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T Bill interest at zero:
NEW YORK – Investors are so nervous they're willing to accept the same return from government debt that they'd get from burying money in a coffee can — zero.
The Treasury Department said Tuesday it had sold $30 billion in four-week bills at an interest rate of zero percent, the first time that's happened since the government began issuing the notes in 2001.
And when investors traded their T-bills with each other, the yield sometimes went negative. That's how extreme the market anxiety is: Some are willing to give up a little of their money just to park it in a relatively safe place.
"No one wants to run the risk of any accidents," said Lou Crandall, chief economist at Wrightson ICAP, a research company that specializes in government finance.
At last week's government auction of the four-week bills, the interest rate was a slightly higher but still paltry 0.04 percent. Three-month T-bills auctioned by the government on Monday paid poorly, too — 0.005 percent.
While everyday people can keep their cash in an interest-earning CD or savings account at the bank, institutional investors with hundreds of millions of dollars on their hands often use government debt as part of their investment strategy.
In the Treasury market, the U.S. government, considered the most creditworthy of borrowers, issues IOUs of varying durations to raise money.
The zero percent interest rate is no reason to panic. As recently as Monday, investors were plowing cash into stocks, and averages like the Dow industrials are off their lows.
And long-term government bonds, while near record lows, are still paying decent money considering the tumultuous climate. The yield on a 30-year bond on Tuesday was a little higher than 3 percent.
There's good news in all this for taxpayers: Low interest rates on government debt mean the United States is financing its $700 billion bailout of the financial system very cheaply. The Treasury has sold mountains of debt to pay for it.
But the trend also underlines stubborn anxiety in the financial market that could keep the economy sluggish for years to come, and it translates into stagnant returns for people who have their money in places like money market funds.
"There's a price for safety," said Peter Crane, president of money market mutual fund information company Crane Data LLC. "Down slightly is the new up."
As the stock market has taken its alarming plunge, people have been moving money from riskier assets to safer ones. According to Crane Data, funds invested purely in Treasurys have surged more than 150 percent over the past year, to $726 billion.
Earning zero percent on an investment for a short while may not seem that dire for the average person. But a zero percent rate has serious consequences for the complex credit markets.
Those markets have been dysfunctional since Lehman Brothers Holdings Inc. went bankrupt in September, scaring away investors who normally buy bonds from seemingly creditworthy borrowers. Lending, the lifeblood of the economy, has frozen up.
One corner of the credit markets is the repurchase markets, known as "repo," where banks and securities firms make and receive short-term loans backed by collateral, usually Treasury bills.
When those T-bills are yielding nothing, there's little incentive to deliver them on time. If the holder loses the interest, it's no big deal.
"This is a particular problem in a time like this, because people are buying Treasury securities for their security, for their safety. It's important that they're delivered," Crandall said.
And high demand for government debt rather than corporate debt could stifle economic growth.
Corporate bond rates have been surging to record levels compared with Treasurys, which makes it more expensive for companies to raise money. And when companies can't raise money, they often have to cut costs, sometimes through layoffs.
Only a few corporate bond deals have been going through lately, and most have been through the government, which has agreed to guarantee financial institutions' bond sales. American Express Co., for one, said Tuesday it has issued $5.5 billion through the government program.
Many worry that the government will become the most attractive lender and borrower in the market — crowding out others in the private sector.
"Because they have a printing press, they can borrow ever greater quantities," said Howard Simons, strategist with Bianco Research in Chicago.
The 2-year note rose 6/32 to 100 25/32 and its yield fell to 0.85 percent from 0.94 percent late Monday. The 10-year note rose 25/32 to 109 17/32 and its yield fell to 2.65 percent from 2.75 percent. The 30-year bond rose 2 21/32 to 128 5/32 and its yield fell to 3.04 percent from 3.16 percent.
The three-month Treasury bill by late trading yielded 0.03 percent, up marginally from 0.02 percent late Monday. The discount rate was 0.02 percent.
And bank-to-bank lending rates slipped. The London Interbank Offered Rate, or Libor, for three-month loans in dollars fell nearly 0.03 percentage points to just over 2.16 percent, according to the British Bankers' Association.
Speaking of manipulation theories, here's the latest from Ted Butler:
http://news.silverseek.com/TedButler/1228768232.php
Delaying Tactics and Interview
By: Theodore Butler and James Cook
-- Posted 8 December, 2008 | Digg This ArticleDigg It! | Discuss This Article - Comments: 1
Here’s a quick follow-up to last week’s comment about the CFTC sending out form letters to me and many of you asking for specific evidence about a manipulation in silver prices. A number of you asked me how to respond. Before you respond, it is important to understand what the Commission is trying to accomplish with their notifications. They are not looking for specific evidence. They are looking to buy time. They are stalling.
All the evidence the CFTC needs is already known to them. Specifically, the evidence is in their August Bank Participation Report which indicated that one or two U.S. banks held a concentrated net short position equal to 25% of the annual world mine production of silver. Such a degree of concentration, on either the long or short side of any market, is manipulative, in and of itself. If not, then the CFTC should simply explain why such a large concentrated position should not be considered manipulative and put the matter to rest. No taxpayer funded, long drawn-out investigation, just an explanation.
In addition, I have provided the Commission with additional specific evidence, in the form of proof that there was intentional forced liquidation of almost 15,000 long silver/short gold spread contracts on the COMEX over the past six weeks. The proof also is known to the CFTC, as it is contained in their weekly Commitment of Traders Reports (COT). That should be enough evidence for anyone. But wait, there’s more.
The just released December Bank Participation Report (BP), as well as the most recent COT, both as of the close of business December 2, provide more evidence of manipulation in COMEX silver. While the number of contracts held by the one or two U.S. banks is lower than the peak in August, the percentage of concentration of the total futures market has grown to the highest level in history. Whereas the one or two U.S. banks held 25.4% of the entire market in August, the big U.S. bank(s) holds 29.9% now. And when all spreads are removed (as they should be), the concentrated short position of the big U.S. bank(s) rises to almost 40% of the entire COMEX futures market.
Further, the level of historic concentration on the short side is confirmed by the latest COT. The level of the net short position of the four largest traders is now 46.6%, the highest level in five or six years. Adjusting for spreads, the true net short position of the big 4 is an astounding 60% of the entire market. The COT also indicates that the next 4 largest traders (5 thru 8) now hold the smallest net short position in 11 years. What this means is that the short position is becoming more concentrated, as fewer and fewer participants choose to be short a market at stupid low prices. The only traders willing to increase their short bets are the manipulators. This is who the CFTC is protecting.
You must apply a little common sense here. With silver prices far below the cost of production, there is little economic justification for legitimate short hedging. After all, who would choose to lock in a loss? Therefore, there is little evidence that the big concentrated short position is legitimate. That’s why fewer and fewer traders are interested in shorting silver at current price levels. Just the few manipulators remain short.
Tell the CFTC to stop looking to you for specific evidence of manipulation and to start analyzing their own data. Tell them to stop stalling and to start doing their jobs.
[Editor’s note: We would also tell them to talk to Ted Butler. Any investigation that bypasses him is truly bogus.]
THEODORE BUTLER INTERVIEW
Early December 2008
Cook: One or two newsletters have recently written that there is plenty of silver around. What do you have to say about that?
Butler: There always seems to be someone saying that. But, when you look for data or hard evidence supporting such claims, none are forthcoming.
Cook: The facts don’t support it?
Butler: No, not at all.
Cook: Well, what facts support that there is a shortage?
Butler: On the retail side, supply is very tight, delays are common and premiums are high. That’s the definition of a shortage. And this is the first time we have ever seen these retail conditions in silver. It’s kind of funny.
Cook: What’s funny?
Butler: Well, I remember everyone predicting a few years back that if silver ever got to $10, there would be a big discount in retail silver items like there was in 1980.
Cook: Why do you think it has turned out to be so different this time?
Butler: There’s a lot less silver now than there was in 1980.
Cook: What about the wholesale side of the market? Any shortages there?
Butler: I think so, but it’s harder to tell. The retail side is very transparent because there are thousands of investors and dealers. So you can see clearly what is happening. Not so on the wholesale side. There’s only a handful of big dealers and relatively few big producers and consumers. The wholesale side is non-transparent.
Cook: So, you can’t see if a wholesale shortage exists?
Butler: It makes it harder to see the real situation. You can’t call up the big dealers or consumers and ask them if things are tight. They’re not going to tell you.
Cook: Then, how can you say there’s a shortage?
Butler: The retail market is tight as a drum for the first time in history, and because we don’t see overtly visible signs of shortage in the wholesale market, everyone assumes there’s plenty of silver available. That’s illogical.
Cook: Do you have any factual evidence of tightness in wholesale?
Butler: Sure. Metal flowing into the ETFs and the Central Fund of Canada still seem slow as molasses. COMEX warehouse stocks seem tighter and shrinking. And more and more retail investors are turning to 1000-oz. bars, since they offer the smallest premiums.
Cook: Despite these facts, the price came down. Are you taking any heat?
Butler: If you’re talking about hate mail and the sort, very little, which is somewhat surprising. Especially considering how far prices came down.
Cook: Why do you think people aren’t angry with you?
Butler: I think I have done a decent job at explaining why we came down so hard. This has been an educational process for us all, and with growing knowledge comes the comfort in holding silver for the long run.
Cook: So, you’re still as bullish as ever?
Butler: Absolutely. I know some might say I’m always bullish and, to a certain extent, that is true. It’s because for a long time we have had such a long way to go in price. These sharply lower prices should make one more bullish, as long as the fundamentals haven’t turned bearish.
Cook: And you don’t think conditions have turned negative?
Butler: Far from it. In addition to the new low and attractive price, conditions in silver have actually gotten much more positive.
Cook: What conditions?
Butler: Less silver available for purchase, less potential new mine supply that’s offsetting any decline in industrial demand, and the potential for major new investment demand in our bailout crazy and money-printing world.
Cook: What about the 300 million ounces in the various ETFs? Isn’t that available supply?
Butler: Just because we can now see the silver that was transferred into the ETF doesn’t mean it’s available.
Cook: Isn’t it available at a price?
Butler: Perhaps, but at what price? Do your clients indicate that they will sell at current prices?
Cook: Not at all.
Butler: There’s your answer – very little, or none, at current prices, maybe some at much higher prices.
Cook: Do you still like silver better than gold in today’s financial environment?
Butler: More than ever. This recent widening in the gold/silver ratio is looney tunes. People should take advantage of it. That’s not because I think gold won’t go a lot higher, because I think it will. It’s just that silver is going to shock people when it gets rolling to the upside.
Cook: A number of gold bugs can’t say anything good about silver. How do you explain that?
Butler: Gold is an emotional subject. It’s hard for many people to be objective about it. You either believe in it or not.
Cook: What does that mean?
Butler: I think there’s a primal desire among many to hold an asset outside the dictates of government. I understand and agree with that desire. Gold is the most popular asset that satisfies that desire and belief.
Cook: So, you think there may be a fanatical belief in gold?
Butler: I didn’t say that. It’s just that gold is less about its specific supply and demand, and more about external factors. All I tried to do is make the case why silver may be a better alternative to gold.
Cook: What’s your take on the current financial predicament? You’ve never talked much about a bad economy. Aren’t today’s economic problems a powerful argument for owning silver?
Butler: For sure. We’re in uncharted waters. We’re seeing financial developments none of us have ever experienced. In times like these, you naturally look for something safe and solid that can be relied on. With the new low price, silver has low-risk and high-profit potential written all over it.
Cook: Do you still think there's more gold around than silver?
Butler: It’s surprising you would even ask me that. I wrote that in the very first article for you 8 years ago and countless times since then.. Have you ever seen any credible evidence in that time that wasn’t true?
Cook: Hey, nobody else has ever suggested it. You’re talking about above-ground silver?
Butler: I’m talking about material in real world terms - investable bullion and bullion equivalent
Cook: If that’s true, how can the price differential between gold and silver be so great?
Butler: It’s a world pricing miscalculation, brought about by a long-term manipulation and the human tendency to assume that the current price is always correct.
Cook: It sounds like a it could be a great opportunity. Is it really that good?
Butler: I’ve certainly tried to make the case that it is. You have to focus on the amazing fact that silver is rarer than gold and more useful.
Cook: Is it possible the government is suppressing the price of silver?
Butler: Unfortunately, yes it is possible. I don’t think it was planned from the get-go, it kind of evolved.
Cook: If they are holding it down, could they continue for a long time?
Butler: No, that’s the beautiful thing. You know, that’s the question I’m asked most often - if silver is manipulated, as I claim, why can’t it go on for another 10 or 20 years?
Cook: Why can’t it?
Butler: People are becoming aware of it, and it’s hard to maintain a fraud and that is increasingly coming into the open. Plus the perpetrators aren’t stupid and I believe they see the end in sight, and will terminate their illegal short selling.
Cook: That’s it?
Butler: A bigger reason is that silver is a physical item, and even though the laws of supply and demand have been suppressed for decades, those laws haven’t been repealed. In the end, the artificial low price must increase demand and decrease supply to the point that the shortage of physical overwhelms the paper short selling. It’s inevitable.
