Is the Unrigged Silver Market Set To Explode?

At long last, a light of truth is shining into the dark corners of the silver market. The results could be explosive.

"The silver market is an inside job."

I'd been hearing that accusation for over ten years -- since my days as a commodity broker in the late 1990s. It was widely believed that the silver market (trading for less than $5 per ounce at the time) was rigged.

It's been a long time coming. But last week, the accusers finally got some satisfaction. As the WSJ reports,

A Commodity Futures Trading Commission regulator is putting pressure on the agency to take action in a high-profile, two-year-old investigation of the silver market.

At a CFTC hearing Tuesday to consider new rules to strengthen its commodity-enforcement powers, commissioner Bart Chilton said market players have made "repeated" and "fraudulent efforts to persuade and deviously control" silver prices.

Mr. Chilton said he believed there have been violations of CFTC rules that should be prosecuted, though he couldn't publicly disclose trader names...

And then came the lawsuits. Quick on the heels of the CFTC news, J.P. Morgan and HSBC were sued for silver manipulation in a New York court of law. (J.P. Morgan is the megabank that swallowed Bear Stearns. HSBC is a behemoth with British Empire roots dating back to 1865.)

The Morgan / HSBC suit alleges that:

...between in or about March 2008 and continuing through the present, Defendants have combined, conspired and agreed to restrain trade in, fix, and manipulate prices of silver futures and options contracts... Also during the Class Period, individual Defendants have intentionally acted to manipulate prices of COMEX silver futures and options contracts...

The two banks are accused of reaping hundreds of millions to billions in illegal profits, by way of bearish collusion that represented as much as 85% of all net short positions in the silver market.

Because the suit seeks class action status -- and because the CFTC commissioner has openly acknowledged shady dealings -- it is unknown how much legal risk this poses to Morgan and HSBC.

But putting that aside, the truly interesting question is this. If the manipulators have been holding silver down all this time, what happens next?

The silver to gold price ratio is a simple way to measure which metal is outperforming.

For much of 2010, silver had been either treading water (relative to gold) or lagging behind a bit. But then suddenly, as you can see from the chart above, the silver market just got up and went...

As the plaintiffs in the Morgan / HSBC lawsuit wryly suggest, this shift in tone might -- just might! -- have something to do with the silver manipulators deciding to lay low, thanks to an uncomfortable spotlight being shone upon them.

(If you would like to read more of my investment commentary on other topics, sign up for Taipan Daily.)

If the crimes of the manipulators are anywhere near what they are made out to be -- if only a fraction of the accusations are true -- then the silver market could arguably be considered one of the greatest "short squeeze" candidates in the history of markets.

As Daniel Drew liked to say (before Commodore Vanderbilt made him eat his own words): "He who sells what isn't his'n / Must buy it back or go to pris'n." If things get truly nutty as the flushed-out banks are forced to cover, there is no telling how high silver could go.

And in addition to the manipulator exposure angle, there is the little manner of China -- the third largest silver producer in the world after Peru and Mexico. As Bloomberg reports,

Silver exports from China, the world's largest, may drop about 40 percent this year as domestic demand from industry and investors climbs, according to Beijing Antaike Information Development Co.

"There is huge demand in China this year and that has affected exports, which were already hurt after the tax rebate was abolished," said Ng Cheng Thye, head of bullion at Standard Bank Asia. "The demand is coming from all areas, including jewelry, investment and fabrication and this has resulted in a physical market shortage in the Far East."

And then, of course, there are the dollar-destroying actions of the "bearded clam," aka Ben S. Bernanke, Chairman of the Federal Reserve.

If the Fed's first "QE" installment (surely you know those initials by now) is deemed a disappointment this week, precious metals could take a hit. But if Ben delivers, or if conviction rises of a likelihood for QE episodes 3 and 4 and 5, the n watch out.

Justice Litle

Taipan Publishing Group

Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader, and Managing Editor to the free investing and trading e-letter Taipan Daily. His articles have been featured in Futures magazine, he has been quoted in The Wall Street Journal and has even contributed regular market commentary to Reuters and Dow Jones.

Article brought to you by Taipan Publishing Group. Additional valuable content can be syndicated via their News RSS feed.  www.taipanpublishinggroup.com.

