Monday, August 8, 2011
S&P Downgrade - Market Crash - August 8, 2011
Dow is down 634. Nasdaq drops 174 and S&P plumets almost 80.
Gold steady at over 1700. Silver takes a minor setback.
Thank you Mr. President. Your words have inspired the market - to panic.
The President says the debt ceiling must be raised, or the US cannot make it's debt obligations (US Treasuries).
Standard and Poors takes him at his word and combine it with the debt ceiling theater in DC and Downgrade US Debt.
Stock markets plummet. The President makes some kind of speech - and markets panic some more.
The mass media says all of this was caused by an S&P downgrade of US Debt on Friday (after the market closes). There is an FOMC (Federal Open Market Committee) meeting tomorrow where Ben Bernanke decides what to do. At this point, it seems almost inevitable that there will be QE3 announced. If it's not, then expect more market collapses. Nobody with half a brain is in this market.
So, how does the S&P downgrade effect the stock market exactly? A downgrade of US Treasuries (which are considered the safest form of debt since the US can print it's own money), implies that various debt instruments may have principle risk - ie: the bondholders might not get back their original principle. This should lead to a bond sell-off - which does NOT go into the stock market. Stocks are considered riskier than bonds. If bonds sell off, then stocks get devastated. People look to put their money into "safe" instruments (This has been discussed by John Exter (former NY Fed chief) in the 1960's - see here for details).
As markets flee towards safety, the natural places are - bonds, cash, and precious metals (ie: gold/silver). The general media would lead us to believe that a downgrade of US Treasuries results in people buying US Treasuries. I find this preposterous. If somebody downgrades the financial instrument - people don't flee towards it. They run away towards something else. The fact that US Treasuries did NOT plummet - implies that somebody is buying US Treasuries. There can ONLY be ONE entity which can buy US Treasuries in the face of a general market fleeing US Treasuries. That entity is the US Federal Reserve Bank.
Let's look at how a downgrade would naturally work, and what would normally occur. Bonds are sold at a discount to face value. A $100 bond might be sold for $80 and when the bond matures, will be worth the entire face value of $100. This discount is computed to a compound interest rate, and we say that a bond is paying 5% compounded.
When there are more buyers of bonds than sellers, the price of the bond goes up (towards the face value), and as a result interest rates fall. The maximum price of the bond is it's face value, and this will result in a payment of 0% interest. When there are more sellers than buyers, the purchase price of the bond falls, and interest rates go up.
So we see that the bond market is the real driver for interest rates. The US Government pays interest on its bonds (Treasuries). Since the rates are near zero, the government is not paying much interest. Suppose that interest rates for Treasuries started rising. In this case, the interest expense (which is currently near zero), would rise dramatically. The money supply would shrink (consumed by interest payment), and the economy would grind to a complete standstill (if it isn't already).
So, let's look at what actually happened. We see a stock market sell-off (in expectation of a shrinking money supply), and a flight towards bonds. Buying bonds before the price drops ties up your money for a long time, or guarantees a loss. So the logical reaction (buy people who want to make money) is to sell stocks and stay in cash, or even better short the market, or buy S&P out of the money puts (for a short term) - but NOT to buy bonds. But we did not see the bond market collapse, therefore somebody must be buying the bonds. I posit that the somebody can ONLY be a Central Bank, or several Central Banks working in collusion. These institutions are not driven by profit, but by maintaining the status quo. By purchasing US Bonds, they keep interest rates artificially low - which results in money going into the stock market (in effect the Central Banks prop up the stock markets of their respective countries). Since the US Dollar is currently the world's reserve currency, nobody can afford the US Dollar to collapse.
Tomorrow's FOMC meeting should result in QE3. Which should stabilize the markets. The Fed will claim that they have no choice but to initiate QE3. If it does not happen tomorrow, it will happen soon. The markets will stabilize after this news - and trillions of new debt will be monetized.
It's a very interesting sequence of events...