Cook: When will that be?
Butler: I think very soon.
Cook: Based on what?
Butler: What, are you kidding me? That’s what the retail shortage is telling us. The low price has obviously created more demand than supply and that’s why we have big premiums and delays on many products.
Cook: But not in 1000-oz. bars yet. Isn’t that the key?
Butler: The operative word is yet. It’s natural that the shortages show up in certain forms of retail silver first, before it spreads to the wholesale form. Besides, I’ve heard you complain at times that even the 1000-oz. bars were getting sticky to get.
Cook: We have managed to get them. Let’s get to some tough questions. The big short position you've always written about has eased. I thought you predicted a major short squeeze someday that would send the price to the moon?
Butler: Yes, I did. And I still think it will, even though that short position has been greatly reduced.
Cook: Sounds like you’re talking out of both sides of your mouth.
Butler: Hear me out. I have always maintained, and still do, that the biggest pricing factor in silver was the large short position. It was why we were priced at very depressed levels and that its resolution would determine price action.
Cook: What kind of price action?
Butler: If we get a physical shortage and the shorts have to cover in a panic to the upside the price would explode beyond description. But I also always said that these shorts were treacherous and that they would try to rig sharp sell-offs to get leveraged longs to liquidate and sell, so that the big shorts could buy back and cover their short positions.
Cook: You certainly didn’t expect this kind of slaughter, did you?
Butler: The sell-off they rigged over the past few months was way beyond anything I could have imagined.
Cook: They had a massive economic liquidation going for them. Why don't you ever mention this de-leveraging? The only person that doesn’t think this financial crisis is the primary reason for silver's drop is you.
Butler: That’s just how they want you to think, namely, that silver only sold off because everything else sold off. But, consider this – the silver sell-off was all about paper silver being sold. There was no evidence of physical metal being sold net. Yes, sometimes I think I’m the only one who sees it.
Cook: What exactly did you see?
Butler: The speculators and hedge funds were heavily long and the bankers were heavily short for many months before the sell-off in many different commodities. These banks are smart enough to know they had to have some cover story to explain why prices sold off simultaneously. So, they waited until they had a good cover story and yanked the rug out from all the long side traders.
Cook: How do they do that?
Butler: They hold the accounts for all the speculators and hedge funds, as their brokers. In that position, the bankers know exactly everyone’s positions and financial condition. The bankers who are the big shorts know where the speculators will have to sell and when they can’t handle margin calls. The bankers are the ones who issue the margin calls. It’s a racket.
Cook: So, you are saying that the bankers rigged the sell-off in everything?
Butler: Exactly. I’m not saying there weren’t other broad economic factors involved, but the bankers just used those factors as a smokescreen. And there’s another thing that bothers me.
Cook: What’s that?
Butler: Why we allow these banks to speculate in the first place. If they stuck to taking deposits and making loans instead of gambling and manipulating, the world would be a lot better off.
Cook: Another thing that bugs me is that you don't think the stronger dollar has anything to do with silver's price decline. Why is that?
Butler: I intentionally disregard currency swings because they are peripheral to core supply/demand analysis in silver. Besides, there must be 10,000 people writing about the dollar on a daily basis, so ask them. I’m not a currency analyst.
Cook: So, where are we right now with these big shorts?
Butler: I think they have liquidated as much as they could possibly liquidate, and the remaining short position, while greatly reduced for the big concentrated shorts is still large enough to add great fuel to any price rally brought about by the inevitable shortage.
Cook: What if none of these big banks wants to go short again?
Butler: Katie, bar the door. That’s the key. They have always been the seller of last resort to cap the price. If they relinquish that role, the price will fly. Heck, in wholesale shortage, it may not matter if they do go short more, but not going short more is a certain formula for sharply higher price.
Cook: Seems to me the industrial users are going to try and keep the price down?
Butler: They may wish that the prices would stay low, but there is not much they can do about it. They don’t have silver to sell and they don’t sell short, so they are a non-factor as far as the downside is concerned. Where they matter to the price equation is to the upside. I’m convinced they will panic and try to build inventory as prices explode and the shortage becomes apparent.
Cook: Everybody assumes a recession will reduce industrial demand. Could you guess by how much?
Butler: It doesn’t make a difference. The worse the fall-off in industrial demand, the better it will be for the price eventually. The more silver industrial demand falls, the more copper, zinc and lead demand will fall, leading to massive mine shutdowns. What will make the difference in silver is investor demand in a world with few good investment options.
Cook: Somebody wrote that investment demand for silver was a minor factor and would not offset the decline in industrial demand. How do you see it?
Butler: Who wrote that? Silver investment demand is clearly the driving force for the price and it has been exploding the past few years. This year, more investment silver has been bought than anytime in history. I see no reason why that won’t continue.
Cook: A lot of people were lured into buying silver on margin and they got killed. Now I see these companies advertising gold. I'm sure they will wipe out a new contingent of investors. What do you say about companies like this?
Butler: You’re talking about two somewhat different things. First, you are correct that many leveraged investors got wiped out on this recent big sell-off in silver, including many hedge funds on both the COMEX and OTC market. That was precisely the reason we sold off, to force these margined holders to sell, so the shorts could buy back. Even though my background comes from the futures side, most people should avoid margin of all types.
Cook: You only recommend holding physical silver, right?
Butler: Yes. That’s the only way you can ride out these engineered sell-offs and stick around for the long term.
Cook: What about these companies advertising gold on TV.
Butler: Most of them appear to be running a scam of some sort. I’ll tell you what really gets my goat
Cook: What’s that?
Butler: I keep running across shady operators on the Internet that are out to cheat people with leveraged deals or phony storage programs, that actually use my research to lure investors in. Let me state clearly that no one has ever been given permission to use my material to promote the sale of silver, save your company. I read on one site recently that claimed they talked with me frequently and I said that their clients should do this and do that. That’s a flat-out lie, as I’ve never talked to them. Avoid doing business with anyone who tries to suggest they work with me. For sure they are liars and most likely thieves.
Cook: For some time you've been complaining about the Commodities Futures Trading Commission not doing their job to regulate the big silver futures dealers. How severe is the concentration in the silver market that you claim is illegal?
Butler: While it varies with big rises and declines in the price, the concentrated short position in silver has remained head and shoulders above any other commodity in real world terms, such as world production.
Cook: Some people have suggested these big shorts have the silver. You disagree?
Butler: I doubt very much that they have the silver, and certainly, no one ever offers proof. But it even goes beyond that.
Cook: In what way?
Butler: Even in the very unlikely event that the big shorts have the silver that doesn’t change the fact that they are manipulating the market. While I think they are naked, the case for manipulation lies in the fact that they are so concentrated.
Cook: Because of a letter writing campaign started by you the Commodities Futures Trading Commission has launched an investigation into the silver futures market. Have they talked to you?
Butler: No
Cook: What kind of investigation is that? They haven't bothered to talk to the world’s foremost silver expert who is the chief accuser?
Butler: You’ll have to ask them that. I think it stinks.
Cook: My faith in government disappeared years ago. What's going to happen?
Butler: I understand how you feel, as many feel the same. But as far as silver, it doesn’t make much of a difference what the government does at this point. When the shortage hits in earnest, nothing will stop the price from exploding.
Cook: Do you think the price of silver is going to explode in their face and cause all kinds of problems.?
Butler: Well, it’s going to explode, and I suppose it will cause problems for the regulators, but I don’t know what you mean by "all kinds of problems."
Cook: I mean a delivery default.
Butler: The price will go up big and the world will adjust to it. Those who own it will make great profits. Those that don’t, won’t. The shorts will get hurt badly. And everyone will say they knew it was coming, especially those who never saw it coming.
Cook: Your friend and mentor, Izzy has written some powerful prose on silver and forecast prices north of $100.00. Do you agree?
Butler: I agree with a hundred for sure. He has some other numbers I am less sure of, but I’ve learned not to doubt the old son of a gun.
Cook: You've consistently written a lot of creative new stuff on silver. In fact, you're the premier thinker on the subject. A lot of writers use your material and fail to mention you. What are your feelings about that?
Butler: I think it’s a very poor reflection on them. In any other field it would not be tolerated.
Cook: Don't you think it’s gotten to a point where it's pure plagiarizing?
Butler: It’s beyond that - it’s pure theft.
Cook: I'm paying you to write this breakthrough information on silver. Don't you think we should insist that writers who use it should mention you as the source?
Butler: Sure. The amazing thing is that by doing the right thing and mentioning the source of an idea makes the writer more credible. Many readers know when something is being plagiarized.
Cook: Let's talk some more about why you think silver is going to go up. You've mentioned the large number of base metal mines that have closed. What about the new mines they've stopped constructing and all those that were planned that are cancelled?
Butler: Right on. Not only are the low prices shutting down current production, a much bigger impact is being felt on development projects. We are losing and delaying future production. This is a problem that higher prices won’t be able to cure for a long time, thus leading to even higher prices.
Cook: These metals prices are ridiculously low. Can any mining company break even today?
Butler: Very few at current prices. There are always lower cost operations that will survive, but we have never witnessed such a dramatic across the board negative impact on miners and refiners.
Cook: Because of this, don't the prices have to rise and soon?
Butler: Well prices do have to rise, but how soon varies with each metal‘s supply and demand characteristics. I think it’s likely that silver will rise more quickly than the base metals, given its investment appeal and the fact that it’s principally a byproduct of base metal mining.
Cook: I've been in this business thirty five years and you're the best precious metals analyst that’s come along. However, we have a lot of people that bought silver over $20.00. What do you say to them?
Butler: Let’s go straight to the worst case possible - people who bought for the very first time right at the top. The vast majority of silver investors didn’t buy then and have a much lower cost basis. For the roughly 100 months your company has been underwriting my research, silver was over $20 for only one month. I know all silver investors have been pained by the drop from $20, but there’s a very special pain for those who first came into the market then.
Cook: So what do you say to them?
Butler: I would tell them to look at the facts and the reasons behind the decline and the prospects going forward. Certainly, if they bought from your company, they bought it in the right form, real silver, in the right manner, for cash, not on margin. That means they still hold their silver, they weren’t forced to sell. Plenty of forms of silver, like mining shares, fared far worse. People on margin, forget about it, they were destroyed.
Cook: What should the folks who bought over $20 do now?
Butler: At a minimum, those that bought at $20 should hold on. As conditions dictate we should cross that number easily. Silver was always meant to be a long term holding. But if they really want to do themselves a favor, buy more at these prices. Those that bought at $20 will be able to sell at a big profit someday, but the profit will be much bigger for silver bought at lower prices.
Cook: At this perilous financial time we're giving the strongest possible advice. We're dealing with people's life's earnings and savings. In light of this important responsibility do you change your advice about silver in any way?
Butler: I fully realize the perilous times we are in, and how serious a responsibility it is to deal with one’s earnings and savings. The only change in my advice is, at current prices, silver looks better than ever. The price smash has taken so much risk out of owning silver that I can’t see how anyone could get hurt by buying it here. Risk is now ultra-low and profit potential is higher than it has ever been.
Cook: We advocate 10% to 20% of a person's net worth in silver. Does that sound reasonable?
Butler: It sounds reasonable, but I’m not a personal financial analyst. As a silver analyst, I would say buy as much as you think you can afford and be sure to buy it in the right form and for cash. It’s one of the very few assets anyone can buy that can’t go bankrupt or worthless overnight. If someone is comfortable with buying more than 10% or 20%, I don’t see anything wrong with that.
Cook: Thanks for a great interview. Could you sum up the case for silver in one paragraph?
Butler: The case for silver is compelling. Recent developments have intensified an already spectacular long-term supply and demand situation, to an extreme I didn’t expect. We have a vital commodity with a critically low world inventory. It has varied industrial applications and a unique dual role as an investment asset. Its price is artificially depressed by a decades-long and increasingly obvious price manipulation. All these long-term conditions are under the radar of the world’s investment community, meaning more buying should come in as awareness spreads..
Throw in an obvious retail shortage for the first time in history with growing wholesale delays and tightness. We’ve seen the largest one-year rush into silver, driven by world financial conditions that’s highly suggestive of a flight into assets that are safe. Top that off with a new low price. I couldn’t make up this many bullish factors if I tried.
No, definately not, however we should never dismiss another point of view, no matter how much we disagree with it.
.....al
From John Mauldin- It is not a gold or silver article but as you read it, a connection should be evident.
.....al
link to article for charts:
http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2008/12/05/the-velocity-factor.aspx
Posted Dec 05 2008, 09:05 PM
by John Mauldin
The Velocity Factor
Richard Russell Tribute
"A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labour markets from rising unemployment will control labor costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1 per cent level that leads to concerns about deflation.