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Gold and 11 Zeroes, Part II

How the one-trick "inflation hedge" more than trebled amid the modern world's template deflation...

LET'S IMAGINE the central bankers are right.

Let's say that – rather than actually ending a two-decade deflation – the price of clothing to Western consumers is only now set to turn lower.

Let's agree that the doubling of central-bank foreign reserves since 2005...plus the worst sub-zero real rates of interest since the mid-70s...will count for nothing in global energy or food prices.

Let's also say, despite all experience since the credit crunch bit in 2007, that the "output gap" theory – those "low rates of resource utilization" as the Fed put it on Wednesday – finally comes good, and so excess capacity conspires with slack demand to pull costs lower.

Let's imagine, in short, that money actually starts to gain value. What then?

Back in 2002, three years after Japanese consumer prices began falling and one year after the Bank of Japan first embarked on quantitative easing to try and reverse that trend, Tokyo's Economic & Industrial Policy Bureau organized a survey of consumer experiences. (A big thank-you to Atsuko Whitehouse of BullionVault Japan for this research, by the way...)

All told, 80% of respondents in 2002 said they felt some level of deflation in prices. A little over 25% felt deflation "very strongly", in fact. And only 1% said there had there been no deflation in their experience.

Yet gold prices in both the Tocom futures market and in Tokyo's Ginza shopping district had risen 37% regardless. That gave early buyers of the ultimate (and apparently one-trick) "inflation hedge" a better than 40% gain in real terms.

Sure, the price of gold globally had also been rising. And Japan's gold-friendly deflation came as the Yen fell on the forex market, extending the Dollar-price rise by 16% for Japanese buyers. But throughout its long, soft depression – and until 2009 – Japan was the world's second-largest economy, with the world's second-largest stock market. Thanks to Tokyo's swollen government spending since consumer prices peaked in 1998, it's since gone from the second-largest to No.1 bond market, too.

So we shouldn't dismiss Japan's experience as a mere footnote or outlier. It certainly suffered deflation in domestic risk-asset prices and credit supplies too, if not in the actual volume of money supplied to the economy. (As in the US and UK, base money grew fat and squatted on bank balance-sheets thanks to quantitative easing; it failed to pile new debt on top of the then-record total.) While government bonds rose in price, yielding just-about real returns thanks to those gently slipping consumer prices, the Nikkei index of stocks fell by more than a quarter. Real estate, having already lost one fifth over the previous decade nationally – and after more than halving in the 6 biggest cities – lost another fifth again.

The only major economy to hit deflation since before the Second World War, Japan thus offers our only template for what a modern deflation might look and smell like. Hence its obsessive hold on central-bank chiefs and would-be policy-makers (Ben Bernanke at the Fed, Adam Posen at the Bank of England, Paul Krugman everywhere). Hence BullionVault's quick survey of Japan's investment landscape since 1998. Because it looks remarkably like the ground opening up before US and UK investors tonight.

* Cash pays zip – ZIRP, in fact, thanks to the zero interest-rate policy pioneered (to no effect) by the Bank of Japan a decade ago;

* No bargain in stocks – the S&P might be very much cheaper from its price/earnings peak of 45 back in 2000, but it's still above 20, while Japan's stock market only now trades at 15 times earnings – an historical discount to be sure, but hardly a single-digit bargain;

* Flight into bonds – where Tokyo led, Washington and even Westminster now follow, issuing record volumes of debt at record-low yields to pension and insurance funds hungry for a "risk-free" zero return;

* Caution thwarted – forced to seek risk by miserable dividends and interest rates, otherwise cautious savers turned to high-yield bonds, emerging markets, currency trading, and precious metals investment.

"Domestic uncertainties spur Japanese investment," the World Gold Council's quarterly Gold Demand Trends reported at the close of 2001. Physical gold demand from private Japanese citizens then rose another 24% in 2002, swelling again in 2003 only to rise by 26% by physical volume in 2004.

