Gold may outperform silver, lifting the ratio between the two metals by as much as 20 percent, according to technical analysis by Societe Generale SA.
The attached chart shows the ratio of gold to silver steadied after dropping as low as 46.6 last week, near a two- year channel support line and the lows of 2008 and 1999. The second chart shows the ratio may climb to between about 56 and 58, which are retracement levels of the decline from June that are singled out in so-called Fibonacci analysis.
“The gold-silver ratio reached an important support at 47.5/46,” said Stephanie Aymes, a cross-commodity technical analyst with Societe Generale in London. “Gold will outperform silver to 56/58.”
An ounce of gold bought as little as 46.6 ounces of silver in London on Dec. 7, the least in almost four years. Precious metals gained this year on demand for a protection of wealth and an alternative to currencies. Some investors betting that silver may benefit from an economic recovery pushed the metal’s 2010 advance to 70 percent, outperforming gold’s 26 percent gain. Silver is used more in industry than gold.
Read Full Article
Wednesday, December 15, 2010
Failing to Prosecute Wall Street Fraud Is Extending Our Economic Problems
Bill Gross, Nouriel Roubini, Laurence Kotlikoff, Steve Keen, Michel Chossudovsky and the Wall Street Journal all say that the U.S. economy is a giant Ponzi scheme.
Virtually all independent economists and financial experts say that rampant fraud was largely responsible for the financial crisis. See this and this.
But many on Wall Street and in D.C. - and many investors - believe that we should just "go with the flow". They hope that we can restart our economy and make some more money if we just let things continue the way they are.
But the assumption that a system built on fraud can continue without crashing is false.
In fact, top economists and financial experts agree that - unless fraud is prosecuted - the economy cannot recover.
Fraud Leads to a Break Down in Trust and Instability in the Markets
As Alan Greenspan said recently:
Fraud creates very considerable instability in competitive markets. If you cannot trust your counterparties, it would not work
Similarly, leading economist Anna Schwartz - co-author of the leading book on the Great Depression with Milton Friedman - told the Wall Street journal in 2008:
"The Fed ... has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible."
So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is "the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue."
***
Today, the banks have a problem on the asset side of their ledgers -- "all these exotic securities that the market does not know how to value."
"Why are they 'toxic'?" Ms. Schwartz asks. "They're toxic because you cannot sell them, you don't know what they're worth, your balance sheet is not credible and the whole market freezes up. We don't know whom to lend to because we don't know who is sound. So if you could get rid of them, that would be an improvement."
And economics professor and former Secretary of Labor Robert Reich wrote in 2008:
The underlying problem isn't a liquidity problem. As I've noted elsewhere, the problem is that lenders and investors don't trust they'll get their money back because no one trusts that the numbers that purport to value securities are anything but wishful thinking. The trouble, in a nutshell, is that the financial entrepreneurship of recent years -- the derivatives, credit default swaps, collateralized debt instruments, and so on -- has undermined all notion of true value.
Robert Shiller - one of the top housing experts in the United States - said recently that failing to address the legal issues will cause Americans to lose faith in business and the government:
Shiller said the danger of foreclosuregate -- the scandal in which it has come to light that the biggest banks have routinely mishandled homeownership documents, putting the legality of foreclosures and related sales in doubt -- is a replay of the 1930s, when Americans lost faith that institutions such as business and government were dealing fairly.
Nobel prize-winning economist Joseph Stiglitz says about the failure to prosecute Wall Street fraud:
The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work. If the legal system is seen as exploitative, then confidence in our whole system starts eroding. And that's really the problem that's going on.
***
I think we ought to go do what we did in the S&L [crisis] and actually put many of these guys in prison. Absolutely. These are not just white-collar crimes or little accidents. There were victims. That's the point. There were victims all over the world.
***
Economists focus on the whole notion of incentives. People have an incentive sometimes to behave badly, because they can make more money if they can cheat. If our economic system is going to work then we have to make sure that what they gain when they cheat is offset by a system of penalties.
Wall Street insider and New York Times columnist Andrew Ross Sorkin writes:
“They will pick on minor misdemeanors by individual market participants,” said David Einhorn, the hedge fund manager who was among the Cassandras before the financial crisis. To Mr. Einhorn, the government is “not willing to take on significant misbehavior by sizable” firms. “But since there have been almost no big prosecutions, there’s very little evidence that it has stopped bad actors from behaving badly.”Economics professor James Galbraith says:***
Fraud at big corporations surely dwarfs by orders of magnitude the shareholders’ losses of $8 billion that Mr. Holder highlighted. If the government spent half the time trying to ferret out fraud at major companies that it does tracking pump-and-dump schemes, we might have been able to stop the financial crisis, or at least we’d have a fighting chance at stopping the next one.