"Deflation is dangerous as it leads to a liquidity trap, a deflation trap and a debt deflation trap: nominal policy rates cannot fall below zero and thus monetary policy becomes ineffective. We are already in this liquidity trap since the Fed funds target rate is still 1 per cent but the effective one is close to zero as the Federal Reserve has flooded the financial system with liquidity; and by early 2009 the target Fed funds rate will formally hit 0 per cent. Also, in deflation the fall in prices means the real cost of capital is high - despite policy rates close to zero - leading to further falls in consumption and investment. This fall in demand and prices leads to a vicious circle: incomes and jobs are cut, leading to further falls in demand and prices (a deflation trap); and the real value of nominal debts rises (a debt deflation trap) making debtors' problems more severe and leading to a rising risk of corporate and household defaults that will exacerbate credit losses of financial institutions."
- Professor Nouriel Roubini of New York University
I had breakfast with Nouriel this morning down in Soho (I am in New York today). I thought the above quote was an excellent way to lead off this week's letter. Some of the more important questions of the moment are whether we face a serious bout of deflation, and if so, what can be done about it. There are market observers who are looking at the graphs which show the meteoric rise in the monetary base (see below) and predict that we will soon see much higher and rising inflation and a seriously falling dollar (accompanied with a large rise in gold). Is inflation everywhere and always a monetary phenomenon, as Friedman taught us? Can we see a large rise in the monetary base that is not accompanied by inflation? As Frederic Bastiat said (roughly), "In economics there is what you see and then there is what you don't see." The more important of the two items is what you don't see. In this week's letter we talk about what most market observers are not seeing, and why you should be paying attention.
We are going to revisit portions of an important e-letter I wrote earlier this year about the velocity of money. I am updating the charts and adding a lot of new commentary. I cannot overly stress how important this is. If you want to understand the markets, the dollar, gold, and more, you have to have this information down. You will need to put on your thinking cap, as much of what I am writing is counterintuitive and certainly not considered as received wisdom in much of the financial-commentator media. (Note: this letter will print longer than usual as there are a lot of graphs.)
Also, I am going to make an important announcement at the end of the letter about a new information service, and I need feedback from some of you.
Swiss Franc at Everbank
Richard Russell Tribute
But first, I and some of my fellow newsletter writers (Bill Bonner and Dennis Gartman, among others, are slated to be there) are going to be hosting a special tribute dinner to honor Richard Russell for his outstanding contribution of over 50 years to not only the craft of investment writing but to the lives and investment portfolios of his readers. He is one of my personal heroes as well as a good friend. At 84, his writing today is better than ever, and now he writes every day, not just once a month! Richard is an institution in the investment writing world, and after talking with his wife Faye he has said he would let us plan the dinner.
Richard has some of the most loyal readers anywhere. I have personally talked to readers who have been reading Dow Theory Letters almost since the beginning (1956), and their enthusiasm for all things Richard has not waned.
We really hope we can get a roomful of Richard's friends, writing colleagues, and fans who have benefited from his wisdom over the years, to honor him for a life well lived and a true servant's spirit, as well as being a guide not just in the markets but in life. The dinner will be Saturday evening, April 4, 2009 in San Diego. In order to know how many people we should plan for, please send an email to russelltribute@2000wave.com indicating how many tickets you would like. Plan on the tickets being around $200, with any money left over going to Richard's favorite charity. I actually expect tickets to go rather fast, so let us know as soon as possible. We will get back into contact with you as to the exact time and place. Thanks.
The Velocity Factor
When most of us think of the velocity of money, we think of how fast it goes through our hands. I know at the Mauldin household, with seven kids, it seems like something is always coming up. And with Christmas looming, the velocity, at least in terms of how fast money seems to go out the door, seems faster than normal. And what about my business? Travel costs are way, way up; and as aggressive as we are on the budget, expenses always seem to rise. Compliance, legal, and accounting costs are through the roof. I wonder how those costs are accounted for in the Consumer Price Index? About the only way to deal with it is, as my old partner from the 1970s Don Moore used to say, is to make up the rise in costs with "excess profits," whatever those are.
Is the Money Supply Growing or Not?
But we are not talking about our personal budgetary woes, gentle reader. Today we tackle an economic concept called the velocity of money and how it affects the growth of the economy. Let's start with a few charts showing the recent high growth in the money supply that many are alarmed about. The money supply is growing very slowly, alarmingly fast, or just about right, depending upon which monetary measure you use.
First, let's look at the adjusted monetary base, or plain old cash plus bank reserves (remember that fact) held at the Federal Reserve. That is the only part of the money supply the Fed has any real direct control of. Until very recently, there was very little year-over-year growth. The monetary base grew along a rather predictable long-term trend line, with some variance from time to time, but always coming back to the mean.
But in the last few months the monetary base has grown by a staggering amount - by over 1400% on an annual basis, as shown in the next chart from my friend Dr. Lacy Hunt at Hoisington Asset Management. And when you see the "J-curve" in the monetary base (which is likely to rise even more!) it does demand an explanation. There are those who suggest this is an indication of a Federal Reserve gone wild and that 2,000-dollar gold and a plummeting dollar are just around the corner. They are looking at that graph and leaping to conclusions. But it is what you don't see that is important.
St Louis Adjusted Monetary Base
Now, the same graph but in percentage terms:
Total Reserves YOY
Several of my readers have sent me questions related to the chart below, which compares the above graph to the value of the US dollar, as measured in the trade-weighted dollar index. If the Fed is flooding the market with dollars, does that not mean a crash in the dollar is imminent? What foreign government or investor would want to hold dollars when the Fed is debasing the currency so rapidly?
US Dollar Index vs US Monetary Base
Give Me Your Tired, Your Poor, Your Illiquid
The answer is that the Fed is not creating money in the sense of, say, monetizing the national debt (that comes later in the letter). Remember that the adjusted monetary base is cash plus bank reserves on deposit at the Fed. Banks have to hold a certain portion of their assets as liquid assets in order to meet potential demand from depositors for their money. If they go below that required number, the regulators come in and demand they increase their liquid assets immediately.
Various assets have been getting a "haircut" as to their ability to count as liquid reserves. With more and more assets becoming illiquid, the amount of money held in the liquid asset portion of many US banks assets has been dwindling. What to do? The Fed decided to take these assets and trade them (temporarily) for US treasuries, which are quite liquid. It's a kind of "Give me your tired, your poor, your humble illiquid assets yearning to be free" program to allow banks to stay in regulatory compliance.
But notice something. While the Fed did create the T-bills, they did not inject new capital into the overall system. If a bank had one billion in assets and gave the Fed $100 million to get liquid T-bills, it still just has $1 billion in assets. Yes, it could sell them to someone else to get cash, but that someone else would use already existing dollars. The Fed has provided liquidity but did not inject (yet) new cash into the overall system through this program. At some point in the future, when banks are once again doing business with each other and the system is more liquid, banks will take those T-bills back to the Fed and receive back whatever collateral they used to get them in the first place.
To illustrate what I am saying, let's look at MZM, or Money of Zero Maturity. Stated another way, you can think of it as cash, whether in a bank, a money market fund, or in your hands. We will look at the growth of MZM in the next two charts, one of which shows the actual growth and the other the growth in annual percentage terms.
Now remember, Friedman taught us that inflation is a monetary phenomenon. If you increase the money supply too fast, you risk an unwanted rise in inflation. If the money supply shrinks or grows too slowly, you could see deflation develop.
MZM Money Stock
MZM Money Stock
Note that MZM was growing at close to an 18% rate year over year earlier in the year but that growth is now down to 10%. Also note that less than three years ago MZM was growing close to zero. Since that time inflation has increased. Therefore, one could make the case that the Fed is causing inflation by allowing the money supply to increase too rapidly. Case closed?
Maybe not. Correlation is NOT causation. More cash sometimes means that people and businesses are taking less risk. The Fed cannot control what we do with our money, only how much bank reserves it allows and how much cash it puts into the system.
Forecasting inflation from a money-supply graph is very difficult. It used to be a lot simpler, but in recent decades has been very unreliable, for reasons we will look at in a moment. But it is much too simplistic to draw a direct comparison between inflation and an arbitrary money-supply measure.
If we look at a graph of M2, which includes time deposits, small certificates of deposit, etc., we again see a rise in recent growth. M2 is the measure of money supply that most economists use when they are thinking about inflation. And we see that M2 is growing at a sprightly 7% year over year. This is not all that high historically, but again it is up significantly from the past few years. See the graph below. Note that there have been several times (as recently as 2000) when annual M2 growth was over 10%.
MZM Money Stock
But there is more to the inflation/deflation debate than just money supply. Money supply is what you see. And now we look at what most of us don't see.
Casey Research - Big Gold
The Velocity of Money
Now, let's introduce the concept of the velocity of money. Basically, this is the average frequency with which a unit of money is spent. Let's assume a very small economy of just you and me, which has a money supply of $100. I have the $100 and spend it to buy $100 worth of flowers from you. You in turn spend the $100 to buy books from me. We have created $200 of our "gross domestic product" from a money supply of just $100. If we do that transaction every month, in a year we would have $2400 of "GDP" from our $100 monetary base.
So, what that means is that gross domestic product is a function not just of the money supply but how fast the money supply moves through the economy. Stated as an equation, it is Y=MV, where Y is the nominal gross domestic product (not inflation-adjusted here), M is the money supply, and V is the velocity of money. You can solve for V by dividing Y by M. (In last April's discussion of the velocity of money I used "P" instead of "Y". Lacy Hunt tells me the more correct statement of the equation is Y=MV, and I defer to the expert. Sorry for any confusion.)
Now, let's complicate our illustration just a bit, but not too much at first. This is very basic, and for those of you who will complain that I am being too simple, wait a few pages, please. Let's assume an island economy with 10 businesses and a money supply of $1,000,000. If each business does approximately $100,000 of business a quarter, then the gross domestic product for the island would be $4,000,000 (4 times the $1,000,000 quarterly production). The velocity of money in that economy is 4.
But what if our businesses got more productive? We introduce all sorts of interesting financial instruments, banking, new production capacity, computers, etc.; and now everyone is doing $100,000 per month. Now our GDP is $12,000,000 and the velocity of money is 12. But we have not increased the money supply. Again, we assume that all businesses are static. They buy and sell the same amount every month. There are no winners and losers as of yet.
Now let's complicate matters. Two of the kids of the owners of the businesses decide to go into business for themselves. Having learned from their parents, they immediately become successful and start doing $100,000 a month themselves. GDP potentially goes to $14,000,000. But, in order for everyone to stay at the same level of gross income, the velocity of money must increase to 14.
Now, this is important. If the velocity of money does NOT increase, that means (in our simple island world) that on average each business is now going to buy and sell less each month. Remember, nominal GDP is money supply times velocity. If velocity does not increase and money supply stays the same, GDP must stay the same, and the average business (there are now 12) goes from doing $1,200,000 a year down to $1,000,000.
Each business now is doing around $80,000 per month. Overall production on our island is the same, but is divided up among more businesses. For each of the businesses, it feels like a recession. They have fewer dollars, so they buy less and prices fall. They fall into actual deflation (very simplistically speaking). So, in that world, the local central bank recognizes that the money supply needs to grow at some rate in order to make the demand for money "neutral."
It is basic supply and demand. If the demand for corn increases, the price will go up. If Congress decides to remove the ethanol subsidy, the demand for corn will go down, as will the price.
If the central bank increased the money supply too much, you would have too much money chasing too few goods, and inflation would rear its ugly head. (Remember, this is a very simplistic example. We assume static production from each business, running at full capacity.)
Let's say the central bank doubles the money supply to $2,000,000. If the velocity of money is still 12, then the GDP would grow to $24,000,000. That would be a good thing, wouldn't it?
No, because only 20% more goods is produced from the two new businesses. There is a relationship between production and price. Each business would now sell $200,000 per month or double their previous sales, which they would spend on goods and services, which only grew by 20%. They would start to bid up the price of the goods they want, and inflation sets in. Think of the 1970s.
So, our mythical bank decides to boost the money supply by only 20%, which allows the economy to grow and prices to stay the same. Smart. And if only it were that simple.
Let's assume 10 million businesses, from the size of Exxon down to the local dry cleaners, and a population which grows by 1% a year. Hundreds of thousands of new businesses are being started every month, and another hundred thousand fail. Productivity over time increases, so that we are producing more "stuff" with fewer costly resources.
Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, plus some more for new population, and you have to factor in productivity. If you don't then deflation will appear. But if money supply grows too much, then you've got inflation.
And what about the velocity of money? Friedman assumed the velocity of money was constant. And it was from about 1950 until 1978 when he was doing his seminal work. But then things changed. Let's look at two charts sent to me by Lacy. First, let's look at the velocity of money for the last 108 years.
Notice that the velocity of money fell during the Great Depression. And from 1953 to 1980 the velocity of money was almost exactly the average for the last 100 years. Also, Lacy pointed out, in a conversation which helped me immensely in writing this letter, that the velocity of money is mean reverting over long periods of time. That means one would expect the velocity of money to fall over time back to the mean or average. Some would make the argument that we should use the mean from more modern times since World War II, but even then mean reversion would mean a slowing of the velocity of money (V), and mean reversion implies that V would go below (overcorrect) the mean. However you look at it, the clear implication is that V is going to drop. In a few paragraphs, we will see why that is the case from a practical standpoint. But let's look at the first chart.