That year, and for the second time since 2002, the Bank of Japan announced a cut in its ceiling for bank-deposit cover (equivalent to the FDIC), capping insurance at ¥10 million ($90,000). That really meant something, as the WGC noted, in a nation of "occasional bank failures" where "56% of household investments are held in bank accounts." Spooked by the fear of a truly deflationary uninsured bank failure, retail gold investment demand surged by 42% in tonnage terms in 2004, rising by nearly 50% by Yen value from 2003 to ¥103 billion ($1bn at the time). And right alongside, four years of ZIRP had forced a far greater quantity of Japan's famous cash-savings to seek better-than-zip elsewhere as well.

The initial period of Japanese deflation – marked by sinking interest rates and gently falling consumer prices – brought a series of mis-selling scandals in high-yield foreign bonds. Well, they were only scandals after Russia and then Argentina defaulted, of course. No-one much minded when they were paying (and the lesson went unlearned too, of course). Average daily volumes in the Tokyo foreign exchange market meantime rose 18% between 2003 and 2006 according to Bank of Japan data, but the Watanabes didn't really get hooked until the finance industry spotted the trend, and created retail-friendly products for leveraged currency speculation.

The Tokyo Financial Exchange, for instance, launched its Click365 forex platform in 2005...

Sound at all familiar? It isn't just gold bullion that catches a bid when the returns paid to cash fall to zero. And absent a sharp decline in consumer prices – rather than the low single-digit declines seen year-on-year in Japan over the last decade – it isn't just US consumers who might doubt the official cost-of-living data either.

A consumer survey run by the Bank of Japan found people felt inflation was running above 3.0% per year in Sept. 2009. After reporting a slight dip this spring, the 4,000 adults responding to Oct. 2010's survey pegged the true rate of consumer-price inflation at 1.3% per year...eating almost all of the 15-year Japanese government bond's current yield (5-year debt yields 0.3%) and delivering negative real-returns-to-cash almost as bad as those now suffered by US and UK savers.

To repeat – two things happen to gold investment when the returns paid to cash fall to zero:

* First, the missed interest that you'd otherwise earn holding cash-on-deposit vanishes. Gold still pays you nothing, of course, but neither does cash. So the opportunity cost of owning gold is removed;

* Second, and only slowly...over time...more and more people come to feel (if not realize) that putting cash in the bank guarantees a loss of real value. Because if inflation is 8.3% but interest rates are only 6.7% (United States, official CPI, winter 1973) – or if inflation is 1.5% but interest rates are zero (official US inflation, summer 2010; Bank of Japan consumer survey, last twelve months' average) – you can be sure your money will buy you less stuff one year from now. So you start seeking an alternative store. And gold's rarity, indestructibility and deep, liquid market make it the obvious choice, even though it still pays you nothing. Because at least it's not cash, which in a world of zero or sub-zero real rates must also be multiplying faster than gold miners can dig new ore out of the ground.

Anyway, thought experiment over. Because that brings us full circle...back to positive inflation and negative real rates...but with 600 billion extra dollars about to pumped into global asset and commodity prices by today's deflation-fearing Federal Reserve.

Adrian Ash

Head of Research

Bullionvault.com

You can also Receive your first gram of Gold free by opening an account with Bullion Vault : Click here.

City correspondent for The Daily Reckoning in London, Adrian Ash is head of research at BullionVault.com – giving you direct access to investment gold, vaulted in Zurich, on $3 spreads and 0.8% dealing fees.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

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World Markets Tumble as G20 Fails to Resolve Tensions. OPEC, IEA Raise Oil Demand Forecasts

ONG Focus | Insights | Written by Oil N' Gold | Fri Nov 12 10 06:49 ET

G20 leaders released a communiqué after the summit in South Korea, pledging to achieve 'strong, sustainable and balanced growth in a collaborative and coordinated way'. However, financial ministers' refusal to join the US in pressuring China to appreciate RMB signals currency and trade disputes will persist for some time. More importantly, G-20 leaders spent a considerable time discussing Europe's debt problems, intensifying worries that the EU may need to bail out some of the peripheral countries.

Financial markets tumbled as Europe's debt crisis worsened and the prospect for Chinese rate hike has increased. The dollar rebounded against major currencies. In the commodity sector, the benchmark contract for WTI crude oil dived to as low as 85.48 in European session. Gold slumped amid broad-based selloffs in commodities with the benchmark contract plunged to a 1-week low of 1377.3.