There will have to be full-scale investigation and cleaning up of the residue of that, before you can have, I think, a return of confidence in the financial sector. And that's a process which needs to get underway.
No wonder Galbraith says that economists should move into the background, and "criminologists to the forefront".
Failure to Stop Fraud and Prosecute Criminals Causes a Loss of Trust in Government, Which Makes Government Less Effective
As Shiller stated in the quote above, the failure of government officials to stop fraud and prosecute the financial fraudsters has caused a lack of trust in government itself.
A psychologist wrote an essay published by the Wharton School of Business arguing that restoring trust is the key to recovery, and that trust cannot be restored until wrongdoers are held accountable:
According to David M. Sachs, a training and supervision analyst at the Psychoanalytic Center of Philadelphia, the crisis today is not one of confidence, but one of trust. "Abusive financial practices were unchecked by personal moral controls that prohibit individual criminal behavior, as in the case of [Bernard] Madoff, and by complex financial manipulations, as in the case of AIG." The public, expecting to be protected from such abuse, has suffered a trauma of loss similar to that after 9/11. "Normal expectations of what is safe and dependable were abruptly shattered," Sachs noted. "As is typical of post-traumatic states, planning for the future could not be based on old assumptions about what is safe and what is dangerous. A radical reversal of how to be gratified occurred."
People now feel more gratified saving money than spending it, Sachs suggested. They have trouble trusting promises from the government because they feel the government has let them down.
He framed his argument with a fictional patient named Betty Q. Public, a librarian with two teenage children and a husband, John, who had recently lost his job. "She felt betrayed because she and her husband had invested conservatively and were double-crossed by dishonest, greedy businessmen, and now she distrusted the government that had failed to protect them from corporate dishonesty. Not only that, but she had little trust in things turning around soon enough to enable her and her husband to accomplish their previous goals.
"By no means a sophisticated economist, she knew ... that some people had become fantastically wealthy by misusing other people's money -- hers included," Sachs said. "In short, John and Betty had done everything right and were being punished, while the dishonest people were going unpunished."
Helping an individual recover from a traumatic experience provides a useful analogy for understanding how to help the economy recover from its own traumatic experience, Sachs pointed out. The public will need to "hold the perpetrators of the economic disaster responsible and take what actions they can to prevent them from harming the economy again." In addition, the public will have to see proof that government and business leaders can behave responsibly before they will trust them again, he argued.
Government regulators know this - or at least pay lip service to it - as well. For example, as the Director of the Securities and Exchange Commission's enforcement division told Congress:
Recovery from the fallout of the financial crisis requires important efforts on various fronts, and vigorous enforcement is an essential component, as aggressive and even-handed enforcement will meet the public's fair expectation that those whose violations of the law caused severe loss and hardship will be held accountable. And vigorous law enforcement efforts will help vindicate the principles that are fundamental to the fair and proper functioning of our markets: that no one should have an unjust advantage in our markets; that investors have a right to disclosure that complies with the federal securities laws; and that there is a level playing field for all investors.
If people don't trust their government to enforce the law, government will become more and more impotent in addressing our economic problems. If government leaders take action, the market will not necessarily respond as expected. When government leaders make optimistic statements about the economy, people will no longer believe them.
Trying to Cover Up the Truth Extends Financial Crises
Elizabeth Warren, William Black and others say that attempting to cover up the truth extended Japan's financial problems into an entire "Lost Decade".
As Joseph Stiglitz said about Wall Street fraud:
So the whole strategy of the banks has been to hide the losses, muddle through and get the government to keep interest rates really low.
***
As long as we keep up this strategy, it's going to be a long time before the economy recovers ....
Pam Martens - who worked on Wall Street for 21 years - writes:The massive losses by big Wall Street firms, now topping those of the Great Depression in relative terms, have yet to be adequately explained. Wall Street power players are obfuscating and Congress is too embarrassed or frightened to ask, preferring to just throw money at the problem and hope it goes away. But as job losses and foreclosures mount and pensions and 401(k)s shrink, public policy measures to address the economic stresses require a full set of unembellished facts...
To the extent that the government tries to cover up - instead of openly discuss - financial fraud, it will only extend America's economic malaise.
It was four years after the crash of 1929 before the major titans of Wall Street were forced to give testimony under oath to Congress and the full magnitude of the fraud emerged. That delay may well have contributed to the depth and duration of the Great Depression. The modern-day Wall Street corruption hearings in Congress ... must now resume in earnest and with sworn testimony if we are to escape a similar fate.
Failing to Prosecute Fraud Encourages Financial Players to Take Bigger and More Blatantly Illegal Actions
Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals - and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. Joseph Stiglitz, Professor Black, and many others agree. See this, this and this.