Velocity of Money 1900-2008
Now, let's look at the same chart since 1959, but with shaded gray areas which show us the times the economy was in recession. Note that (with one exception in the 1970s) velocity drops during a recession. What is the Fed response? An offsetting increase in the money supply to try and overcome the effects of the business cycle and the recession. Y=MV. If velocity falls then the money supply must rise for nominal GDP to grow. The Fed attempts to jump-start the economy back into growth by increasing the money supply.
Velocity of Money
In this chart, Lacy assumes we are already in recession (gray bar at far right). The black line is his projection of velocity in the near future. If you can't read the print at the bottom of the chart, he assumes that GDP is $14.17 trillion, M2 is $7.6 trillion and therefore velocity is 1.85, down from almost 1.95 just a few years ago. If velocity reverts to or below the mean, it could easily drop 10% from here. We will explore why this could happen in a minute.
Y=MV
But let's go back to our equation, Y=MV. If velocity slows by 10% (which it well should) then money supply (M) would have to rise by 10% just to maintain a static economy. But that assumes you do not have 1% population growth, 2% (or thereabouts) productivity growth, and a target inflation of 2%, which means M (money supply) would need to grow about 5% a year, even if V is constant. And that is not particularly stimulative, given that we are in recession. And notice above that M2 is growing just about in line with that.
Bottom line? Expect money-supply growth well north of 7% annually for the next few years. Is that enough? Too much? About right? We won't know for a long time. This will allow armchair economists (and that is most of us) to sit back and Monday morning quarterback for many years.
My friends at GaveKal have their own measure of world velocity, and as you might expect it is slowing too. This slowing is a global problem and is one of the reasons we are in a global recession.
The GaveKal Velocity Indicator
A Slowdown in Velocity
Now, why is the velocity of money slowing down? Notice the significant real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to have been rising faster than normal. Why? It is financial innovation that spurs above-trend growth in velocity. Primarily because of the financial innovations introduced in the early '90s, like securitizations, CDOs, etc., we saw a significant rise in V.
And now we are watching the Great Unwind of financial innovations, as they went to excess and caused a credit crisis. In principle, a CDO or subprime asset-backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in, and Wall Street began to game the system. End of game.
What drove velocity to new highs is no longer part of the equation. The absence of new innovation and the removal of old innovations (even if they were bad innovations, they did help speed things up) are slowing things down. If the money supply did not rise significantly to offset that slowdown in velocity, the economy would already be in a much deeper recession.
While the Fed does not have control over M2, when they lower interest rates it is supposed to make us want to take on more risk, borrow money, and boost the economy. So, they have an indirect influence.
I expect the Fed to cut at least another 50 basis points next week, and to give us a statement with a nod toward difficult economic conditions. The latest Beige Book from the Fed was simply dreadful, so you can bet the governors will have a deteriorating economy in mind. Given the 25-plus-year low in consumer confidence, they have little choice.
I agree with Nouriel that the Fed will soon move rates close to zero. For all intents and purposes, the markets have already moved there. But is it having an effect on the willingness of banks to lend? Not hardly. Standards for lending are tightening every week. Look at the graphs below. The willingness of banks to make consumer loans is dropping to a 28-year low. And they are tightening standards on all sorts of business loans.
Various Charts
Now, I argued above that the Fed is not really expanding the money supply, so far. But within a few quarters, we will be facing outright deflation. The Fed is going to monetize at least a portion of what will be a $1+ trillion dollar US deficit. They have announced they are going to purchase $800 billion in mortgage-backed and other types of consumer loan assets. That will be a direct infusion of dollars into the economy. That is serious monetization. But they may feel they have no choice if they want to keep the US economy from going Japanese.
When someone becomes a Fed governor, they take them into a back room and perform a DNA transplant on them. They come out of that room viscerally, almost genetically, focused on preventing deflation from happening on their watch.
How much monetization will be enough to halt deflation and overcome the slowdown in the velocity of money and the rise in personal savings? No one knows. There is no fancy equation or model which can encompass all the factors, or at least not one I know of.
We will also soon see which of the additional deflation-fighting policies that Bernanke outlined in his 2002 "helicopter" speech the Fed will adopt. It is highly likely that we will see more than a few of them. It is quite possible that we will see the Fed start to set rates on longer-term bills and even bonds in an effort to pull down longer-term rates for corporations and individuals.
We will explore all the deflation-fighting options and what the results might be in future letters, but remember that there will come a time when the Fed will have to "take back" some of the liquidity they are going to provide. That means we could be in for a multi-year period of slow growth after we pull out of this recession. And this recession could easily last through 2009.
from John Mauldin
link for article and charts:
http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2008/12/05/the-velocity-factor.aspx
Posted Dec 05 2008, 09:05 PM
by John Mauldin
The Velocity Factor
Richard Russell Tribute
"A severe global recession will lead to deflationary pressures. Falling demand will lead to lower inflation as companies cut prices to reduce excess inventory. Slack in labour markets from rising unemployment will control labor costs and wage growth. Further slack in commodity markets as prices fall will lead to sharply lower inflation. Thus inflation in advanced economies will fall towards the 1 per cent level that leads to concerns about deflation.
"Deflation is dangerous as it leads to a liquidity trap, a deflation trap and a debt deflation trap: nominal policy rates cannot fall below zero and thus monetary policy becomes ineffective. We are already in this liquidity trap since the Fed funds target rate is still 1 per cent but the effective one is close to zero as the Federal Reserve has flooded the financial system with liquidity; and by early 2009 the target Fed funds rate will formally hit 0 per cent. Also, in deflation the fall in prices means the real cost of capital is high - despite policy rates close to zero - leading to further falls in consumption and investment. This fall in demand and prices leads to a vicious circle: incomes and jobs are cut, leading to further falls in demand and prices (a deflation trap); and the real value of nominal debts rises (a debt deflation trap) making debtors' problems more severe and leading to a rising risk of corporate and household defaults that will exacerbate credit losses of financial institutions."
- Professor Nouriel Roubini of New York University
I had breakfast with Nouriel this morning down in Soho (I am in New York today). I thought the above quote was an excellent way to lead off this week's letter. Some of the more important questions of the moment are whether we face a serious bout of deflation, and if so, what can be done about it. There are market observers who are looking at the graphs which show the meteoric rise in the monetary base (see below) and predict that we will soon see much higher and rising inflation and a seriously falling dollar (accompanied with a large rise in gold). Is inflation everywhere and always a monetary phenomenon, as Friedman taught us? Can we see a large rise in the monetary base that is not accompanied by inflation? As Frederic Bastiat said (roughly), "In economics there is what you see and then there is what you don't see." The more important of the two items is what you don't see. In this week's letter we talk about what most market observers are not seeing, and why you should be paying attention.
We are going to revisit portions of an important e-letter I wrote earlier this year about the velocity of money. I am updating the charts and adding a lot of new commentary. I cannot overly stress how important this is. If you want to understand the markets, the dollar, gold, and more, you have to have this information down. You will need to put on your thinking cap, as much of what I am writing is counterintuitive and certainly not considered as received wisdom in much of the financial-commentator media. (Note: this letter will print longer than usual as there are a lot of graphs.)
Also, I am going to make an important announcement at the end of the letter about a new information service, and I need feedback from some of you.
Swiss Franc at Everbank
Richard Russell Tribute
But first, I and some of my fellow newsletter writers (Bill Bonner and Dennis Gartman, among others, are slated to be there) are going to be hosting a special tribute dinner to honor Richard Russell for his outstanding contribution of over 50 years to not only the craft of investment writing but to the lives and investment portfolios of his readers. He is one of my personal heroes as well as a good friend. At 84, his writing today is better than ever, and now he writes every day, not just once a month! Richard is an institution in the investment writing world, and after talking with his wife Faye he has said he would let us plan the dinner.
Richard has some of the most loyal readers anywhere. I have personally talked to readers who have been reading Dow Theory Letters almost since the beginning (1956), and their enthusiasm for all things Richard has not waned.
We really hope we can get a roomful of Richard's friends, writing colleagues, and fans who have benefited from his wisdom over the years, to honor him for a life well lived and a true servant's spirit, as well as being a guide not just in the markets but in life. The dinner will be Saturday evening, April 4, 2009 in San Diego. In order to know how many people we should plan for, please send an email to russelltribute@2000wave.com indicating how many tickets you would like. Plan on the tickets being around $200, with any money left over going to Richard's favorite charity. I actually expect tickets to go rather fast, so let us know as soon as possible. We will get back into contact with you as to the exact time and place. Thanks.
The Velocity Factor
When most of us think of the velocity of money, we think of how fast it goes through our hands. I know at the Mauldin household, with seven kids, it seems like something is always coming up. And with Christmas looming, the velocity, at least in terms of how fast money seems to go out the door, seems faster than normal. And what about my business? Travel costs are way, way up; and as aggressive as we are on the budget, expenses always seem to rise. Compliance, legal, and accounting costs are through the roof. I wonder how those costs are accounted for in the Consumer Price Index? About the only way to deal with it is, as my old partner from the 1970s Don Moore used to say, is to make up the rise in costs with "excess profits," whatever those are.
Is the Money Supply Growing or Not?
But we are not talking about our personal budgetary woes, gentle reader. Today we tackle an economic concept called the velocity of money and how it affects the growth of the economy. Let's start with a few charts showing the recent high growth in the money supply that many are alarmed about. The money supply is growing very slowly, alarmingly fast, or just about right, depending upon which monetary measure you use.
First, let's look at the adjusted monetary base, or plain old cash plus bank reserves (remember that fact) held at the Federal Reserve. That is the only part of the money supply the Fed has any real direct control of. Until very recently, there was very little year-over-year growth. The monetary base grew along a rather predictable long-term trend line, with some variance from time to time, but always coming back to the mean.
But in the last few months the monetary base has grown by a staggering amount - by over 1400% on an annual basis, as shown in the next chart from my friend Dr. Lacy Hunt at Hoisington Asset Management. And when you see the "J-curve" in the monetary base (which is likely to rise even more!) it does demand an explanation. There are those who suggest this is an indication of a Federal Reserve gone wild and that 2,000-dollar gold and a plummeting dollar are just around the corner. They are looking at that graph and leaping to conclusions. But it is what you don't see that is important.
St Louis Adjusted Monetary Base
Now, the same graph but in percentage terms:
Total Reserves YOY
Several of my readers have sent me questions related to the chart below, which compares the above graph to the value of the US dollar, as measured in the trade-weighted dollar index. If the Fed is flooding the market with dollars, does that not mean a crash in the dollar is imminent? What foreign government or investor would want to hold dollars when the Fed is debasing the currency so rapidly?
US Dollar Index vs US Monetary Base
Give Me Your Tired, Your Poor, Your Illiquid
The answer is that the Fed is not creating money in the sense of, say, monetizing the national debt (that comes later in the letter). Remember that the adjusted monetary base is cash plus bank reserves on deposit at the Fed. Banks have to hold a certain portion of their assets as liquid assets in order to meet potential demand from depositors for their money. If they go below that required number, the regulators come in and demand they increase their liquid assets immediately.
Various assets have been getting a "haircut" as to their ability to count as liquid reserves. With more and more assets becoming illiquid, the amount of money held in the liquid asset portion of many US banks assets has been dwindling. What to do? The Fed decided to take these assets and trade them (temporarily) for US treasuries, which are quite liquid. It's a kind of "Give me your tired, your poor, your humble illiquid assets yearning to be free" program to allow banks to stay in regulatory compliance.
But notice something. While the Fed did create the T-bills, they did not inject new capital into the overall system. If a bank had one billion in assets and gave the Fed $100 million to get liquid T-bills, it still just has $1 billion in assets. Yes, it could sell them to someone else to get cash, but that someone else would use already existing dollars. The Fed has provided liquidity but did not inject (yet) new cash into the overall system through this program. At some point in the future, when banks are once again doing business with each other and the system is more liquid, banks will take those T-bills back to the Fed and receive back whatever collateral they used to get them in the first place.
To illustrate what I am saying, let's look at MZM, or Money of Zero Maturity. Stated another way, you can think of it as cash, whether in a bank, a money market fund, or in your hands. We will look at the growth of MZM in the next two charts, one of which shows the actual growth and the other the growth in annual percentage terms.
Now remember, Friedman taught us that inflation is a monetary phenomenon. If you increase the money supply too fast, you risk an unwanted rise in inflation. If the money supply shrinks or grows too slowly, you could see deflation develop.
MZM Money Stock
MZM Money Stock
Note that MZM was growing at close to an 18% rate year over year earlier in the year but that growth is now down to 10%. Also note that less than three years ago MZM was growing close to zero. Since that time inflation has increased. Therefore, one could make the case that the Fed is causing inflation by allowing the money supply to increase too rapidly. Case closed?
Maybe not. Correlation is NOT causation. More cash sometimes means that people and businesses are taking less risk. The Fed cannot control what we do with our money, only how much bank reserves it allows and how much cash it puts into the system.
