Silver Breaks Out From Price Manipulation, the Gains Will be Breathtaking By Jim Willie | November
5, 2010
A love affair with silver is so natural. The
fundamentals are astoundingly positive and bullish in price
prospects. My basic argument has been repeated many times.
Industry has countless uses for silver, significant demand.
But industry has only miniscule isolated uses for gold,
in trivial demand. So silver wins on the Demand side of
the equation. Central banks own a huge amount of gold. They
frequently sell it, even through their slippery surrogate
the Intl Monetary Fund. Central banks own zero silver. So
silver wins on the Supply side of the equation.
My motto is that gold fights the major political
and financial war, but silver will ride in on a shiny white
horse and take much larger spoils. That effect has already
begun. Since the significant game changing FOMC meeting
on September 21st, where the telegraph message delivered
to the world financial markets was made by megaphone, the
impact has been clear and stark. Compared to closing prices
on September 21st versus October 29th, just five weeks,
the silver price had risen from $20.64 to $24.56, up 19.0%.
During the same timespan, the gold price had risen from
$1274.30 to $1357.60, up 6.5%. My claim, a loose forecast
often repeated, has been that the silver breakout gains
would be at least double and possible triple the gold gains.
We have seen exactly that in recent weeks.
An extremely fuzzy factor is the CFTC attention.
The Commodity Futures Trading Commission is supposedly investigating
the Big Four Banks for gigantic concentrated short positions
in the silver market, for naked shorting of silver, and
for collusion with other banks. Commissioner Bart Chilton
has made a lot of noise, but has done next to nothing. Some
find encouragement, an absurd notion in my view. Let me
know when court injunctions are slapped at JPMorgan. Several
class action lawsuits against JPMorgan have begun, also
encouraging, but unclear on substance. They crop up every
couple weeks, the latest citing a RICO aspect. Let me know
when the full force of the USGovt regulatory bodies order
JPMorgan, Goldman Sachs, Citigroup, and Bank of America
to liquidate even 10-20% of their short positions. Unless
and until such action occurs, the CFTC chirping is just
that, noise from the managerie of obedient pets who work
on short leashes at the behest of bankers. Mail room clerks
do not give orders or make demands to the executive suites,
not now, not ever. The regulatory chiefs are mere squires
to the bankers, and will follow orders, not give them. By
the way, the Big Four positions are naked short positions
in all likelihood. They are immune from posting collateral,
as required by the metals exchanges. So they routinely sell
a stack of silver whenever the price moves have been made,
like in the wee hours this Wednesday and very early at the
New York open. Good Morning New York resulted in almost
a full $1.00 drop in the silver price, undoubtedly another
naked short raid before the QE decision by the US Federal
Reserve and its statement. The full impact of the ambush
decline was reversed by afternoon. Right before important
events deemed negative nasty to the USDollar, the Big Four
go wild with naked shorts, called ambushes. The evidence,
the trails, the fingerprints are easily seen except by blind
men, official gold industry wonks, and USGovt regulators.
SUPPLY & DEMAND BASICS
Silver total demand was essentially flat in
2009 versus 2008, as the world adjusted to a mammoth meltdown
late in 2008. During the extraordinary disruptions, disturbances,
and sudden insolvencies, JPMorgan liquidated much of the
inherited (commandeered) precious metals accounts from Bear
Stearns and Lehman Brothers. In the case of Bear Stearns,
a solid argument can be made that they were targeted for
kill due to their long gold account. In the case of Lehman,
they were targeted fro kill in order to consolidate the
power structure in the twin monoliths at JPMorgan and Goldman
Sachs. On silver demand, the bulk of the 11.9% decline in
the 2009 fabrication demand was primarily driven by the
global financial crises. The reduced drop in industrial
requirements was the lowest level since 2003. Total fabrication
demand totaled 729.8 million oz and industrial demand was
352.2 moz in consumption. Much of the decline in factory
demand was attributed to the car industry.