It was largely fraud which brought down the financial system in 2008. Unless we prosecute the fraudsters, they will do even bigger, stupider and more blatantly illegal things in the future which will lead to even bigger crises.
Failure to Prosecute Fraud Exacerbates the Sovereign Debt Crisis
The governments of the world have spent trillions trying to paper over the fraud and prop up the big, insolvent banks, instead of forcing them to restructure and forcing bondholders and shareholders to take a haircut.
A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent drives up the costs to the country:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.
***
All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
The American banks and government have certainly pretended that all of the big banks are solvent. As ABC wrote in October 2009:
The Treasury Department and the Federal Reserve lied to the American public last fall when they said that the first nine banks to receive government bailout funds were healthy, [the special inspector general for the Troubled Asset Relief Program] states in a new report released today.Similarly, the stress tests were a complete and utter sham.
The government has given the giant banks huge amounts in loans and guarantees based upon their false representations about their financial health. The Fed has larded up its balance sheet with toxic assets from the banks.
Debt levels are also getting dangerously close to the level that they become a drag on the economy. See this and this. When Keynesian economists argue that debt does not harm the economy, they are talking about debt incurred to pay for stimulus and productive things for the economy. But throwing trillions at the giant banks - who are mainly using the money to gamble - is not stimulus. It helps the executives of the big banks and their shareholders and bondholders, but not the broader economy.
Indeed, attempting to prop up big, insolvent banks is preventing stimulus from getting out into the economy.
Fraud Causes Growing Inequality, Which Undermines the Economy
Growing inequality is very harmful to our economy. Indeed, if wealth is concentrated in too few hands, the "poker game" ends, as one or two fat cats are left with all of the chips. See this, this, this and this.
Fraud benefits the wealthy more than the poor, because the big banks and big companies have the inside knowledge and the resources to leverage fraud into profits. Joseph Stiglitz noted in September that giants like Goldman are using their size to manipulate the market. The giants (especially Goldman Sachs) have also used high-frequency program trading (representing up to 70% of all stock trades) and high proportions of other trades as well). This not only distorts the markets, but which also lets the program trading giants take a sneak peak at what the real traders are buying and selling, and then trade on the insider information. See this, this, this, this and this.
Similarly, JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley together hold 80% of the country's derivatives risk, and 96% of the exposure to credit derivatives. They use their dominance to manipulate the market.
Fraud Increases the Severity of Boom-Bust Cycles
More and more people - such as the Bank of International Settlements and Barons - are saying that bubbles inevitably lead to busts, thus destabilizing the economy.
Professor Black says that fraud is a large part of the mechanism through which bubbles are blown.
Without strong laws against fraud, bubble after bubble will be blown, guaranteeing that the financial system cannot be stabilized in any fundamental sense.
Failure to Prosecute Fraud Is Worsening the Housing Crisis
Finally, failure to prosecute mortgage fraud is arguably worsening the housing crisis. See this and this.
So trying to ignore the fraud will not work.
The New American Dream: Sprawling Tent Cities Filled With Tents Made In China
What would you do if you had your job suddenly ripped away from you and you ended up losing your home? Well, that is exactly what hundreds of thousands of families across America have found themselves facing during this economic downturn. So what would you do? Would you move in with relatives? Would you join the ranks of those living in the tent cities that are popping up all over the nation? Would you live in a van down by the river? The truth is that with each passing month even more Americans find themselves pushed to the brink of absolute desperation. For many of our fellow citizens, the American Dream has been reduced to finding some way to keep the rain off of them each night and finding someone who will be kind enough to give them some food during the day.
So why are so many Americans hurting? Where did all the good jobs go? Well, over the past couple of decades our new "global economy" has encouraged big corporations to move thousands of factories and millions of jobs out of the United States. Many of the good jobs that these homeless and unemployed Americans used to do are now done on the other side of the world. The ironic thing is that many of the tent cities that have bloomed in communities across the United States are filled with tents that were made in China.
Unfortunately, the tent cities that have grown up all over the nation are just a foretaste of what is coming in the future. When the economy really collapses, millions more Americans are going to be living in conditions just like this....
One of the saddest things about all of this is what is happening to older Americans. There are large numbers of older Americans that have worked hard all of their lives but that now find everything just slipping away.
A reader of this column named William recently left the following comment....
I thought I would try to start things rolling here. I am a 46 year old 99er, who just found out last week that unemployment is done. I was making $283/week which I am very thankful for, but was not enough to pay the mortgage on our small 2 bedroom, 1941 cape, ( mostly because of increasing taxes). I have been doing misc. barter jobs in trade for others services or food, etc. I have been sending resumes all around, but no bites. I am a 25 year veteran, high end woodworker. I even have some AutoCad and CNC experience, but evidently not enough experience in this economy to land me a job.