Despite short-term volatility, oil agencies remained confident in the oil market. OPEC raised its global oil demand forecasts for 2010 and 2011 as consumptions in advanced countries should improve amid economic recovery. According to the cartel holding 40% to the world's total oil output, World oil demand will reach 85.8M bpd in 2010, up +1.3M bpd from 2009 and +0.2M bpd from October's forecast. Consumption in the OECD has outpaced expectations as various stimulus plans have driven up economic activities. The forecast for world oil demand in 2011 has been revised up to 86.9M bpd, up +1.1M bpd from 2010 and +0.3M bpd from previous projection. The improved outlook for OECD demand is a key factor behind this adjustment.

While demand outlooks were higher, productions from non-OPEC countries, and OPEC NGL and non-conventional remained largely unchanged from October's forecasts. Therefore, demands for OPEC's supply were revised up to 28.8M bpd and 29.2M bpd for 2010 and 2011 respectively.

In its latest report, the International Energy Agency also upgraded the global oil demand forecasts to 87.3M bpd in 2010, up +2.6M bpd from 2009 and +0.4M bpd from October's projection, as both OECD and non-OECD posted stronger-than expected demand readings in 2010. Outlook for 2011 was revised higher to 88.5M bpd, up +1.2M bpd from 2009 and +0.3M bpd from previous projections. Supplies will continue to come mainly from non-OPEC countries but calls for OPEC increased in both this and next years as growths in non-OPEC supplies do not match with demand growths.

Although monetary tightening may curb commodity consumptions, other measures from China may help boost oil prices. The Chinese government's control on power supply has led factories to using their own power generations. According to the National Bureau of Statistics, China's oil processing in October rose +12% y/y 8.8 M bpd. Meanwhile, there are increasing expectations that China may return to a net importer of diesel after being a net exporter since October 2008. Indeed, China's net exports of diesel fell for a second consecutive month to 55K bpd in September.

 

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Crude Modestly Higher ahead of FOMC Meeting

ONG Focus | Insights | Written by Oil N' Gold | Sun Oct 31 10 23:05 ET

Crude oil price climbed higher in Asian session on Monday as USD's decline ahead of the FOMC meeting raised appeal for commodities. Data showing strong manufacturing activities in China also boosted oil prices. Gold kept hovering around 1360. We believe either upside or downside surprise from Fed's QE should benefit positive for gold in the long-term. However, a milder than expected dose of QE may trigger selloff in the metal in the near-term.

Economic data released last Friday were mixed. US GPD grew by an annualized pace of +2% (consensus: +2.2%) in 3Q10, from +1.7% a quarter ago. University of Michigan consumer confidence was revised down -0.2 points to 67.7 in October. While the ‘economic conditions' index rose +3.6 points to 76.6, the ‘expectations index' fell -2.7 points to 61.9.Chicago PMI, however, beat market expectations and improved to 60.6 in October. We believe the set of data should not alter the Fed's decision to announce new QE measure at the meeting this week.

The dollar fell against major currencies with the exception of Japanese yen. The market forecast the size of Fed's new bond-buying program would be $1-2 trillion but it may begin by announcing $500B over several months or $100B per month. Apart from purchasing Treasury securities, the Fed may modify its language used in the accompanying statement. At the Boston Fed conference, Chairman Ben Bernanke said that 'clear communication about the longer-run objectives of monetary policy is beneficial at all times but is particularly important in a time of low inflation and uncertain economic prospects such as the present' and the FOMC will continue to 'actively review its communications strategy with the goal of providing as much clarity as possible about its outlook, policy objectives, and policy strategies'.

China's PMI expanded to 54.7 in October from 53.8 a month ago. This is the fastest growth pace in 6 months and signaled the country's economy can sustain through the government's tightening measures. This is also positive news for the oil market as, according to IEA, China has overtaken the US as the world's largest oil user.

With the exception of gasoline, speculators were bullish on oil sector in the week ended October 26. Net length for crude oil surged +24 441 to 125 271 contracts, the highest level since January 2010. QE anticipations and rise in European oil demand due to strikes in France have helped attracting capitals. Net length for heating oil added +963 to 29 605 contracts but that for gasoline fell -4 404 to 57 683 contracts. Net shorts for natural gas dropped for a second consecutive week, by -8 130, to 165 744 contracts, the lowest level in 8 weeks.