Implied net silver investment increased by
a staggering 184% to 136.9 million oz last year, reaching
its highest level in 20 years. Overall jewelry demand fell
slightly by 1.1% in 2009 to 156.6 moz, a testament to the
historical norm. It falls with a bull market, not to contradict
it, but to confirm it!! That is the opposite message, contrary
to what the official gold industry propaganda preaches.
In fact, India and China posted increases in jewelry demand
last year, outside the global trend. Silverware demand rose
by a decent 4.6% to 59.5 moz, largely due to a surge in
Indian fabrication. Their middle class grows impressively.
As for supply, the silver mine production
rose by 4.0% to 709.6 moz in 2009. Gains came both from
primary silver mines and output from mining by-product.
The strongest growth came from Latin America, where silver
output increased by a hefty 8%, the biggest gains logged
in Argentina and Bolivia. Again Peru was the world leader
in silver production in 2009, followed by Mexico, China,
Australia, and Bolivia. All of these countries saw increases
last year except for Australia, where output was dragged
down from the lead/zinc sector, with the by-product impact.
Some mines are devoted solely to silver targets, called
primary silver projects. Global primary silver output saw
a 7% increase in 2009, accounting for 30% of total mine
production last year. The cash operating costs for primary
silver mines remained relatively stable, rising by less
than 1% to $5.23/oz in 2009. The big story is the huge decline
in net silver supply from above ground inventory stocks,
which were reduced by 86% to 20.2 moz in 2009. The drawdown
was driven mostly by the surge in net investment, higher
de-hedging (the active reduction in forward sale contracts),
lower government sales (like official mints), and a drop
in scrap supply. The scrap supply came down by 6% from 2008,
enough to register a 13-year low of 165.7 moz. It was the
third consecutive year of losses in the scrap category.
Government stocks of silver, the feeder in official coin
mint programs, fell by an estimated 13.7 moz last year,
to reach their lowest levels in more than a decade. Data
was supplied by the Silver Institute.
IMPACT OF Q.E. CANCER
The big event on the horizon has been the
US Midterm Elections, just completed. Its outcome was close
to poll expectations. Many decisions have been delayed.
Much detail has been withheld. Unfortunate pauses have come
as a result. A palpable dread can be identified and pointed
to. Difficult unpopular decisions will now be made. Some
of the decisions will involve continued bank sector welfare
after failed fiduciary responsibility. Some of the next
programs or legislation will involve devious political and
legal cover for criminal bond fraud related to the mortgage
industry, which is fully in the open for dissection, outcry,
and acrimonious debate. Basically, the bank sector will
see great maneuvers to be supported, protected, with escape
routes, now that the consequences of voter backlash are
out of the picture. Furthermore is the issue of political
partisan gridlock. Only dim bulbs would call the gridlock
constructive or a good thing in the current setting. When
a nation is mired in a financial crisis, requires leadership,
demands restructure, and urgently needs reform, any inaction
from gridlock is like fighting over the steering wheel on
a big tractor trailer truck unable to manage a winding road,
certain to careen over the cliff. Some analysts use the
term public serpents to describe public servants, which
seems spot on. Activists should demand that private bank
accounts be investigated of committee heads, or even past
Secretary of State (Colin Powell), or joint chiefs of staff
at the Pentagon, or past SEC and CFTC heads. While at it,
check the bank accounts of past presidents too.
The most reliable and expert sources within
my contacts mention a specific point, with consistency.
When the US elections are over, and after the USFed gives
some guidance on the QE2 Launch for monetized debt, the
system will experience tremendous added strains and will
gradually show signs of breakdown again, in accelerated
mode. This time, unlike September 2008, efforts to stabilize
will not be possible. The system will degrade, as supports,
pylons, control cables, levers, guy wires, and buttresses
will be removed in the coming weeks. The Midterm Elections
served at the roadblock event, the beacon on the horizon,
the gate factor, the delayed lit fuse. The actions taken
in November will involve both the US captains and foreign
entities. The US brass can act without as much concern of
voter backlash. The foreign financial decision makers can
act with knowledge that the USGovt, the USFed, and Wall
Street will not make a single solitary move toward bank
system reform, toward bank debt restructure, or toward debt
liquidation on the balance sheets. Instead, the US will
redouble the magnitude of what failed, their habit, their
engrained failure in policy, their legacy.