We are on the edge of not being able to pay mortgage, even though our cars are paid off, we have no phone, no cable, and the wife cooks all the meals, and I did not mention, we don’t have kids either. Just two people trying to make ends meet.
At least William and his wife still have a home (for now) and are hanging in there. There are countless others that have not been so fortunate. In fact, in the three counties surrounding Disney World, it is estimated that there are approximately 8000 people living in the woods. What some of those people have to face on a daily basis is absolutely horrifying....
Can you imagine living that way?
Sadly, many local communities across the United States are cracking down on homeless people because they simply do not want to deal with them.
In Venice, California the police are actually arresting people that are living in RVs and are towing away their vehicles. The following is an excerpt from an article that recently appeared on the Daily Kos website....
They took Eric while he was changing his battery in his car. Claimed he lived in his car. A few days later they went to 3th Street and took his RV because he was in jail and no one moved it for 72 hours. Saturday they did a sweep of 7th and took Bear and his RV. They also took Elizabeth's RV but do not know if they took Elizabeth but can not find her. The police went to 6th and took the white RV that always parks by Broadway on 6th. Everyday they take 1 to 4 RVs. Very soon there will be no one left.
If you lost your home would you try to live in your vehicle?
Well, the truth is that it is not so easy. In fact, just on Friday a 56-year-old homeless man in northwestern Montana that was living in his car froze to death after his car battery died.
Once you have been kicked out of your home it is not easy to survive.
That is why so many Americans are so desperate to hang on to their homes.
But what do you do when you can't find a job and your money has dwindled away to almost nothing? What do you tell your children when there is not enough money for food?
The following quote from a Huffington Post article comes from a 99er named Toni. It kind of sums up the frustration and anger that so many unemployed Americans are feeling right now....
"How does someone explain to their child that they can have a place to live and maybe stay warm in the winter, but in order to do that they won't have any food to eat? Or they can eat, but may not have a secure place to live? Just try to explain those adult decisions to a child and see how much they understand!"
Unfortunately, many Americans respond to such suffering by saying that people like this "should just get a job". But as I wrote about recently, the truth is that there are not nearly enough jobs for everyone who wants one anymore.
In fact, in the United States today there are over 6 million Americans that have been out of work for 6 months or longer. In such an environment, "black market industries" such as drug dealing and prostitution are thriving as desperate Americans look to survive any way that they can.
But there are many Americans that will never stoop to a life of crime. There are many Americans who feel like they have done everything that they were "supposed" to do all these years and now they feel like they are being tossed aside by society like a piece of trash.
A woman identified only as "oldandtired" recently posted the following very sad message on the Unemployed-Friends website....
How did I get here? I have donated, volunteered, etc. for those in need for decades. Now, I have $2.34 to my name. I have lost my home, filed bankruptcy, and have been separated from my daughter. I have not seen a doctor in three years. I keep looking for work, but it is like a cruel joke - and the joke is on me. I exist day to day on the charity of family and I try to keep in mind that so many of you don’t have that option.
My eyesight has been bad for most of my life. I am -8.25 and -8.50 for vision. For those of you who know the eyes, you realize that I am so near-sighted that I am legally blind when not corrected. However, I am corrected with contacts or glasses - neither of which I can afford. Contacts ran out last year and my glasses are almost 10 years old (my fault for not getting new ones when I had a job). Don’t you know? The f#$%ing things broke. No chance of fixing. No contacts. How the heck am I supposed to get work when I can‘t see????? There is no social services available without an address, and I am homeless. A PO box doesn’t cut it.
Okay, the eternal optimist isn’t being so optimistic, eh? I catch myself thinking the word ‘hate’ lately. It is a word that was never in my vocabulary before. I hate politicians. I hate the economy. I have even begun to resent and hate people who have jobs. Sometimes, tears just fall from my cheeks and I can only think of those two words…..”I hate”.
If any of you knew me, you would know how bizarre this is for me. My spirit needs a boost, but I hate to even try anymore. Anyone got a good joke? One that will make me laugh until I cry instead of me just crying.
The president and I are the same age. Retirement is so far off. Why is my life over already?
So what can the rest of us do about all of this?
Well, first of all we can all reach out and help those we know that are in need.
Secondly, we can all start preparing for the hard times that are coming. Instead of maxing out our monthly budgets, we should all be setting aside some extra money in case we lose our jobs or businesses. In addition, we should be storing up extra food and supplies for when the U.S. economy totally collapses.
Unfortunately, the U.S. economy is not going to be getting better in the long-term. We are living in the greatest debt bubble in the history of the world, and when it bursts things are going to get far worse than they are now.
So don't look down on the millions of Americans that are really suffering right now, because one day you might be the one that is suffering.