QE2 ends - and the fed stops pouring money into the stock markets
Debt Ceiling limit reached - the US Congress cannot issue more debt (which gets monetized and become US Dollars)
Stock Market collapses
Fed becomes "forced" into QE3
If these events did not happen in this sequence, we would not see money being created and injected into the stocks market and into the banking sector (QE3 will also bail out the banks, as there are currently rumors of large US and European banks being in trouble). It's almost like a script that is being followed.
Since QE3 increases the quantity of US dollars in existence, this makes gold priced in US Dollars go up, and similarly for silver.
The FOMC meeting will result in a statement being issued tomorrow at 2:15 Eastern time tomorrow.
It seems we live in "interesting" times (as per the ancient chinese saying).
Friday, August 5, 2011
Crash of August 4 and What the Future Holds
Here's a half-hour explanation of the forces at work causing yesterday's crash in silver prices.
When silver prices are low, it gets consumed at an even greater rate, and physical stockpiles (COMEX reserves) drop to all time lows. Today, it is estimated that there is something like 27 million ounces available for delivery from the COMEX. Eric Sprott tried to purchase a few million ounces of silver to start his Physical Silver Fund, and it took him several months. Some of the silver that was eventually delivered, was mined some months after he had paid for it.
Price is the result of supply and demand coming to agreement. It looks like the supply is low, and demand is constant. At some point, we should see a major correction in prices.
... basically, the price of silver drops from 42 (which appears to a key short term price point - somebody might have a derivative position that kicks in here, who knows?) down to 40, and today is around 39.
Gold is relatively steady - yesterday's high was around 1680, and today it's around 1660.
Silver Prices
Chances are it will be a very rocky ride. It won't be comfortable. Overall, though, it can only go up. Here's a James Turk - Eric Sprott interview explaining why.When silver prices are low, it gets consumed at an even greater rate, and physical stockpiles (COMEX reserves) drop to all time lows. Today, it is estimated that there is something like 27 million ounces available for delivery from the COMEX. Eric Sprott tried to purchase a few million ounces of silver to start his Physical Silver Fund, and it took him several months. Some of the silver that was eventually delivered, was mined some months after he had paid for it.
Price is the result of supply and demand coming to agreement. It looks like the supply is low, and demand is constant. At some point, we should see a major correction in prices.
What About Additional Margin Hikes?
At the start of May, Silver was close to $50/oz, and the price collapsed to the mid-low $30's. This happened due to 5 margin increases issued by the CME in the space of 9 days. In essence, somebody changed the rules mid-game as the wrong people were losing. Can't this happen again?
It's possible. But, the more the kind of action takes place, the more people will come to believe that the market is manipulated. If people believe the market is manipulated, some will leave in disgust, while others will understand that when markets are manipulated in a particular direction, it means there will be an even bigger correction going the other way. These people will not operate in margin - and hence will not be effected by margin increases, and will demand physical delivery. Others will purchase actual physical silver - depleting any physical supply.
The end result will be a depletion of any physical inventory followed by a massive correction in prices.
Junior Mining stocks?
Looks like prices on junior mining stocks (and silver streaming stocks such as Silver Wheaton (SLW)) have taken a major beating. These stocks were hit significantly harder than makes sense, when looking at the silver price. But several of these companies are flush with cash - as the price of silver is far above the cost to mine it (ie: digging doesn't cost that much, you just have to have the right place to dig).
Endeavor Silver (EXK) just had a conference call yesterday discussing their recent Q2 earnings. They have a growing cash position, and last quarter decided not to sell silver (growing their inventory) which hurts their earnings numbers. Due to the IFRS accounting rules, they cannot put this silver inventory on their books at the current market value, but must put it on their books at their cost of production (mining cost). There have already used some of the cash to expand operations, and purchase additional land. But since silver revenues are bringing in a ton of cash, it's conceivable that they could purchase other miners.
In essence, while the stock price of silver miners are oversold, and at the same time, certain silver miners are flush with cash, it's only natural that a consolidation phase might start in silver mining shares. Some mining shares might decide to buy back their own shares (as it could provide better return than mining).