The main worry by the USFed and USDept Treasury
will center on foreign creditors and abandonment. US bank
leaders will ramp up the monetization under the QE2 banner
with added motivation. Trade war stokes the fires of hostility,
angst, and rebuke. Foreign creditors are worried that their
debt security paper is being diluted. Its value will be
diminished, but later in time. Expect a new European Dollar
Swap Facility to be announced soon, but with less delay
than the last one. They must match and offset the power
of the QE2 initiative. It could be urgently declared by
EU in next several weeks. They must defend against a rising
Euro currency. Do not be trapped into thinking a USTreasury
Bond rally means a USDollar coincident rise. The USTBonds
are from the Printing Pre$$, which means no source of funds
to convert. The Jackass still believes 2.0% is an important
10-year USTreasury yield target. All hell breaks loose after
the target is hit, as the USTBond bubble is likely to give
off massive greenhouse gas afterwards.
UNWIND OF TREMENDOUS SUPPRESSION
When professional equity analysts ply their
craft in examining the merits of a certain stock, they often
use a simple statistical technique. They fit a model of
the growth in a stock Y versus the sector X in which it
trades, like BAC (Bank of America) versus the BKX (bank
index). They fit a model of the growth of a major stock
Y versus the X market backdrop, like IBM versus the S&P500
index. A stock Y performs well if it does better than its
sector or does better than the entire market. That shows
up as a BETA over 1.0 within the fitted model using data
as weekly change entries in price for X and Y. Take silver
as Y and the entire commodity arena as X, as measured for
instance by the CRB index. Clearly silver rises and falls
with the commodities, and even makes swings with more volatility
than other items. That testifies to a high silver BETA.
Lately, the silver move has been powerful, much bigger than
other commodity items since it is being recognized as a
currency hedge, a safe haven asset, with the menace of lawsuits
and investigations hanging overhead. In fact, Silver is
a currency, if pure money can be classified as currency
at all. Like gold, silver is a super-currency.
Y = a + ß X
The important aspect to highlight of the linear
price change model is the ALPHA component. When an asset
or stock has a particular advantage or unique strength,
it can outperform its class. Take for instance a pharmaceutical
firm with a vaccine discovery, or a computer firm like Apple
with a nifty IPod winner, or a mining firm with a huge ore
discovery or great process improvement. Silver and gold
each share a robust ALPHA feature that is not often mentioned,
even in the gold community. As the monetary system crumbles
further, as the big banks topple amidst insolvency, as the
sovereign debt for certain nations defaults, as the USGovt
deficits spiral endlessly into the $trillions, the concept
of real money is being questioned by important chambers
of global finance. Money wants to escape the false monetary
clutches, and find true safe haven. Sound money is sought
out with increased vigor and even desperation to preserve
wealth. At the same time, illicit activity from two to three
decades of gigantic price suppression, extended from enormous
naked short positions being revealed, has conspired to suppress
the price of gold & silver. The slow healing of the
market infestation reveals the manifestation of the Silver
Alpha, during its release.
The monetary system works gradually to unmask
the corrupt precious metals market, and to lay bare the
absent bullion at the official metals exchanges. Angry depositors
like the Chinese and Arabs have been demanding their bullion
for return back home, no longer trusting the London and
New York banksters. They have grown fully aware of illicit
gold leasing as commonplace. The fraud of the USGovt balance
sheets, recording deep storage gold as a ledge item, an
utter absurdity, only adds to the motive to unmask the banksters
at their own game. The fast rising deadly USGovt deficits
has brought cries to prove the collateral for new debt added
upon old debt, in an uncontrollable debt episode. The world
pursues gold & silver, knowing the USGovt has none,
even as it continues to suppress its price with heavy hands.