J.P. Morgan and the Great Silver Caper
There’s
a lot of rumor, buzz, innuendo, chitchat and scuttlebutt about the
precious metals markets these days. Most of the chitchat is about
J.P. Morgan and silver. Rumor has it that J.P. Morgan has amassed
a whopping short position in silver.
The scuttlebutt,
according to Scott
Rubin of Benzinga.com, is that “J.P. Morgan holds a giant
short position in silver. Furthermore, some observers are accusing
the bank of acting as an agent for the Federal Reserve in the market…I.e.,
a lower silver price helps maintain the relative appeal of the US
dollar…
“By selling
massive amounts of paper silver in the futures market,” Rubin
continues, “J.P. Morgan has been able to suppress the price
of the precious metal. It is believed that these short positions
are naked (i.e. they are not backed by any physical silver).”
If the silver
price were falling, Morgan’s (alleged) short position would
be lauded as a stroke of genius. But since the silver price is soaring,
Morgan’s (alleged) short position looks much less laudable.
“In recent
days,” Rubin notes, “rumors have been swirling on the
Internet that J.P. Morgan’s massive short position is about
to blow up in its face in the form of an almighty short squeeze
and potential COMEX default, as large traders demand physical delivery
of silver that COMEX does not have in its vaults.”
Based on some
of the latest conjecture, Morgan’s short position totals a
whopping 3.3 billion ounces. If, therefore, the buzz about J.P.
Morgan and silver is even half true, the prestigious investment
bank could be cruisin’ for bruisin’.
For perspective,
3.3 billion ounces is roughly equal to:
1) One third
of all the world’s known silver deposits;
2) Two times
the world’s approximate stockpiles of silver bullion;
3) Four times
the annual mined supply of silver;
4) 30 times
the inventory of silver at the COMEX.
To repeat,
short positions – even titanic ones – are no big deal,
as long as the price of the underlying asset is falling. But if,
inconveniently, it is rising, the spaghetti can hit the fan in spectacular
and gruesome fashion.
The silver
price is rising…a lot. From less than $10 an ounce two years
ago, the silver price has more than tripled. Therefore, if J.P.
Morgan does, in fact, hold a 3.3 billion ounce short position, every
one-dollar increase in the silver price would produce a loss of
$3.3 billion…at least on paper.
Unfortunately,
Morgan cannot simply unwind this trade with a couple of mouse-clicks
in an E*trade account. The position is too large, both in relation
to the world’s physical supplies of silver and in relation
to the paper “supplies.” (Morgan holds almost half of
all short positions on the COMEX, which is essentially a “paper
market” – participants rarely take delivery of physical
silver).
To make matters
even more dicey for Morgan, the supplies of physical silver are
disappearing rapidly from the marketplace. Increasingly, the kinds
of folks who invest in precious metals are also the kinds of folks
who distrust intermediaries. These precious metals investors want
to know that the shiny stuff is in their personal possession.
Meanwhile,
the ETFs that hold precious metals are soaking up massive quantities
of physical metal. Over the last 12 months, the silver ETFs around
the globe have increased their holdings by nearly 100 million ounces
– or almost as much silver as the entire inventory of the COMEX.
The trend in gold is identical.
Therefore,
as a result of soaring demand from both individual investors and
ETFs, the physical stockpiles of gold and silver are atrophying
in relation to the paper claims on both metals. This is not a pleasant
picture for a short seller of silver.
Furthermore,
the kinds of folks who tend to buy gold and silver are also the
kinds of folks who have contempt for Wall Street…and for Wall
Street banks like J.P. Morgan. So it should come as no surprise
that a grassroots campaign has formed – the sole purpose of
which is to punish J.P. Morgan for its attempted manipulation of
the silver market.
“A viral
campaign (Crash JP Morgue Video [below]) to buy a physical silver
and ‘crash’ the bank is now spreading like wildfire on
the Internet,” Rubin reports. “Just Google, ‘Crash
JP Morgan Buy Silver’ [to learn more about it]… Those
who wish to participate in squeezing the living daylights out of
J.P. Morgan, may want to consider buying physical silver, silver
futures and SLV.”
Maybe this
story about J.P Morgan’s short position in silver is mere innuendo.
Maybe not. But two facts are irrefutable:
Eric J. Fry has been
a specialist in international equities since the early 1980s. He
was a professional portfolio manager for more than 10 years, specializing
in international investment strategies and short-selling. Mr. Fry
launched the sometimes abrasive, mostly entertaining and always
insightful Rude
Awakening. His views and investment insights have appeared in
numerous publications including Time, Barron’s, Wall Street
Journal, International Herald Tribune, Business Week, USA Today,
Los Angeles Times, San Francisco Chronicle and Money.