So, miners will increase the number of ounces of silver (mined, in the ground, etc) per share, taking advantage of the cash build-up combined with discounted silver prices.
So, miners will increase the number of ounces of silver (mined, in the ground, etc) per share, taking advantage of the cash build-up combined with discounted silver prices.
Finally, we see rumors that silver mining stocks are being naked shorted. If this is true, then when these shorts get over-run, the up-side correction for junior miners will be spectacular.
Hong Kong Mercantile Exchange and the Pan Asia Gold Exchange ...
The Hong Kong Mercantile Exchange (HKMEx) recently started trading 1000 oz contracts for silver. The web site is here. Click on the pop-up which lists 32 troy oz gold futures, and select 1,000 troy oz silver futures, to see the silver price.
The interesting thing about this, is that it is a real physical market. There is no "paper" silver here. The COMEX and LBMA appear to be mostly "paper" markets (see here).
Currently, spot silver on the Globex is going for 38.97, and the HKMEx is 41.79 (September delivery).
The COMEX supposedly has 27.331 million oz of silver (registered inventory) available for immediate delivery. It should be possible to buy silver on the COMEX, take delivery and have it shipped to Hong Kong, and sell it on the HKMEx, netting 2.82 per oz. Since each COMEX contract is for 5000 oz. It should cost $194,850, and sell for $208,950, netting $14,100 per contract.
Similarly, the Pan Asian Gold Exchange is starting up and should be on-line by Q3 2011.
Due to the leverage of paper silver to actual physical silver, there are rumors that there is not enough actual physical silver available if everyone asked for delivery. If this is true (and it seems that Jeffery Christiansen of the CME group has confirmed it under testimony to the CFTC), it means that the price of silver has been suppressed compared to a normal supply-demand logistics in a normal market. It becomes possible that there could be a "run" on the silver market, if the buyers don't believe they can get the silver they purchased. (There are also rumors of people getting paid significant amounts over to settle their silver purchases in cash vs physical metal).
If you don't have $194,850 to buy a contract on the COMEX, you can buy 1 oz silver coin - at these suppressed prices. Max Kaiser believes that JP Morgan is short 3.3 Billion oz of silver (annual world mine production is around 700-800 million oz according to the USGS), so he has started a "crash JP Morgan - buy silver campaign". He believes that if he can get enough people to just buy a few silver coins, it could force JP Morgan to cover their position - (which would be an impossibility if they really are short 3.3 billion oz - there's not enough silver in the world).
If silver is being manipulated and suppressed, how high could it get to (when the manipulation fails)? Lorimar Wilson believes it could get this high. And he says he's got a bunch of academics, economists, analysts, and investors who agree with him.
If there is a manipulation in the markets, these two new markets opening up should help to end the manipulation, and we should see the price of silver take off.
PS: By the way, if you don't have any gold or silver, here's a cool video showing why you might want to get some.
The interesting thing about this, is that it is a real physical market. There is no "paper" silver here. The COMEX and LBMA appear to be mostly "paper" markets (see here).
Currently, spot silver on the Globex is going for 38.97, and the HKMEx is 41.79 (September delivery).
The COMEX supposedly has 27.331 million oz of silver (registered inventory) available for immediate delivery. It should be possible to buy silver on the COMEX, take delivery and have it shipped to Hong Kong, and sell it on the HKMEx, netting 2.82 per oz. Since each COMEX contract is for 5000 oz. It should cost $194,850, and sell for $208,950, netting $14,100 per contract.
Similarly, the Pan Asian Gold Exchange is starting up and should be on-line by Q3 2011.
Due to the leverage of paper silver to actual physical silver, there are rumors that there is not enough actual physical silver available if everyone asked for delivery. If this is true (and it seems that Jeffery Christiansen of the CME group has confirmed it under testimony to the CFTC), it means that the price of silver has been suppressed compared to a normal supply-demand logistics in a normal market. It becomes possible that there could be a "run" on the silver market, if the buyers don't believe they can get the silver they purchased. (There are also rumors of people getting paid significant amounts over to settle their silver purchases in cash vs physical metal).