Forecasting inflation from a money-supply graph is very difficult. It used to be a lot simpler, but in recent decades has been very unreliable, for reasons we will look at in a moment. But it is much too simplistic to draw a direct comparison between inflation and an arbitrary money-supply measure.
If we look at a graph of M2, which includes time deposits, small certificates of deposit, etc., we again see a rise in recent growth. M2 is the measure of money supply that most economists use when they are thinking about inflation. And we see that M2 is growing at a sprightly 7% year over year. This is not all that high historically, but again it is up significantly from the past few years. See the graph below. Note that there have been several times (as recently as 2000) when annual M2 growth was over 10%.
MZM Money Stock
But there is more to the inflation/deflation debate than just money supply. Money supply is what you see. And now we look at what most of us don't see.
Casey Research - Big Gold
The Velocity of Money
Now, let's introduce the concept of the velocity of money. Basically, this is the average frequency with which a unit of money is spent. Let's assume a very small economy of just you and me, which has a money supply of $100. I have the $100 and spend it to buy $100 worth of flowers from you. You in turn spend the $100 to buy books from me. We have created $200 of our "gross domestic product" from a money supply of just $100. If we do that transaction every month, in a year we would have $2400 of "GDP" from our $100 monetary base.
So, what that means is that gross domestic product is a function not just of the money supply but how fast the money supply moves through the economy. Stated as an equation, it is Y=MV, where Y is the nominal gross domestic product (not inflation-adjusted here), M is the money supply, and V is the velocity of money. You can solve for V by dividing Y by M. (In last April's discussion of the velocity of money I used "P" instead of "Y". Lacy Hunt tells me the more correct statement of the equation is Y=MV, and I defer to the expert. Sorry for any confusion.)
Now, let's complicate our illustration just a bit, but not too much at first. This is very basic, and for those of you who will complain that I am being too simple, wait a few pages, please. Let's assume an island economy with 10 businesses and a money supply of $1,000,000. If each business does approximately $100,000 of business a quarter, then the gross domestic product for the island would be $4,000,000 (4 times the $1,000,000 quarterly production). The velocity of money in that economy is 4.
But what if our businesses got more productive? We introduce all sorts of interesting financial instruments, banking, new production capacity, computers, etc.; and now everyone is doing $100,000 per month. Now our GDP is $12,000,000 and the velocity of money is 12. But we have not increased the money supply. Again, we assume that all businesses are static. They buy and sell the same amount every month. There are no winners and losers as of yet.
Now let's complicate matters. Two of the kids of the owners of the businesses decide to go into business for themselves. Having learned from their parents, they immediately become successful and start doing $100,000 a month themselves. GDP potentially goes to $14,000,000. But, in order for everyone to stay at the same level of gross income, the velocity of money must increase to 14.
Now, this is important. If the velocity of money does NOT increase, that means (in our simple island world) that on average each business is now going to buy and sell less each month. Remember, nominal GDP is money supply times velocity. If velocity does not increase and money supply stays the same, GDP must stay the same, and the average business (there are now 12) goes from doing $1,200,000 a year down to $1,000,000.
Each business now is doing around $80,000 per month. Overall production on our island is the same, but is divided up among more businesses. For each of the businesses, it feels like a recession. They have fewer dollars, so they buy less and prices fall. They fall into actual deflation (very simplistically speaking). So, in that world, the local central bank recognizes that the money supply needs to grow at some rate in order to make the demand for money "neutral."
It is basic supply and demand. If the demand for corn increases, the price will go up. If Congress decides to remove the ethanol subsidy, the demand for corn will go down, as will the price.
If the central bank increased the money supply too much, you would have too much money chasing too few goods, and inflation would rear its ugly head. (Remember, this is a very simplistic example. We assume static production from each business, running at full capacity.)
Let's say the central bank doubles the money supply to $2,000,000. If the velocity of money is still 12, then the GDP would grow to $24,000,000. That would be a good thing, wouldn't it?
No, because only 20% more goods is produced from the two new businesses. There is a relationship between production and price. Each business would now sell $200,000 per month or double their previous sales, which they would spend on goods and services, which only grew by 20%. They would start to bid up the price of the goods they want, and inflation sets in. Think of the 1970s.
So, our mythical bank decides to boost the money supply by only 20%, which allows the economy to grow and prices to stay the same. Smart. And if only it were that simple.
Let's assume 10 million businesses, from the size of Exxon down to the local dry cleaners, and a population which grows by 1% a year. Hundreds of thousands of new businesses are being started every month, and another hundred thousand fail. Productivity over time increases, so that we are producing more "stuff" with fewer costly resources.
Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, plus some more for new population, and you have to factor in productivity. If you don't then deflation will appear. But if money supply grows too much, then you've got inflation.
And what about the velocity of money? Friedman assumed the velocity of money was constant. And it was from about 1950 until 1978 when he was doing his seminal work. But then things changed. Let's look at two charts sent to me by Lacy. First, let's look at the velocity of money for the last 108 years.
Notice that the velocity of money fell during the Great Depression. And from 1953 to 1980 the velocity of money was almost exactly the average for the last 100 years. Also, Lacy pointed out, in a conversation which helped me immensely in writing this letter, that the velocity of money is mean reverting over long periods of time. That means one would expect the velocity of money to fall over time back to the mean or average. Some would make the argument that we should use the mean from more modern times since World War II, but even then mean reversion would mean a slowing of the velocity of money (V), and mean reversion implies that V would go below (overcorrect) the mean. However you look at it, the clear implication is that V is going to drop. In a few paragraphs, we will see why that is the case from a practical standpoint. But let's look at the first chart.
Velocity of Money 1900-2008
Now, let's look at the same chart since 1959, but with shaded gray areas which show us the times the economy was in recession. Note that (with one exception in the 1970s) velocity drops during a recession. What is the Fed response? An offsetting increase in the money supply to try and overcome the effects of the business cycle and the recession. Y=MV. If velocity falls then the money supply must rise for nominal GDP to grow. The Fed attempts to jump-start the economy back into growth by increasing the money supply.
Velocity of Money
In this chart, Lacy assumes we are already in recession (gray bar at far right). The black line is his projection of velocity in the near future. If you can't read the print at the bottom of the chart, he assumes that GDP is $14.17 trillion, M2 is $7.6 trillion and therefore velocity is 1.85, down from almost 1.95 just a few years ago. If velocity reverts to or below the mean, it could easily drop 10% from here. We will explore why this could happen in a minute.
Y=MV
But let's go back to our equation, Y=MV. If velocity slows by 10% (which it well should) then money supply (M) would have to rise by 10% just to maintain a static economy. But that assumes you do not have 1% population growth, 2% (or thereabouts) productivity growth, and a target inflation of 2%, which means M (money supply) would need to grow about 5% a year, even if V is constant. And that is not particularly stimulative, given that we are in recession. And notice above that M2 is growing just about in line with that.
Bottom line? Expect money-supply growth well north of 7% annually for the next few years. Is that enough? Too much? About right? We won't know for a long time. This will allow armchair economists (and that is most of us) to sit back and Monday morning quarterback for many years.
My friends at GaveKal have their own measure of world velocity, and as you might expect it is slowing too. This slowing is a global problem and is one of the reasons we are in a global recession.
The GaveKal Velocity Indicator
A Slowdown in Velocity
Now, why is the velocity of money slowing down? Notice the significant real rise in V from 1990 through about 1997. Growth in M2 (see the above chart) was falling during most of that period, yet the economy was growing. That means that velocity had to have been rising faster than normal. Why? It is financial innovation that spurs above-trend growth in velocity. Primarily because of the financial innovations introduced in the early '90s, like securitizations, CDOs, etc., we saw a significant rise in V.
And now we are watching the Great Unwind of financial innovations, as they went to excess and caused a credit crisis. In principle, a CDO or subprime asset-backed security should be a good thing. And in the beginning they were. But then standards got loose, greed kicked in, and Wall Street began to game the system. End of game.
What drove velocity to new highs is no longer part of the equation. The absence of new innovation and the removal of old innovations (even if they were bad innovations, they did help speed things up) are slowing things down. If the money supply did not rise significantly to offset that slowdown in velocity, the economy would already be in a much deeper recession.
While the Fed does not have control over M2, when they lower interest rates it is supposed to make us want to take on more risk, borrow money, and boost the economy. So, they have an indirect influence.
I expect the Fed to cut at least another 50 basis points next week, and to give us a statement with a nod toward difficult economic conditions. The latest Beige Book from the Fed was simply dreadful, so you can bet the governors will have a deteriorating economy in mind. Given the 25-plus-year low in consumer confidence, they have little choice.
I agree with Nouriel that the Fed will soon move rates close to zero. For all intents and purposes, the markets have already moved there. But is it having an effect on the willingness of banks to lend? Not hardly. Standards for lending are tightening every week. Look at the graphs below. The willingness of banks to make consumer loans is dropping to a 28-year low. And they are tightening standards on all sorts of business loans.
Various Charts
Now, I argued above that the Fed is not really expanding the money supply, so far. But within a few quarters, we will be facing outright deflation. The Fed is going to monetize at least a portion of what will be a $1+ trillion dollar US deficit. They have announced they are going to purchase $800 billion in mortgage-backed and other types of consumer loan assets. That will be a direct infusion of dollars into the economy. That is serious monetization. But they may feel they have no choice if they want to keep the US economy from going Japanese.
When someone becomes a Fed governor, they take them into a back room and perform a DNA transplant on them. They come out of that room viscerally, almost genetically, focused on preventing deflation from happening on their watch.
How much monetization will be enough to halt deflation and overcome the slowdown in the velocity of money and the rise in personal savings? No one knows. There is no fancy equation or model which can encompass all the factors, or at least not one I know of.
We will also soon see which of the additional deflation-fighting policies that Bernanke outlined in his 2002 "helicopter" speech the Fed will adopt. It is highly likely that we will see more than a few of them. It is quite possible that we will see the Fed start to set rates on longer-term bills and even bonds in an effort to pull down longer-term rates for corporations and individuals.
We will explore all the deflation-fighting options and what the results might be in future letters, but remember that there will come a time when the Fed will have to "take back" some of the liquidity they are going to provide. That means we could be in for a multi-year period of slow growth after we pull out of this recession. And this recession could easily last through 2009.
LOL. Frontier justice or the threat thereof will always be more effective than the SEC. One could make a good case for more of it in this industry.
.......al
midrew, thanks for your input. I posted that to 1) show some competition in the industry and 2) to show another opinion on the potential of the pet industry.
......al
some competition:
http://www.freep.com/article/20081207/BUSINESS06/812070389/1019/BUSINESS
Eternal memories for beloved pets
BY KIMBERLY LIFTON • FREE PRESS SPECIAL WRITER • December 7, 2008
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There is good news. Fluffy won't be spending eternity in an unmarked grave.
Advertisement
Wealthy pet lovers are memorializing their beloved companions in style, spending big bucks on high-end silk-lined caskets with foam mattresses, chiseled-edged stone markers, cemetery plots, private mausoleums and urns topped with hand-carved figurines of the pet's image.
"For a lot of people, their pets are part of their family," said Pat Norris, who runs the Garden of Our Little Friends pet cemetery inside Cadillac Memorial Gardens East in Clinton Township. "Money is not the object. It's about unconditional love."
LAP OF LUXURY: Americans spent $43 billion last year on products and services that ensure their pets live the good life. Now those who have the means are making sure their dogs, cats, birds, lizards, rabbits and ferrets are properly laid to rest.
One local family doled out more than $40,000 for a private mausoleum at the Garden of Our Little Friends in Clinton Township with spaces for 12 pets. Seven dogs and cats are buried inside. Another pet lover spent more than $10,000 on a granite bird bath doubling as a tomb for his beloved bird.
ETERNAL LOVE: A crematory urn with an LCD screen showing pictures of a pet costs about $500. A wooden casket, lined with linen, starts at about $750. For $1,000, you might consider displaying your pet's urn in a columbarium at a pet cemetery.
"This is a huge business, and it is going to get bigger," Norris said.
WANT IT? The average cost of a pet funeral at one of four Garden of Our Little Friends' cemeteries throughout metro Detroit, which includes gravesite, opening it, lowering the casket and a marker, is $2,000. Starting price for a small silver hand-carved figurine for an urn designed by jeweler Link Wachler is $1,500. A small figurine carved in gold could top $4,500. Go to www.linkwachler.com. Contact Norris at 586-286-7500.
If you have an idea, send it to firstclassfp@comcast.net.
From So Carolina:
http://www.independentmail.com/news/2008/dec/06/tag-youre-it/
This & that: Tag, you're it
Independent Mail
Saturday, December 6, 2008
We’ve often heard of thieves taking license plates, but usually it’s to get away with a crime, not to create a collection.
A Long Island man purchased OBAMA vanity plates, either with optimism or foresight, shortly after the president-elect’s victory in the January South Carolina primary.
But would-be thieves have tried repeatedly to pry the plates from his vehicle, according to the New York Post, even one who was caught by the car’s owner while in the process.