He appears regularly on business news stations like CNBC and Fox.
a lot of rumor, buzz, innuendo, chitchat and scuttlebutt about the
precious metals markets these days. Most of the chitchat is about
J.P. Morgan and silver. Rumor has it that J.P. Morgan has amassed
a whopping short position in silver.
The scuttlebutt,
according to Scott
Rubin of Benzinga.com, is that “J.P. Morgan holds a giant
short position in silver. Furthermore, some observers are accusing
the bank of acting as an agent for the Federal Reserve in the market…I.e.,
a lower silver price helps maintain the relative appeal of the US
dollar…
“By selling
massive amounts of paper silver in the futures market,” Rubin
continues, “J.P. Morgan has been able to suppress the price
of the precious metal. It is believed that these short positions
are naked (i.e. they are not backed by any physical silver).”
If the silver
price were falling, Morgan’s (alleged) short position would
be lauded as a stroke of genius. But since the silver price is soaring,
Morgan’s (alleged) short position looks much less laudable.
“In recent
days,” Rubin notes, “rumors have been swirling on the
Internet that J.P. Morgan’s massive short position is about
to blow up in its face in the form of an almighty short squeeze
and potential COMEX default, as large traders demand physical delivery
of silver that COMEX does not have in its vaults.”
Based on some
of the latest conjecture, Morgan’s short position totals a
whopping 3.3 billion ounces. If, therefore, the buzz about J.P.
Morgan and silver is even half true, the prestigious investment
bank could be cruisin’ for bruisin’.
For perspective,
3.3 billion ounces is roughly equal to:
1) One third
of all the world’s known silver deposits;
2) Two times
the world’s approximate stockpiles of silver bullion;
3) Four times
the annual mined supply of silver;
4) 30 times
the inventory of silver at the COMEX.
To repeat,
short positions – even titanic ones – are no big deal,
as long as the price of the underlying asset is falling. But if,
inconveniently, it is rising, the spaghetti can hit the fan in spectacular
and gruesome fashion.
The silver
price is rising…a lot. From less than $10 an ounce two years
ago, the silver price has more than tripled. Therefore, if J.P.
Morgan does, in fact, hold a 3.3 billion ounce short position, every
one-dollar increase in the silver price would produce a loss of
$3.3 billion…at least on paper.
Unfortunately,
Morgan cannot simply unwind this trade with a couple of mouse-clicks
in an E*trade account. The position is too large, both in relation
to the world’s physical supplies of silver and in relation
to the paper “supplies.” (Morgan holds almost half of
all short positions on the COMEX, which is essentially a “paper
market” – participants rarely take delivery of physical
silver).
To make matters
even more dicey for Morgan, the supplies of physical silver are
disappearing rapidly from the marketplace. Increasingly, the kinds
of folks who invest in precious metals are also the kinds of folks
who distrust intermediaries. These precious metals investors want
to know that the shiny stuff is in their personal possession.
Meanwhile,
the ETFs that hold precious metals are soaking up massive quantities
of physical metal. Over the last 12 months, the silver ETFs around
the globe have increased their holdings by nearly 100 million ounces
– or almost as much silver as the entire inventory of the COMEX.
The trend in gold is identical.
Therefore,
as a result of soaring demand from both individual investors and
ETFs, the physical stockpiles of gold and silver are atrophying
in relation to the paper claims on both metals. This is not a pleasant
picture for a short seller of silver.
Furthermore,
the kinds of folks who tend to buy gold and silver are also the
kinds of folks who have contempt for Wall Street…and for Wall
Street banks like J.P. Morgan. So it should come as no surprise
that a grassroots campaign has formed – the sole purpose of
which is to punish J.P. Morgan for its attempted manipulation of
the silver market.
“A viral
campaign (Crash JP Morgue Video [below]) to buy a physical silver
and ‘crash’ the bank is now spreading like wildfire on
the Internet,” Rubin reports. “Just Google, ‘Crash
JP Morgan Buy Silver’ [to learn more about it]… Those
who wish to participate in squeezing the living daylights out of
J.P. Morgan, may want to consider buying physical silver, silver
futures and SLV.”
story about J.P Morgan’s short position in silver is mere innuendo.
Maybe not. But two facts are irrefutable:
- J.P. Morgan
is already under investigation by the CFTC for manipulating the
silver market. “The investigation into the bank can be traced
back to November 2009,” Rubin reports, “when London
metals trader and whistleblower Andrew Maguire contacted the CFTC
to report market manipulation prior to it actually occurring.” - Precious
metals investors are increasingly keen to get their hands on physical
gold and silver, rather than mere paper facsimiles.