Foreign creditors are angry that the gold & silver they
hold has been pushed down in price by illicit USGovt devices.
The consequence is that SILVER possesses a
high ALPHA. What lifts the ALPHA is many factors, each powerful.
The Silver price will rise much more than price inflation.
The Silver price will rise in response to money fleeing
corrosive vehicles like the major currencies, whose basis
is not gold but rather rapidly growing debt resting upon
broken banking and economic foundations. The Silver price
will rise as the USTreasury Bond bubble becomes more widely
recognized. The Silver price will rise as greater volumes
of freshly printed money undermine the USDollar well behind
controlled activity. The Silver price will rise more than
most analysts anticipate out of the sheer release from corrupted
markets that hold down the price after a mountain of silver
has been shorted in the market without collateral. THIS
IS THE ESSENCE OF ALPHA!! The shorts are being squeezed,
in clear fashion since August. The naked short quantity
for Silver is well beyond a full year of annual global output
from the mining industry. As the markets work toward a freely
traded system that seeks a true equilibrium, the Silver
price will move past $100 per ounce easily. Laughter now
will be followed by sheepish quiet in three years. But first
it will surpass the $40 price, maybe as soon as late 2011
or early 2012. The silver ALPHA is big, and that fact will
be quite evident very soon, if not already. My forecast
is for a $29 to 31 price for Silver by mid-January. Both
December and January are strong seasonal months for silver,
just like September. Notice how silver is outperforming
the commodity group, and shows a BETA over one.
INELASTICITY PARADOX
In many recognized markets, a higher price dampens demand,
and a higher price adds to new supply. That is the normal
Elastic market. Imagine the price of beef steak like tenderloins
or porterhouse or T-bone, even the high end eye of the round.
Suppose the steak price rose 10%. Two things would happen
in the market for steak. Demand would reduce as consumers
would turn to pork or chicken or fish to a greater extent,
or order their steak less often. As a result, less steak
would be bought. On the supply side, ranchers would be more
encouraged to raise more cattle, while at the same time
they would be led to slaughter less of the herd. More steak
would come to market. That is what Elasticity is, a direct
market impact from price.
Actually, an interesting fine point is necessary for a
deeper concept on Elasticity. Among the big battles for
market share, sometimes a slighter lower price offered by
a big supplier can result in impressive gains. Suppose Sony
Ericsson decided to cut their cellphone prices by 5% in
an attempt to win a larger slice of market share. The profit
margin is sufficient to permit the tactical maneuver, as
that margin would come down by 5%. Refer not to a loss leader
tactic or a losing ploy in order to gain market share. They
sacrifice some profits in order to wrest more market share
and at the same time, they test whether the cellphone market
is Elastic. If sales rise by more than 5%, then economists
claim this market has strong Elasticity. Total sales revenue
of greater proportion comes from a corresponding slight
price reduction, thus greater profit. The most capable firms
can rely upon the aggressive tactic, since they are more
efficient, and can afford to take the profit risk. If the
cellphone market already is loaded with excellent competition,
with several very efficient firms battling it out, then
the response of the Sony Ericsson 5% marketing plan might
result in only 3% sales growth. The Elasticity would be
0.6 (less than 1.0) and thus not worth the promotion. Under
such circumstances, the giant would discontinue the program.
It would not be worth it. The price would slide back to
where it was. If the promotion was a big hit, they might
realize a 6% sales gain. That would translate to a 1.2 Elasticity
and very much worth the promotion.
Precious metals have an Inelastic market, a remarkable
anomaly, the opposite effect at work. When the gold price
falls, demand slacks off. In fact, demand for gold has never
been lower in almost the last 20 years when it made a price
low in 2001. It is called the Brown Bottom after numbskull
Gordon Brown, who sold half of the British gold in aid of
Deutsche Bank. When the gold price rises, demand jumps.
It is called a gold fever. The same effect applies to silver.