Great Neck, N.Y., resident Jonathan Lifschutz said he has removed the vanity plates from his vehicle and now they ride around with him in the comfort of the car’s interior.
A fan for life — and beyond
Sports fans come in all sizes, and now there’s a casket to fit the bill for fans of the Boston Red Sox. We recently read a report of a casket manufactured by Eternal Image of Michigan that features the team logo on both its exterior and interior. We presume that’s so both the deceased and the mourners can know where one’s heart lies.
A funeral home director in Rockland, Mass., told The Boston Globe that it’s not unusual for families to want their loved one buried with favorite items, including Red Sox paraphernalia. This is just expanding the options, we suppose.
The first purchasers chose Red Sox No. 0001 for their father and didn’t hesitate at the $3,000 price tag for dear old dad.
Should have swallowed his pride and fessed up
A young thief didn’t want to get caught with stolen goods, so he swallowed his ill-gotten gains. Authorities say an 18-year-old in Naples, Fla., stole a pair earrings from a JCPenney store at his local mall, and when approached by the security officer, gulped not in fear but to get the gems down his gullet with a long drink of water.
No indication if the earrings were recovered.
We don’t think we want to know.
RB- I was going to suggest that also, but thought everyone would laugh at me, LOL. Right now that is my main source of silver 90% coins. Cheapest place around. Gotta work at it and make a lot of bids but you can pick some up at 8-9X face there.
......al
I agree. The topic of lawsuits comes up every time a pinkie CEO decides to legally rip off shareholders. I don't think one has ever been initiated let alone won. I'll stand corrected on that if anyone has any info. One of the key pieces od DD on any penny stock is who is involved with running the company and where have they been before. Amazing what you will find sometimes. Scam artists move from shell to shell with pie in the sky PRs all the while selling shares to support lavish lifestyles. Sad to say most of it is all legal.
........al
OT- I couldn't understand why TraderRick was banned from the board so I inquired from admin. I may have disagreed with his point of view, but saw no reason to ban him. Turns out he was banned by admin by his own request. FWIW
Best of luck on the lawsuit, but I have reservations on it's success. I have read every PR issued and most info is covered on the forward looking statements paragraph. All that is except the releases that the company was buying back shares and Clayton was buying shares for himself. Even if he issued 100 billion new shares, as long as he bought those shares he said he would he is covered. My legal training goes back many years and laws change daily I know. But those 2 items are the only ones I see that could be a chink in the armor of the forward looking statements paragraphs that are in the releases. What he is doing and has done may be morally and ethically wrong, but illegal? I don't believe so. JMHO
.........al
Red Alert: Gold Backwardation!!!
-- Posted Friday, 5 December 2008 | Digg This ArticleDigg It! | Source: GoldSeek.com
Antal E. Fekete
Gold Standard University Live
December 2, 2008, was a landmark in the saga of the collapsing international monetary system, yet it did not deserve to be reported in the press: gold went to backwardation for the first time ever in history. The facts are as follows: on December 2nd, at the Comex in New York, December gold futures (last delivery: December 31) were quoted at 1.98% discount to spot, while February gold futures (last delivery: February 27, 2009) were quoted at 0.14% discount to spot. (All percentages annualized.) The condition got worse on December 3rd, when the corresponding figures were 2% and 0.29%. This means that the gold basis has turned negative, and the condition of backwardation persisted for at least 48 hours. I am writing this in the wee hours of December 4th, when trading of gold futures has not yet started in New York.
According to the December 3rd Comex delivery report, there are 11,759 notices to take delivery. This represents 1.1759 million ounces of gold, while the Comex-approved warehouses hold 2.9 million ounces. Thus 40% of the total amount will have to be delivered by December 31st. Since not all the gold in the warehouses is available for delivery, Comex supply of gold falls far short of the demand at present rates. Futures markets in gold are breaking down. Paper gold is progressively being discredited.
Already there was a slight backwardation in gold at the expiry of a previous active contract month, but it never spilled over to the next active contract month, as it does now: backwardation in the December contract is spilling over to the February contract which at last reading was 0.36%. Silver is also in backwardation, with the discount on silver futures being about twice that on gold futures.
As those who attended my seminar on the gold basis in Canberra last month know, the gold basis is a pristine, incorruptible measure of trust, or the lack of it in case it turns negative, in paper money. Of course, it is too early to say whether gold has gone to permanent backwardation, or whether the condition will rectify itself (it probably will). Be that as it may, it does not matter. The fact that it has happened is the coup de grâce for the regime of irredeemable currency. It will bleed to death, maybe rather slowly, even if no other hits, blows, or shocks are dealt to the system. Very few people realize what is going on and, of course, official sources and the news media won’t be helpful to them to explain the significance of all this. I am trying to be helpful to the discriminating reader.
Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold. I dubbed this event that has cast its long shadow forward for many a year, the last contango in Washington ― contango being the name for the condition opposite to backwardation (namely, that of a positive basis), and Washington being the city where the Paper-mill of the Potomac, the Federal Reserve Board, is located. This is a tongue-in-cheek way of saying that the jig in Washington is up. The music has stopped on the players of ‘musical chairs’. Those who have no gold in hand are out of luck. They won’t get it now through the regular channels. If they want it, they will have to go to the black market.
I founded Gold Standard University Live (GSUL) two years ago and dedicated it to research of monetary issues that are pointedly ignored by universities, government think-tanks, and the financial press, centered around the question of long-term viability of the regime of irredeemable currency. Historical experiments with that type of currency were many but all of them, without exception, have ended in ignominious failure accompanied with great economic pain, unless the experiment was called off in good time and the authorities returned to monetary rectitude, that is, to a metallic monetary standard. It is also worth pointing out that the present experiment is unique in that all countries of the world indulge in it. Not one country is on a metallic monetary standard, under which the Treasury and the Central Bank are subject to the same contract law as ordinary citizens. They cannot issue irredeemable promises to pay and keep them in monetary circulation through a conspiracy known as check-kiting. Not one country will be spared from the fire and brimstone that once rained on the cities of Sodom and Gomorrah as a punishment of God for immoral behavior.
In all previous episodes there were some countries around that did not listen to the siren song and stayed on the gold standard. They could give a helping hand to the deviant ones, thus limiting economic pain. Today there are no such countries. If you want to be saved, you must be prepared to save yourself.
You cannot understand the process whereby a fiat money system self-destructs without understanding the gold and silver basis. The Quantity Theory of Money does not provide an explanation, because deflation may well precede hyperinflation, as it appears to be the case right now.
For these reasons I placed the study of the gold and silver basis on the top of the list of research topics for GSUL. These can serve as an early warning system that will signal the beginning of the end. The end is approaching with the inevitability of the climax in a Greek tragedy, as the heroes and heroines are drawn to their own destruction. The present reactionary experiment with paper money is entering its death-throes. GSUL has had five sessions and could have established itself as an important, and even the only, source of information about this cataclysmic event: the confrontation of the Titanic (representing the international monetary system) with the iceberg (representing gold and its vanishing basis) as the latter is emerging from the fog too late to avoid collision.
Unfortunately, this was not meant to be: GSUL has to terminate its operations due to a decision made by Mr. Eric Sprott, of Sprott Asset Management, to terminate sponsoring GSUL, saying that “results do not justify the expense.”
I sincerely regret that our activities did not live up to the expectations of Mr. Sprott, but I am very proud of the fact that our research is still the only source of information on the vanishing gold basis and its corollary, the seizing up of the paper money system that threatens the world, as it does, with a Great Depression eclipsing that of the 1930’s.
Let me summarize the salient points of discussion during the last two sessions of GSUL for the benefit of those who wanted to attend but couldn’t. The gold basis is the difference between the futures and the cash price of gold. More precisely it is the price of the nearby active futures contract in the gold futures market minus the cash price of physical gold in the spot market. Historically it has been positive ever since gold futures trading started at the Winnipeg Commodity Exchange in 1972 (except for some rare hiccups at the triple-witching hour. Such deviations have been called ‘logistical’ in nature, having to do with the simultaneous expiry of gold futures and the put and call option contracts on them. In all these instances the anomaly of a negative basis resolved itself in a matter of a few hours.)
In the commodity futures markets the terminus technicus for a positive basis is contango; that for a negative one, backwardation. Contango implies the existence of a healthy supply of the commodity in the warehouses available for immediate delivery, while backwardation implies shortages and conjures up the scraping of the bottom of the barrel. The basis is limited on the upside by the carrying charges; but there is no limit on the downside as it can fall to any negative value (meaning that the cash price may exceed the futures price by any amount, however large).
Contango whereby the futures price of gold is quoted at a premium to the spot price is the normal condition for the gold market, and for a very good reason, too. The supply of monetary gold in the world is very large relatively speaking. Babbling about the ‘scarcity of gold’ reflects the opinion of uninformed or badly informed people. In terms of the ratio of stocks to flows the supply of gold is far and away greater than that of any commodity. Silver is second only to gold. It is this fact that makes the two of them the only monetary metals. The impact on the gold price of a discovery of an extremely rich gold field, or the coming on stream of an extremely rich gold mine, is minimal ― in view of the large existing stocks. Paradoxically, what makes gold valuable is not its scarcity but its relative abundance, which evokes that superb confidence in the steadiness of the value of gold that will not be decreased by a banner production year, nor can it be increased by withdrawing gold coins from circulation. For this reason there is no better fly-wheel regulator for the value of currency than gold. The same goes, albeit to a lesser degree, for silver.
Here is the fundamental difference between the monetary metal, gold, and other commodities. Backwardation will pull in stocks from the moon as it were, if need be. The cure for the backwardation of any commodity is more backwardation. For gold, there is no cure. Backwardation in gold is always and everywhere a monetary phenomenon: it is a reminder of the incurable pathology of paper money. It dramatizes the decay of the regime of irredeemable currency. It can only get worse. As confidence in the value of fiat money is a fragile thing, it will not get better. It depicts the paper dollar as Humpty Dumpty who sat on a wall and had a great fall and, now, “all the king’s horses and all the king’s men could not put Humpty Dumpty together again.” To paraphrase a proverb, give paper currency a bad name, you might as well scrap it.
Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust in the value of the irredeemable dollar can no longer be stopped.
Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks. They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system. Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days. In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?
Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.
December 2 is a landmark, because before that date the monetary system could have been saved by opening the U.S. Mint to gold. Now, given the fact of gold backwardation, it is too late. The last chance to avoid disaster has been missed. The proverbial last straw has broken the back of the camel.
I have often been told that the U.S. Mint is already open to gold, witness the Eagle and Buffalo gold coins. But these issues were neither unlimited, nor were they coined free of seigniorage. They were sold at a premium over bullion content. They were a red herring, dropped to make people believe that gold coins can always be obtained from the U.S. Mint, and from other government mints of the world. However, as the experience of the past two or three months shows, one mint after another stopped taking orders for gold coins and suspended their gold operations. The reason is that the flow of gold to the mints has become erratic. It may dry up altogether. This shows that the foreboding has been evoked by the looming gold backwardation, way ahead of the event. Now the truth is out: you can no longer coax gold out of hiding with paper profits.
If the governments of the great trading nations had really wanted to save the world from a catastrophic collapse of world trade, then they should have opened their mints to gold. Now gold backwardation has caught up with us and shut down the free flow of gold in the system. This will have catastrophic consequences. Few people realize that the shutting down of the gold trade, which is what is happening, means the shutting down of world trade. This is a financial earthquake measuring ten on the Greenspan scale, with epicenter at the Comex in New York, where the Twin Towers of the World Trade Center once stood. It is no exaggeration to say that this event will trigger a tsunami wiping out the prosperity of the world.
Jim- I believe the only this this has got going for it now is the low AS. Will it increase? Time will tell. We will have to keep an eye on filings. In the meantime, low AS or not, this has been acting like a typical, as the phrase goes, "stinky pinkie". I can give no formal definition for that phrase, but from many years experience in penny stocks 2 criteria come to mind.-
1. News releases with pie in the sky projections that never happen with no follow up explanations.
2. Company led shareholder dilution.
Is this our story here?
........al
Jim- I respect your opinions and your right to express them. In the past I have posted my fears of dilution and been lambasted by others saying manipulation and shorting etc. I had hoped they were right and I was wrong, but the numbers are out now. It seems like the only manipulation going on here has been on the part of our CEO. I am not happy about it and have no reason to think the dilution has stopped given the current share price action or lack thereof. Also given past company releases vs. current knowledge, how much credibility does Clayton have now? Had I not had some recent losses to offset previous gains, I would have sold out and been gone already. But I'm in for the ride now with a lot less faith that I had before. If I ever have a need for offsets, this will be the first to go. Selling what I have into what I believe to be going on here will most certainly drive this down to your buy level. Best of luck to you.
..............al
I do believe most of us remember the releases put out by the company saying they were in the process of a share buyback. 3 million I think was the number stated. And Clayton did release that he was buying stock for himself also. I don't have the old releases, but I'm sure someone does or they are in the iBox.