December
11, 2009
11, 2009
Eric J. Fry has been
a specialist in international equities since the early 1980s. He
was a professional portfolio manager for more than 10 years, specializing
in international investment strategies and short-selling. Mr. Fry
launched the sometimes abrasive, mostly entertaining and always
insightful Rude
Awakening. His views and investment insights have appeared in
numerous publications including Time, Barron’s, Wall Street
Journal, International Herald Tribune, Business Week, USA Today,
Los Angeles Times, San Francisco Chronicle and Money.
He appears regularly on business news stations like CNBC and Fox.
Copyright
© 2009 Daily Reckoning
© 2009 Daily Reckoning
Vatican Bank 'allowed clergy to act as front for Mafia'
The Vatican Bank is under new scrutiny in a case involving money-laundering allegations that led police to seize €23m (£19.25m) in September.
The Vatican calls the seizure of assets a "misunderstanding" and expresses optimism it will be quickly cleared up. But fresh court documents show that prosecutors say the Vatican Bank deliberately flouted anti-laundering laws "with the aim of hiding the ownership, destination and origin of the capital". The documents also reveal investigators' suspicions that clergy may have acted as fronts for corrupt businessmen and Mafia.
The documents pinpoint two transactions that have not been reported: one in 2009 involving the use of a false name, and another in 2010 in which the Vatican Bank withdrew €650,000 from an Italian bank account but ignored bank requests to disclose where the money was headed.
The new allegations of financial impropriety could not come at a worse time for the Vatican, already hit by revelations that it sheltered paedophile priests. The corruption probe has given new hope to Holocaust survivors who tried unsuccessfully to sue in the United States, alleging that Nazi loot was stored in the Vatican Bank.
Yet the scandal is hardly the first for the bank, already distinguished from other banks by the fact that its cash machines are in Latin and priests use a private entrance.
In 1986, a Vatican financial adviser died after drinking cyanide-laced coffee in prison. Another, Roberto Calvi, was found dangling from a rope under London's Blackfriars Bridge in 1982, his pockets stuffed with money and stones. The incidents blackened the bank's reputation, raised suspicions of ties with the Mafia, and cost the Vatican hundreds of millions of dollars in legal clashes with Italian authorities.
On 21 September, financial police seized assets from a Vatican Bank account. Investigators said the Vatican had failed to furnish information on the origin or destination of the funds as required by Italian law.
The bulk of the money, €20 million, was destined for the American JP Morgan bank branch in Frankfurt, Germany, with the remainder going to Banca del Fucino, an Italian bank.
Prosecutors alleged the Vatican ignored regulations that foreign banks must communicate to Italian financial authorities where their money has come from. All banks have declined to comment.
10 Signs That Confidence In U.S. Treasuries Is Dying And That Financial Armageddon May Be Approaching
Selling government debt is a gigantic confidence game. For decades, investors all over the globe have gobbled up massive amounts of U.S. debt at incredibly low interest rates because they believed that it was a certainly that they would be paid back and be able to make a little bit of profit on top of it. Unfortunately, things have changed. Confidence is U.S. Treasuries is dying, and if confidence in U.S. government debt completely collapses at some point we could literally be looking at financial Armageddon. Why is that so? Well, when the world totally loses faith in U.S. Treasuries, interest rates on U.S. Treasuries will have to keep going up until enough investors are found to buy them. But much higher interest rates will mean much higher interest on the national debt and thus much higher federal budget deficits. That will erode confidence in U.S. Treasuries even further. In the end, a vicious cycle of eroding confidence and higher interest rates could ultimately lead to hyperinflation as the U.S. government and the Federal Reserve flood the system with endless amounts of paper money to try to keep the system solvent.
Faith in U.S. Treasury bonds is absolutely critical if the world financial system is going to continue to operate in a stable manner. In the post-World War 2 era, U.S. Treasuries have been largely viewed as the absolutely safest investment out there. So if there comes a point when the market for U.S. Treasuries completely collapses, it is going to cause unprecedented financial chaos. The worldwide derivatives market, which is already highly unstable, would almost certainly implode. Credit markets all over the globe would seize up. Global trade would quickly grind to a standstill.
This isn't going to happen overnight (hopefully). Rather, the loss of confidence in U.S. Treasuries is something that is likely to take months or even years to play out. But once that confidence is gone, it is not something that will be able to be rebuilt easily.
Think of it this way - once you drive a car off a cliff, is it easy to reconstruct it?
Of course not.
Well, that is where we are headed with U.S. Treasuries.
The Federal Reserve is flooding the system with new dollars, Barack Obama and the U.S. Congress seem poised to pass a new tax deal which does not include corresponding spending cuts which will cause U.S. government budget deficits to become even more bloated, and there is a tremendous lack of faith both in U.S. political leaders and in the Federal Reserve at this point.
The rest of the world is losing faith that the U.S. government is going to be able to handle all of the debt that it has accumulated. We may be approaching a "tipping point" soon.
