in Corporate Counsel Magazine and posted  on, Cassels Brock partner, Bruce Leonard,  the Chair of  the International Insolvency Institute, said that such a task is  "very difficult, and perhaps verging on impossible" for  multi-country financial entities. "I can't remember the last time a  large financial intermediary with international operations was  successfully reorganized."

Leonard noted that Chapter 11  proceedings allow management to remain in place, rather than  requiring the appointment of a trustee, so they provide "a soft  landing”. In a sense, you're using Chapter 11 to slide into  oblivion."


Then late last night, the CME announced that they were going to help customers with the aid of a flush fund and a partial recovery.
 The interesting development in the MF Global story came after the close on the stock market where the CME made a partial settlement to the trustee.  I believe that Bruce is wrong as the customer collateral account is segregated and does not belong to MFGlobal or can be seized. However, what is true if the customer does not get its 100 cents on the dollar back, nobody will place their money with brokerage accounts and consumer confidence will fade badly:

(courtesy Bruce Krasting/zero hedge)

The $300mm is in the form of a guarantee. The objective is to get the Bankruptcy Trustee to release money owed to former MF customers. From the CME release:
"Though CME Clearing does not guarantee FCM-held assets, CME Group is willing to provide a $250 million financial guarantee to the trustee to give the trustee greater latitude to make an interim distribution of cash to customers now, given themonumental task he faces to sort through considerable data and claims in order to complete the MF Global liquidation and make distributions to creditors.”
Some thoughts:
-The amount of “missing” customer money is $600. So the CME is picking up the tab for half of the nut.
-This is a glass half full for MF customers. Yes, they are getting half their money back. But my read from this is that this other half is very much at risk.
-The CME steps up for $300 large and they don’t have to? Nobody does that. There is more to this offer than meets the eye.
-I can’t see how the CME can be held liable for MF customer losses. Therefore the money is an attempt to preserve the integrity of the exchange and to protect its members.
-It’s possible that the CME action was done with a gun to their head. Absent a fix (partial or otherwise) a systemic risk was (is) a consequence. The only one who could hold a gun in this discussion is Treasury.
-Has anyone noticed that Treasury has been silent on the MF story? I’ve been very surprised at this. It’s long since time that Geithner should have spoken publicly on this important development. The WH wants to steer clear of anything that smells like a bailout. The WH is ignoring its responsibilities.
-It’s (again) clear that there is a ton of cash sitting with the Trustee. The reason this money has not been forwarded to customers is that there is a claim against it. I can’t imagine how that can be.
-The most likely entity that is claiming the money is JPM. It’s possible that JP is acting on behalf of yet another party, but I doubt that.
-That this matter has now gone on for two weekends confirms to me that there are losses outside of MF. What shouldn’t have happened has happened.
-Early next week the Trustee will accept or reject the CME deal (I’m sure there are strings). If the Trustee does reject this (its very unusual) then there will be some fallout. If this happens, all of the customer money is at risk.
-I’ve thought from the beginning that this had the makings of a Black Swan. I’m not sure that the actions by the CME defuse the risk.
-If there is going to be a reaction (capital withdrawals from other brokers, liquidity issues in futures markets), it will be evident on Monday.
-If I had an account with a second tier broker I would take the money out. It’s easy to put it back in. It’s a disaster if you can’t take it out.

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