Just another disgruntled long,
........al
I cut and pasted the whole paragraph. Notice the last part where gold may be coming from England. It's from Jim Willie
.......al
The laws of Supply & Demand have not gone away. Yet we have grand disparities to pressure price structures. A) The supply of USTreasury Bonds is huge, yet yields are low and price is high. That is ass backwards. B) The creation of truly vast sums of USDollars is huge, needed to pay for the bond swaps, bailouts, stimulus packages, and nationalizations. Yet the USDollar index rises, due to liquidations and payouts. That is ass backwards. C) The demand for physical gold and silver is huge, motivated by crisis, yet their prices are determined by corrupt paper pricing systems. That is ass backwards. Soon, all three stresses on price structures will be addressed. A strange day occurred on Monday. Gold was down hard, the euro currency was down a little, but the pound sterling was down 500 bpts. Some attributed it to lousy economic news in England. Not completely so! Another factor might be at work. A clearer perception of a struggling UK Economy would not take down the gold price. My sources tell of possible shipments of gold from England to the US-based COMEX, in order to satisfy gold demands for delivery. It is hard to verify. Time will tell.
Is anyone else bothered by the way this whole Big3 bailout farce being
played out recently. Granted they have made some very poor decisions and
perhaps should be allowed to fail. However, that is not my point. We all
watched as our executive and legislative branches of government
literally gave away $800 billion with no hard questions asked, virtually
no strings attached, and no demands for a better business model. That is
just what was voted on. Another $6-7 trillion went out through the
federal reserve. All this to assist institutions that did nothing for
the economy except create worthless paper that is now coming back to
bite them right on their collective asses. Instead of allowing them to
fail due to bad business practices the taxpayer is now on the hook for
those $trillions of dollars. Along comes GM, Ford, and Chrysler asking
for $34 billion, a measly sum compared to what the bankers have already
appropriated, and they get raked over the coals by the very same people
that gave kid glove treatment to the bankers. And these companies employ
a large number of average ordinary Americans that actually make
something. What is wrong with this picture? Or is it the fact that I'm
getting old and my moral sense of values has become deluded and warped?
.........al
Spoof or not, the recognition of the product availability doesn't hurt. It's just another building block.
.........al
Although it is very disappointing at this point, it is still not a large OS or float for a pinkie. The lack of information from the company is keeping this down.
.......al
Where are those "there is no dilution" people now? Share price action was saying it all along. We need a valid explanation very quickly. The credibility of our CEO is straining to the breaking point.
............al
Shock and Awe at COMEX:
Link for charts
http://www.financialsense.com/Market/kirby/2008/1201.html
Shock and Awe at COMEX
BY ROB KIRBY
This past Friday, Nov. 28, 2008, was first notice day for delivery of the December COMEX [a division of NYMEX] gold and silver futures contracts which trade on the New York Mercantile Exchange. The chart appended below shows that on Friday, 8,600 gold futures contracts @ 100 ounces per contract [and 3,040 silver futures contracts @ 5,000 ounces per contract] were delivered. To try to give some perspective to these numbers the previous delivery month for gold futures was October, 2008 when there were 11,554 deliveries for the entire month – a “big” number by historical standards.
1201.01
It is important for casual market observers to understand that normally, investors who are speculating on the price of gold DO NOT take delivery of the underlying commodity. Instead, whether they are “long” or “short” the future, they usually “roll” their positions into the next contract month as the current or “spot” month approaches its delivery cycle, which begins with first notice day [Friday was the 1st notice day for delivery of the Dec. Gold and Silver Futures Contracts].
So, looking at the COMEX gold table appended below, readers can see that the Dec. contract was still registering Open Interest of 16,053 contracts as of the close of business on Friday. One can also see that “the bulk” of trading has migrated [rolled] into the next delivery month for gold futures – which is Feb., 2009 with 158,895 contracts of Open Interest .
1201.r
The remaining contracts “open” in December, 2008 must either be “rolled,” covered or delivered before Dec. 31, 2008 – as per the contract termination contract termination schedule.
When deliveries of precious metal occur at COMEX, there is change in beneficial ownership of warehouse receipts representing the underlying physical metal stored in COMEX depositories:
Depositories
Depository Facility Code
New York
Brink's, Inc.
580 Fifth Avenue, Suite 400
New York, New York 10036
USA
phone: 718-949-2186
652 Kent Avenue
Brooklyn, NY 11211
USA 4001
HSBC Bank USA
1 West 39th Street, SC 2 Level
New York, New York 10018
USA
phone: 212-525-6439
1 West 39th Street, SC 2 Level
New York, NY 10018
USA 5001
Manfra, Tordella & Brookes, Inc.
90 Broad Street
New York, New York 10004
USA
phone: 212-981-4516
90 Broad Street
Sub-Basement
New York, NY 10004
USA 7001
ScotiaMocatta Depository, A Division of the Bank of Nova Scotia
230 International Airport Cntr Blvd Bldg C Ste 120
Jamaica, New York 11412
USA
phone: 212-225-6330
230 International Airport Ctr Blvd, Bldg C Ste 120
Jamaica, NY 11412
USA 3002
Weighmasters
Ledoux & Company Weighmasters
phone: 201-837-7160
fax: 201-837-1235
359 Alfred Avenue
Teaneck, NJ 07666
USA
In this regard, we can say that “elevated” deliveries – instead of market participants simply speculating on price change by “rolling” contracts - are consistent with robust or growing demand for the underlying commodity.
We know that global investment demand has, in fact, been robust and growing – because the World Gold Council has told us so:
Demand for gold at an all-time high
Demand for gold reached a record high in the third quarter as investors sought refuge from the financial crisis and volatile stock markets, according to the Wrld Gold Council.
The WGC said demand for gold reached an all-time quarterly record of $32bn between July and September as investors around the world sought refuge from the global financial meltdown. This was 45pc higher than the previous record in the second quarter of 2008.
Demand for gold via exchange traded funds (ETFs) and bars and coins was the biggest contributor to overall demand during the quarter.
The figures show investment demand from private investors rose by 121pc to 232 tonnes in the third quarter, with strong bar and coin buying reported in Swiss, German and US markets. The quarter also witnessed widespread reports of gold shortages among bullion dealers across the globe, as investors searched for a haven…
Why The Rush to Gold?
The reason that investors are flocking to gold the world over is highly understandable given that banks are failing all over the world and the U.S. Federal Reserve and U.S. Treasury are printing MASSIVE amounts of money to “bail out” many of those who remain in business. We see this empirically demonstrated by monetary aggregate data supplied by the St. Louis Federal Reserve:
1201.03
While we see signs of “big money” moving into gold through machinations occuring with respect to “deliveries” at COMEX, there are other ‘tell tale’ signs that demand for physical metal is in fact SOARING. This is reflected by the recent decoupling of the price of COMEX gold futures and real costs one must incur to obtain physical ounces in coin or bar form. The premiums being paid for physical ounces have decoupled to the point where leading gold web sites now routinely list current ebay pricing for gold bars and coins to achieve “accurate” real world pricing for physical metal.
Why Are People Using Ebay For Pricing Gold?
The reason that investors are turning to alternate reference sources for pricing physical precious metal is that the COMEX futures derived prices for metal are INCONSISTENT with the empirical robust demand story outlined above. In short, the COMEX pricing model appears to be FRAUDULENT, when despite overwhelming demand for the commodity we routinely and increasingly see “BUYERS STRIKES” in the futures markets like the one we experienced just this morning in gold and particularly in silver.
1201.a
1201.b
These counter-intuitive, fundamental-defying price movements are the basis for claims of market rigging on the part of the U.S. Treasury and Federal Reserve.
1201.c
These shock and awe campaigns being waged against precious metals on the part of officialdom are intended to instill faith in fiat currencies which has been naturally waning in recent weeks and months in the face of unprecedented money creation being availed to officialdom’s crony capitalist friends on Wall Street.
This is why everyone needs to get physical now!
The value of physical precious metal is not the same as prices being falsely derived at COMEX.
Today’s Market
Overseas equity markets began the week on a sour note with Japan’s Nikkei Index falling 115 points to 8,397. North American Markets followed suit with the DOW losing 680 to 8,149.10, the NASDAQ dropping 137.50 to 1,398.07 and the S & P losing 80.05 to close at 816.20. NYMEX crude oil futures fell 5.14 to 49.29 per barrel.
On foreign exchange markets the U.S. Dollar Index gained .23 to close at 86.88.
Interest rates were lower across the curve with the benchmark 5 yr. bond ending the day at 1.74% while the 10 yr. bond finished at 2.75%.
The precious metals complex was hammered with COMEX gold futures prices falling 47.90 to 769.20 per ounce while COMEX silver futures fell .97 to close at 9.37 per ounce. The XAU Index fell 10.20 to 91.39 while HUI dropped 32.54 to 214.86.
On tap for tomorrow, Nov. Auto Sales data is due – expected 3.8M vs. prior 3.8M. November Truck Sales data is also due – expected 4.3M vs. prior 4.1M.
Wishing you all a pleasant evening and a prosperous tomorrow!
Rob Kirby
Cubs caskets are selling:
http://www.thespoof.com/news/spoof.cfm?headline=s6i44632
One company is now catering to the many sports fans by manufacturing signature caskets with their favorite sports team's logo on the side.
Eternal Image of Illinois, which has a licensing agreement with Major League Baseball, recently has delivered to Greenleaf-Johnson Funeral Home in Rockford, Illinois, a Chicago Cub casket that features the team's logo on the inside as well as the exterior.
Brendan Baggins, co-director of the funeral home, told the Chicago Sun Times that the families in mourning often want their loved ones buried with favorite items, including Chicago Cubs paraphernalia.
Baggins says the family that chose the $3,000 Chicago Cubs casket, bearing serial number 0011, did not hesitate in picking it for their dad, Leland Smith. Nor did they object to the rule that those with Cubs Logos be buried in the cellar.
In leiu of flowers the Smith family has requested ivy for the wooden box.
"What next?", stated a cousin of the family when he walked into the funeral home. "H-O-L-Y C-O-W!!!"
No, IMHO, simply because of the cost per each grading. It adds to your initial cost per coin and if you don't get the highest grade it becomes a burden that has to be made up. In a silver buying frenzy which I expect the coin will be one ounce of silver whether graded or not to the majority of the buying public. Also, I have heard from several people that the affiliates that do the actual grading give their own coins a better break on grading standards than ones submitted from 3rd parties. That's only rumor and I can't substantiate it. Personally, I wouldn't send them in for grading.
........al
You can become a member of PCGS or NGC at the website. I don't know the fees but they do give you a couple of free or reduced gradings and slab for the membership. Could be worthwhile if you had a few pieces that were really worth a lot as the grading by either of these companies is accepted thruout the collecting world and commands a higher price. PCGS has the most sought after graded coins. Don't send either service a cleaned coin as they will not grade it for you. If the coin has been cleaned try ANACS as they will grade a cleaned coin and mark it as such. ICG is also an up and coming grading service with credibility in the industry.
.......al
ABC from San Francisco:
Picture of urn on webpage
http://abclocal.go.com/kgo/story?section=news/bizarre&id=6533371
KGO-TV San Francisco, CAHOME
New caskets feature MLB logo
Monday, December 01, 2008 | 4:43 PM
Boston Red Sox Fan Loyalty Casket Death MLB Baseball In this computer generated rendering provided by Eternal Image, a funeral urn with the Philadelphia Phillies logo is seen. Major League Baseball has entered into a licensing agreement with Eternal Image, which hopes to eventually make urns and caskets with for all 30 baseball teams. Eternal Image says urns for six teams, the New York Yankees, Boston Red Sox, Detroit Tigers, Philadelphia Phillies, Chicago Cubs and Los Angeles Dodgers, should be available by Opening Day 2007, and caskets for those teams should be ready later in the year. (AP Photo/Eternal Images)
AP
ROCKLAND, MA -- Lifelong Red Sox fans can now take their love of the team to the next level -- eternity.
A Massachusetts funeral home recently took delivery of the first Red Sox casket, which features the team logo on the exterior as well as the inside.
The casket is manufactured by Eternal Image of Michigan, which has a licensing agreement with Major League Baseball.
Bob Biggins, co-director of Magoun-Biggins Funeral Home in Rockland, tells The Boston Globe families in mourning often want their loved ones buried with favorite items. In the past that's included Red Sox paraphernalia; the casket takes it to the next step.
Biggins says the family that chose the $3,000 Red Sox casket bearing serial number 0001 did not hesitate in picking it for their father.
surprising share count update in iBox. eom
Any future here? Thanks eom.
Thanks basser. Everyday seems to get better for the company's prospects. I've always maintained patience is the key here. For those willing to wait it out, the long term future looks very bright indeed.
........al
Hey basser, you beat me to the punch on that one. Great article.
...........al
4Godnwv- information just is. Interpretation whether positive or negative is up to the reader. I always like to get all points of view beofre acting or making decisions. It can save one a lot of grief.