So gold & silver demand is inelastic, a counter-intuitive
market. The truly intriguing part of the equation is that
Gold Supply is also inelastic, a claim made in 2005 and
repeated in 2006 and 2007 in the Hat Trick Letter. As the
gold price rises, supply actually falls. The more accurate
statement should be the supply inelasticity combines with
geological and jurisdictional factors to reduce supply over
time. During the passage of time in recent years, the gold
price has risen. In statistical parlance, we call this a
confounding of factors, a confounding effect, impossible
to separate and measure without experimental design. The
gold ore deposits are deeper underground, in thinner veins,
of lower yield grade (as in grams per ton). The multitude
of national governments that host mining operations varies
tremendously. Some are suing the mining firms like Indonesia
for massive pollution runoff in the water systems. Others
like Uzbekistan engage in contract treachery to basically
steal property rights. Others like South Africa introduced
marxist nitwits to manage the electrical grid, only to cripple
the output urgently needed to run underground operations.
Others like Mexico are in the middle of a systemic failure,
an explosion of violence during a battle for national control
with drug cartels. Others like Mongolia have turned fickle,
on again, off again, to the point that mining firms cannot
maintain enough trust to invest heavily. Others like China
and Russia has closed their doors to export.
The analytic fabric is even more interwoven. The supply
of silver, in particular, is wrapped within the economic
outlook and fallout. Silver is a major by-product of mining
operations for copper, lead, tin, and zinc. Ore deposits
that contain silver actually contain orders of magnitude
more industrial metals. As these more common industrial
metals suffer reduced demand, due to a decline in the global
economy, a reduction is seen from mining output. Therefore
the silver output falls in tandem. Although sizeable, the
silver mine output is a fraction of the major industrial
metals. It runs as the tail on industrial metal mining operation
dog. Matters related to silver do not drive the decisions
for the majority of its mining output. As copper, lead,
tin, and zinc push the decision process in business operations,
the silver output follows. Silver might have numerous important
and even unique industrial applications, but its niche market
is subservient to the major metals. Hence, as the global
economy has entered a decline over the last three years,
the global output for silver has actually come down. It
has not responded to a higher silver price with much greater
supply from encouraged profit. Instead, it responds to demand
for base industrial metals.
PROPAGANDA ANGLES
The Quantitative Easing name makes the Jackass irritable,
whose sound is much like that made by fingernails on a chalkboard.
The QE nametag is hyper-inflation in official parlance.
QE is ruinous to the monetary system and the major currencies.
QE represents a magnificent escalation in the currency war.
It motivates central bank retaliation, often called the
Competing Currency War, in the defense of large native export
industries. It triggers amplifies gestures toward trade
protection. It can be easily stated and more easily defended
that the United States has done more to worsen global trade
war than any nation. Its export of fraud-ridden mortgage
bonds and tainted USTreasurys that support annual $1.5 trillion
deficits has flooded the global banking systems, inviting
sharp response. Its decision to export a significant portion
of its industrial base to China, the so-called Low Cost
Solution, promoted from 2001 to 2005, is an unmitigated
disaster not yet recognized as such. The USGovt turned from
promoter of the factory export to China early on, only to
condemn its fruit harvested by China in the form of $20
billion monthly surpluses.
How unspeakably incredibly blockheaded stupid, deceitful,
and destructive can a nation be from its leadership helm??
A tight race exists between stupidity and corruption. The
Quantitative Easing has been hinted in August, confirmed
in September, and detailed in November. The QE program has
been minimized in the press, more pure propaganda slop.
It has been estimated to arrive as $500 billion more in
pure monetary inflation, only to rise to another $1000 billion
by next year. QUANTITATIVE EASING IS PURE HYPER-INFLATION
of the most egregious magnitude in modern history. The bubble
is found in the USDollar.
The cancer is infectious and contagious, if not a metastasis
in progress. Capital is in steady profound destruction.
Europe took charge of $750 billion in Dollar Swap Facility
that monetized European bank debt. The entire world must
quarantine the US cancer, but it feels somewhat helpless.