Speculators trimmed long positions in gold and silver but staying positive for PGMs. Net long for gold fell -10 666 to 239 086 contracts while that for silver slipped -2 788 to 26 743 contracts. Prices, however, were a tad higher. Net length for platinum climbed +1 181 to a record of 26 743 contracts while that for palladium gained +851 to 16 134 contracts, only slightly below a record high of 16 185 contracts made in May 2010. Recovery in the auto sector and new emission standard in the US have been buoyant for PGMs as they are mainly used as autocatalytic converters.

 

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The outlook for Silver remains very Bullish

Silver’s short-term uptrend remains intact, notwithstanding silver’s big price drop on Friday.  The fundamental factors driving silver higher have not changed.  The outlook for silver remains very bullish.

There has been no damage to silver’s technical condition.  For example, silver is above its 21-day moving average.  Also, silver remains well above $25, its last major resistance level.  More importantly, the price drop at the end of the week occurred with bullish sentiment taking a nosedive.  These conditions bode well for silver’s short-term outlook, as does the following chart.

The above chart will be familiar because it is the one I used on King World News on October 28 to forecast a $30 silver price in less than 18 trading days.  Silver closed that day at $23.871.  On November 9, only 8 trading days later, it reached $29.342 – nearly hitting my target.  The good news is that my reading of the above chart indicates that silver might yet reach $30 within my 18-day target, i.e, November 23.

Note the new pattern silver has formed.  It is a pennant, and these have the same features as the flag pattern upon which I based my $30 forecast.  Both are continuation patterns within uptrends.  They allow for a short-term consolidation, mainly to work-off some bullish sentiment, which accurately describes what happened in silver as this pennant formed over the past few days.  A pennant pattern typically ends with an upside breakout.

My expectation therefore, is that silver will break out of this pennant to the upside, and probably early this week.  The demand for physical silver remains very strong, and it is the demand for physical silver, and not paper-silver, that ultimately determines the silver price. 

Most trading in physical silver takes place in London and Zurich.  The weakness on Friday occurred after both of these centers had closed.  That means that prices were driven down in the paper market.  We have seen these late Friday raids to ‘paint the tape’ many times over the past decade, so this latest one should not be a surprise.  But what is indeed a surprise to me is that the silver shorts would try this gambit now when the physical market is so tight.  Lower prices will only heighten the demand for physical metal.  Thus, I expect the silver price to rebound sharply this week.

James Turk

Free Gold Money Report

Article originally published by the Free Gold Money Report.

James Turk is the founder of the Free Gold Money Report and of GoldMoney.com. He is also the co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).. Copyright ©  by James Turk.  All rights reserved.

Copyright © 2008. All rights reserved.
Edited by James Turk

This material is prepared for general circulation and may not have regard to the particular circumstances or needs of any specific person who reads it. The information contained in this report has been compiled from sources believed to be reliable, but no representations or warranty, express or implied, is made as to its accuracy, completeness or correctness. All opinions and estimates contained in this report reflect the writer's judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility.

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Gold Daily Technical Outlook

ONG Focus | Technical | Written by Oil N' Gold | Fri Nov 26 10 07:42 ET

With 4 hours MACD crossed below signal line, Gold's recovery from 1329 should have completed at 1382.9 already. Intraday bias is now cautiously on the downside for 1315.8/1329 support zone. Decisive break there will complete a head and shoulder top reversal pattern and should turn outlook bearish for deeper fall. On the other hand, strong rebound from 1315.8/1329 will indicate that gold is merely in sideway consolidation and another would still be seen before topping.

In the bigger picture, rise from 1155.6 is treated as the fifth wave of the five wave sequence from 1044.5, which should also be fifth wave of the rally from 681 (2008 low). Such rally might still continue towards 161.8% projection of 931.3 to 1227.5 from 1044.5 at 1449.6 before completion. Though, we're aware of long term projection target of 100% projection of 253 to 1033.9 from 681 at 1462 and we'd anticipate strong resistance from there to bring medium term correction finally. On the downside, however, break of 1315.8 support will be an early alert of medium term reversal and will turn focus back to 1155.6 support for confirmation.

Comex Gold Continuous Contract 4 Hours Chart

Comex Gold Continuous Contract Daily Chart

 

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