..........al
from JIm Sinclair on taking COMEX delivery:
Trader Dan says:
The more buyers that can be recruited to this effort, particularly buyers of large size, the more difficult the life of the paper shorts will become. Short of taking delivery of the actual metal, preferably pulling it out of the warehouses, the shorts can reign supreme over this market. What’s more – they are doing this with impunity as they pay no price financially to do so and profit quite handsomely I might add. Strip them of the metal and they are cooked. Then they will have to compete on a level playing field like the rest of us. Who was it that said, “He who sells what isn’t his’n, must pay the price or go to prison”? If the paper shorts are selling what doesn’t exist, namely tons of actual gold, forcing them to show us the actual metal will work to modify their behavior. This is the only way to keep the Comex gold market honest.
Speaking of deliveries, another 307 deliveries were assigned this morning. I can tell you that 43 of those were retenders by Greenwich Capital Markets. The total so far this month is 11,473 contracts or 1,147,300 ounces. I want to see the warehouse totals over the next couple of days before commenting on that. Time is needed to actually move the metal that is going out.
You would have to define "active operations" before considering any lawsuit.
That sounds like what shysters use to get their guilty clients off the hook on technicalities. As the key defender of this operation I would hope you would come up with better.
We do have some opposing points of view here on the company. I would like nothing better than you being able to say "I told you so."
.......al
Another take on shortages:
Why Pay High Silver Premiums?
By: Roland Watson, The Silver Analyst
-- Posted 2 December, 2008
I was checking out a new facility by Eric LeMaire which lists the latest eBay prices for gold and silver as well as some common numismaticals from decades past. You can see the statistics at this link. What struck me were the huge premiums that silver investors are prepared to pay for one ounce coins right up to 100 oz bars. At a glance I could see an average premium of 124% for American Silver Eagles, 164% for Kookaburras and 105% for Maples. More sane premiums can be seen on the 100 oz at 35% which is nevertheless still a hefty premium compared to how much one may pay for other asset classes.
Now of course some of these buyers will be just coin collectors who don’t give priority to the metal price but the savvier silver buyer can avoid all of this by purchasing in bulk. For example, at one dealer you can buy a box of 500 Silver Eagles for a better premium of 52% over the spot price but that means stumping up over $7000. No doubt some can quote better deals to me. The main point is this though, the higher the premium the higher you have to wait to break even.
A 124% premium on eBay silver eagles mean you don’t break even until silver hits $21.57 which is above the 20 year high set in March! If you buy in bulk as mentioned above, you break even at about $15 an ounce. The bottom line is no investor should be buying silver bullion at double the spot price. Even 52% smacks of inefficiency and a waste of investment capital.
Consider this, you pay a 52% premium and break even is $15. You set your price objective for selling out (this should be done before buying). Clearly it has to be something well above $15 to be worth your while. There are some things to consider when setting that price objective. What will be the hit when selling? Will premiums have narrowed by the time silver is over $20? I see some dealers are paying a dollar or more over spot just now. Will that last when buyers become sellers? If you go the eBay route you may preserve some of the original premium but the eBay and Paypal fees kick in thereafter.
Furthermore, you are not likely to time the top to perfection so you can knock another dollar or two off your final price - at best.
Then there are the tax considerations, capital gains tax kicks in and you lose some more of that upside profit. So it may be that you buy silver when its spot price is below $10 but you can’t even make a profit at $20 once every middleman gets their slice of your pie.
So why don’t people buy the silver ETFs instead and get their silver near to spot? Well they are and in bulk – over 1,500 tonnes has been added to the SLV stockpile since silver peaked in March to a new level of about 6,700 tonnes. That’s the equivalent of over 48 million Silver Eagles! You may have your doubts about “paper” silver but those who used the Barclays ETF at its inception and rode it up to $21 would have had no qualms.
Or you could take delivery on the COMEX of 5,000 ounces of silver which will set you back over $50,000 at the current spot price plus fees. Then there are silver mining stocks which if liquid enough deliver a bid-ask spread far better than 52%! In other words, there are better ways to invest in silver than frittering away a lot of your hard earned cash on high premiums.
But you may object that the Banking system is in crisis and one needs to hold physical metal for the worst case scenario. That worst case scenario is a deflationary depression. The last time we had one in the 1930s silver crashed from $1.34 to its millennial low of 25 cents. When money is destroyed, assets prices collapse. Silver is a hedge against inflation – not deflation!
You may also point to the huge demand for retail silver bullion and say that this is proof that the silver is geared up for $50 by next year. Fifty dollars – Yes. Next year – No. An ounce of silver costs up to $21 on eBay but is available on the futures market at $10. What gives?
The answer is the retail silver price doesn’t reflect the true spot price of silver – not the other way round. The market for retail silver is squeezed because refiners are not upping production of these relatively unimportant rounds or bars. When customers like the Barclays ETF adds the equivalent of 48 million silver eagles in 8 months I think you get the picture. It’s as simple as that and I can prove it. Why exactly would the international market price of silver be less than the retail price? The market price is the price based on 1000oz bars and you can buy them for 59 cents over spot at one reputable dealer. I will repeat that – 1000 oz bars are 5% over spot and Silver Eagles are 50% or more over spot.
Why is there no high premium on 1000 oz bars? The answer is because there is plenty of them to be had - the more common the item, the lower the premium. The scarcity of small investor silver is not a shortage of silver, it is a shortage of small pieces of silver pressed and stamped into pretty pictures.
If you cannot afford the COMEX price or bulk retail purchases then I think you should not purchase silver at all, just buy gold because after subtracting those hefty premiums your silver may well underperform the same investment in gold bullion.
Finally, silver is heading for a substantial rally soon. It will be profitable but it won’t go as high as you think it will. Furthermore it will last a matter of months and not years. It is a narrow opportunity and one must invest efficiently to make the most of it. So keep your premiums low and good luck.
Ted Butler on COT
COT Extremes
By: Theodore Butler
-- Posted 2 December, 2008
It’s been a while since I have commented in detail about the Commitment of Traders Report (COT), since there have been other issues to be discussed. Plus, I know many find the topic confusing. However, there have been some recent developments that should be reviewed.
Long-time readers know that I have studied and written about the COTs for years. I find the report invaluable. This weekly report from the CFTC tells us who has been buying or selling in all U.S. futures and options on futures. The reports don’t tell us the "who" by name, but offer three broad trader categories - large commercial, large non-commercial, and non-reportable. The two large categories must report their positions to the CFTC on essentially a daily basis, once a minimum contract size has been achieved. The data for the non-reportable category is calculated on an "all other" basis by deducting all the reportable traders’ positions from total open interest.
Speaking specifically about the COMEX silver and gold markets, the non-commercials are comprised of large speculators, including certain hedge funds that trade futures contracts on a technical price basis (tech funds). The commercial category is mostly comprised of financial institutions (banks who are speculating). Many people assume the commercial category is mostly comprised of large producers and consumers of gold and silver engaged in legitimate hedging. That’s the way it probably should be, but in my experience that is generally not the case. The non-reportable category is comprised of all traders, speculators and hedgers alike, who fall below the threshold contract reporting limit (150 contracts in silver and 200 contracts in gold)
The purpose of studying the COTs is to try to determine if the market is structured to move big, either up or down in price. This is done by trying to gauge those points at which the individual categories are at such historical extremes, either to the long side or short side, that they are likely to reverse. As a general rule of thumb, the non-commercial and non-reported categories are pitted against the commercial category. In simple terms, when the non-commercials and non-reportable are extremely long and the commercials are extremely short, a big sell-off is likely. When the non-commercials and non-reportable categories are at very low levels of long positions and the commercials are at historical low short levels, a large price rally is likely.
This method of gauging the COTs has proven very reliable over the years, although it is far from perfect. In fact, this measurement has been particularly weak in gauging the extent of the recent large decline in silver and gold. For instance, the COTs started flashing "buy" in silver at $16 in August, even though the price eventually declined below $9. This raises the legitimate question that if an indicator can miss by so much, should it still be relied upon? To me, that’s like asking if democracy is the best form of government. First tell me what’s the alternative?
The question of the legitimacy of the COT analysis derives from the almost stubborn nature of the indicator itself, namely, it is a "do or die" indicator. If the COT flashes "buy" it will not flash "sell" until the structure of the holdings in the categories changes to an extreme in the other direction. In this sense, the COT approach is not price generated, but structure generated. What this means is that the COT approach can be "wrong" in terms of price, while not wrong in terms of structure. In other words, it can sometimes fail to tell us of the exact bottom or top in price by wide amounts in time and price. Like indicating a buy at $16, and all the way down to $9. (The only way to offset this inherent weakness in the COT is by controlling what and how we buy - real metal, for cash, not margin).
The market structure for silver and gold have been flashing buy for months. All the way down. In fact, the COTs in gold and silver are more bullish now, in many important sub-categories, than they have been in years. With that background, what are the new developments in the COTs that I opened this article with? Let me give you the conclusion up front - I am shocked with the extent to which the big shorts have gone to liquidate every possible long silver and gold position held by traders in the non-commercials and non-reportable categories.
In fact, the big shorts have even managed to recently liquidate some big long silver positions by other commercials (the raptors), held in the form of long silver/short gold spread positions. About a month ago, I noticed an unusual liquidation of raptor long silver positions over a two week period, in the amount of around 8,000 contracts (40 million ounces). What made it unusual was that I had never seen the raptors (the smaller traders in the commercial category, other than the 8 largest) liquidate long positions on a decline in price. For a while, I couldn’t figure out why many different traders would liquidate positions held for a long time so suddenly. Then it dawned on me (in a conversation with Izzy) that it had to be silver/gold spread liquidation brought about by changes in margin and/or margin collateral requirements. These changes were dictated by the big shorts themselves, who undoubtedly cleared the accounts for the raptors. For the first time, the raptors were forced by the big shorts (read JP Morgan) to liquidate long silver/short gold spread positions. Talk about a clean-out of silver long positions.
The most recent COT report, as of the close of business November 25, indicated another shocking liquidation of long silver/short gold spreads, this time by those held in the non-commercial category. Roughly 15 different non-commercial traders suddenly liquidated at least 5,000 additional long silver/short gold spreads. I would submit that the only way you could get 15 separate accounts to act in unison would be if you forced them to act. And just like the earlier forced liquidation of raptor spread positions, the only way you could force them was by radically altering margin collateral requirements. Who decides to radically alter margin collateral requirements is the prime broker who holds and clears (guarantees) the accounts (read JP Morgan).
What this means is that new and unprecedented efforts have been made to forcibly liquidate the long silver holdings of any account not held by the big shorts. Those shorts are resorting to tricks never employed before. The COTs were already wildly bullish before this blatant silver/gold spread forced liquidation. What comes after wildly bullish? All this should make you think. Why is the big short so intent on liquidating every long position he does not hold? The answer should be clear. Because he knows the real story in silver, and that the price will soon reflect that reality. He is determined to buy as much silver as possible, through any means available. So should you. The fact that the big short is forcing as much silver liquidation as possible, should harden your resolve to own silver.
* * * * * * * * * *
As I was finishing this article, I received an e-mail form letter from the CFTC concerning the silver manipulation they are supposedly conducting. Others of you have sent me copies of the same e-mail form letter. The CFTC sends me, for the very first time, a form letter asking for information about a manipulation in silver after me contacting them on many hundreds of different occasions over the past 23 years. Are they kidding? I don’t know whether to laugh or cry.
AMEN. eom.
JMHO, but any silver you get your hands on at this price is a bargain. There are some very strong rumors that domestic and foreign buyers will be taking a lot of deliveries of Dec contracts from the COMEX. Either the COMEX will deliver and severly deplete it's inventory or they will fail to deliver and force closings in cash. Either way will severely jolt the system and be very bullish for gold and silver.
........al
If this ever shows up on Utube or something, would someone kindly post a link.
Thanks
...........al
We also have an article from Charlotte, NC. You need a subscription to access it.
http://www.sportsbusinessdaily.com/index.cfm?fuseaction=sbd.preview&articleID=125902
And from Dallas:
http://collegesportsblog.dallasnews.com/archives/2008/12/lets-take-a-break-from-bcs-bashing-to-la.html
Let's take a break from BCS bashing to laugh at SMU
1:36 PM Mon, Dec 01, 2008 | Permalink | Yahoo! Buzz
Tim MacMahon E-mail News tips
smucasket.jpg
This picture of an SMU casket was sent to a bunch of media members by a PR firm representing a company called Eternal Images. These Pony pine boxes really are being sold. Here's an excerpt from the PR release:
Covering college sports, you may already know a Mustang fan or two out there that would make space on their mantle for any kind of Southern Methodist University memorabilia.
Now those fans and dedicated alumni have the opportunity to show their dedication for the school in a way that lasts beyond their lifetime. They can purchase a licensed SOUTHERN METHODIST UNIVERSITY urn or casket.
A company called Eternal Image is offering alumni a new way to show their ultimate passion for their school. Now, graduates can reaffirm their love of their university at the close of their life with Eternal Image's new collegiate line of urns and caskets.
SOUTHERN METHODIST UNIVERSITY is one of the first schools to offer this special line of products, made available through Eternal Image's agreement with Collegiate Licensing Company.