Therefore, initiatives proceed behind the scene, like the
movement by the Eastern Alliance to find a USDollar alternative
in global trade settlement, like The Group of Central Europe
in fashioning, implementing, and executing a New Nordic
Euro currency. If Germany does not launch a new Nordic Euro
currency with a gold component, it will sink into oblivion,
and suffer a financial collapse, the same type that United
States finds itself sinking deeper into.
Propaganda extends to the Canadian Mint story. At one point
a large number of gold bullion tonnage was missing. Then
it was reclaimed in part by accounting corrections, even
nonsense like recovery of drips and waste on the floor.
Then came the final coverup story of the gold bullion actually
being found. What a relief? Perhaps they found tungsten
laced gold bars, and did a quick recovery in the dead of
night, forcing losses on the supplier. Couple the mint story
with the bizarre deceptive IMF stories of gold bullion sales.
The IMF sales announced during the last several years were
rife with blatant falsehoods, as most were close-outs of
old USGovt leased sales. On the books, an amateur or an
ignoramus could call it a sale. It was a sale, but it occurred
back in the Clinton Admin days. Lease, then sale, and years
later buy it back, but put press focus on the original sale
and lie about the timing. Clever indeed!
RISING SPECTER OF CHAOS
The beacon event in the elections has passed. Those in
power will feel free to redeem more US$-based bonds. The
official story came from the USFed on Wednesday, that $600
billion in long-term USTreasury Bonds would be bought with
freshly printed money. The key is how the number exceeds
the consensus $500 billion. Also, the USFed announced up
to $900 billion in total asset purchases. The key is how
mortgage bonds will be bought, fair game. One can be certain
as an observer, a vassal bound within the castle walls,
that TARP-2 has been secretly launched. More toxic bank
assets will be purchased. No waste of bank lobby funds will
be squandered on the USCongress minions. They will be circumvented
as will the annoyance. This is all about the ruling elite
in a nation of the banks, by the banks, and for the banks.
A process will resume for redeeming blood on the floor,
banker blood, as their death episode never ended. The big
bank mortgage bond putbacks (under legal force) will proceed
with dangerous high volume. The QE2 will absorb much of
this swill and thereby relieve the big banks. No TARP-2
could possibly pass as legislation, so the bankers will
rely on a hidden QE2 expansion, a vast expansion. The amount
stated for QE bond purchases is a ruse. The stated volume
represents a line in the sand brushed away by a banker footprint
or sudden wave of seawater, even sheer expedient.
The unknown is whether the USFed will detour the high volume
of toxic mortgage bonds from monetization operations into
the Fannie Mae basement filing cabinets. The emphasis of
the USFed QE bond purchase is between 5-year and 10-years
duration. Look for the 2.0% TNX target to be hit easily,
even shock the textbook bond analysts who point too much
to heavy USGovt debt supply and ignore the monetization
initiatives. The USTBond rally in the face of huge deficits
is proof of never ending monetization, hidden poorly. It
should be noted that the USFed will only devote 3% of purchases
to TIPS. They have been purchasing the Treasury Inflation
Protection Securities all along for the last year. Doing
so is a travesty and violation of its security prospectus.
Imagine monetizing an inflation meter, a ruinous step much
like placing a thermometer in a cold glass of water next
to the flu victim suffering a fever. The patient What a
charade! Only in America!
The inescapable truth is that as for restructure of banks,
NOTHING. As for the return of US industry from Asia, NOTHING.
The USFed with USDept Treasury running interference will
next fund programs without reform or restructure, which
Joseph Stiglitz is quick to point out will not produce any
positive results, and accomplish little if anything. It
is like feeding a man whose legs require amputation from
gangrene. He (the big banks) cannot walk (lend). By the
end of 2011, expect a full discussion with debate on the
need for QE3. Witness the ruin of currencies, part &
parcel to the monetary system destruction. Gold will respond.
Its highly inelastic little brother Silver will respond
even more.