The following are 10 signs that confidence in U.S. Treasuries is dying....
#1 The financial community is extremely concerned that the tax deal that Barack Obama is pushing is going to dramatically increase U.S. government budget deficits over the next two years. On Monday, Moody's warned that if Barack Obama's tax deal with the Republicans becomes law, it will increase the likelihood that Moody's could soon be forced to slash the rating of U.S. government debt.
#2 Already there are signs that some bond investors are looking for the exits. Last week, U.S. Treasuries suffered their largest two day sell-off since the collapse of Lehman Brothers back in September 2008.
#3 The yield on 10-year Treasury bonds set a six-month high on Monday before pulling back a bit. Most analysts believe that Treasury yields are going to push significantly higher in coming weeks.
#4 This trend of rising yields has been going on for a while. In fact, yields on 10-year Treasury bonds have been steadily rising since October 7th.
#5 Even before the recent tax deal was announced there were already troubling signs regarding the growth of U.S. government debt. The U.S. government budget deficit rose to $150.4 billion in November, which was the largest November budget deficit ever recorded.
#6 It is not just the new tax deal that has investors around the globe spooked. The truth is that the rest of the globe reacted very negatively to the new round of quantitative easing that the Federal Reserve announced back in November. The Federal Reserve is flooding the system with liquidity and the rest of the world is not amused.
#7 The American people have less faith in the Federal Reserve and in the financial system than at any other point in recent memory. For example, a new Bloomberg National Poll has found that a majority of Americans now want the Federal Reserve to either be held more accountable or to be abolished entirely.
#8 Investors all over the globe are starting to wake up and realize that America's debt problem is unsolvable. David Bloom, the currency chief at HSBC, raised eyebrows when he recently stated that "if yields are rising because people think America's fiscal situation is unsustainable, then its Armaggedon."
#9 There is also a growing feeling among investors that the Federal Reserve simply does not care about the danger of inflation, and this is making bondholders very nervous. Stephen Lewis of Monument Securities recently put it this way....
"There is a feeling that the Fed doesn't care about inflation – in fact, wants more of it – and that is certainly not in the interest of bondholders."
#10 Over the next 12 months, the U.S. government is going to be rolling over trillions of dollars in debt along with all of the new borrowing that it is going to be doing. In fact, the U.S. government is somehow going to have to find a way to finance debt that is equivalent to 27.8 percent of GDP in 2011.
For years our politicians have told us that "deficits don't matter", but the truth is that they do matter. The national debt of the United States is now the biggest debt in the history of the world by far, and yet most Americans do not seem to grasp the absolute financial horror that we are facing as a nation.
In the end, debt is always painful. It can be a lot of fun to run out and buy a beautiful new house, a couple of brand new cars and to run your credit cards up to the max, but eventually it catches up with you. Well, the same thing is now happening to us on a national level.
We are getting to the point where eventually we are not even going to be able to service the debt that we have already piled up. Once that happens we can either declare national bankruptcy or we can try to hyperinflate our way out of trouble.
Meanwhile, the once great U.S. economic machine is dying as well. The only reason we have been able to survive with all of this debt as long as we have is because of how powerful our economy has been.
But over the past couple of decades, the big global corporations that now dominate our economy have shipped thousands of factories and millions of jobs overseas.
The mighty economic machine which is supposed to provide funds to pay off all of this debt is being dismantled right in front of our eyes.
There was no way in the world that U.S. government debt was going to be sustainable even if our economy remained vibrant and healthy. The sad truth is that U.S. government debt is approximately 13 times larger than it was just 30 years ago.
But now that the "real economy" is dying a savage death there is simply no hope that this thing is ever going to turn around. The only thing left to do is to take bets on when the implosion is going to happen.
All of this "great tax cut debate" nonsense going on in Washington D.C. right now is just a bunch of incompetent politicians running around rearranging the deck chairs on the Titanic. Perhaps these tax cuts will provide enough of a short-term economic boost to get many of them re-elected in 2012. Meanwhile, our long-term economic problems continue to get a lot worse.
It has become quite obvious that Barack Obama is completely clueless about the economy, and what is even sadder is that the "highly educated" Chairman of the Federal Reserve, Ben Bernanke, seems almost equally as clueless.
Unfortunately, Americans have become so dumbed-down that they don't even realize that their leaders are incompetent. In fact, as sad as it is to say, most Americans you will meet on the street probably cannot even tell you what U.S. Treasuries are.
Let us hope and pray that investors around the globe continue to have at least some confidence in U.S. Treasuries for at least a little while longer. When "financial Armageddon" finally does happen, it isn't going to be pleasant for any of us.
So enjoy these happy economic times while you still have them, because at some point things are going to get a whole lot worse.
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