If you don't have $194,850 to buy a contract on the COMEX, you can buy 1 oz silver coin - at these suppressed prices. Max Kaiser believes that JP Morgan is short 3.3 Billion oz of silver (annual world mine production is around 700-800 million oz according to the USGS), so he has started a "crash JP Morgan - buy silver campaign". He believes that if he can get enough people to just buy a few silver coins, it could force JP Morgan to cover their position - (which would be an impossibility if they really are short 3.3 billion oz - there's not enough silver in the world).
If silver is being manipulated and suppressed, how high could it get to (when the manipulation fails)? Lorimar Wilson believes it could get this high. And he says he's got a bunch of academics, economists, analysts, and investors who agree with him.
If there is a manipulation in the markets, these two new markets opening up should help to end the manipulation, and we should see the price of silver take off.
PS: By the way, if you don't have any gold or silver, here's a cool video showing why you might want to get some.
Thursday, August 4, 2011
First Post
Ron Paul questions Ben Bernanke : "Is gold money?"
Ben Bernanke : "(pauses) No."
JP Morgan (a long time ago) : "Gold is the only money - everything else is credit"
It seems there is a difference of opinion here...
This is going to be blog about silver, gold, markets (stocks/bonds/futures, etc), the economy, and current events, and my thoughts where things are headed ...
Gold lost 40 points in approximately 1.5 hrs. Silver lost over 2 in about 15 minutes.
Gold will go up in price as long as the clowns in DC keep printing money. As they don't really know how to stop, this is a practical certainty.
Silver is completely different. It has industrial as well as economic uses.
Silver has a bunch of fundamentals going for it including
... sometime around 1933, President Roosevelt seized all the gold from US Citizens at about $20/oz and the next day, repriced gold to $35/oz
Ben Bernanke : "(pauses) No."
JP Morgan (a long time ago) : "Gold is the only money - everything else is credit"
It seems there is a difference of opinion here...
This is going to be blog about silver, gold, markets (stocks/bonds/futures, etc), the economy, and current events, and my thoughts where things are headed ...
Today was an interesting day (for a first blog post)
The dow lost 500+ points. S&P lost 50, Nasdaq down 130+Gold lost 40 points in approximately 1.5 hrs. Silver lost over 2 in about 15 minutes.
So, where's this thing headed?
In the long term, gold and silver will be much higher than they are today, but it's going to be a roller coaster ride getting there.Gold will go up in price as long as the clowns in DC keep printing money. As they don't really know how to stop, this is a practical certainty.
Silver is completely different. It has industrial as well as economic uses.
Silver has a bunch of fundamentals going for it including
- fixed rate of supply (takes a couple of years for a mine to become operational)
- inelastic demand (used in small quantities, with not easy replacement, it's use pattern is price inelastic)
- voracious consumption (more is consumed than replaced)
- limited inventories (comex inventories of silver are at all time lows)
A Brief History of ...
If you're new to the silver and gold story, here's a brief history of the precious metals, and the US economy ...... sometime around 1933, President Roosevelt seized all the gold from US Citizens at about $20/oz and the next day, repriced gold to $35/oz
... after WWII, the US Dollar achieves the status of the world's reserve currency. The US will exchange it's dollars for gold for non-US citizens. This is known as a gold-backed currency.
... up until 1964, most US coins (exception being pennies) were 90% silver. Lyndon B. Johnson takes silver out of US currency, and says "Don't hoard your present silver coins, ... [it] won't be profitable"
http://sgtreport.com/2011/07/dont-hoard-your-silver-coins-president-johnson-1965/
(In 1964, a silver dollar was worth, it's weight in silver - about a $1)
(In 1964, a silver dollar was worth, it's weight in silver - about a $1)
... circa 1972, President Nixon takes the US Dollar off the gold-standard, and in exchange, allows US Citizens to buy gold (at that time, gold was around $41/oz)
... and some history about the Hunt Brother's silver position (circa 1980) which took silver up to $50/oz
their famous quote : "Any damn fool can run a printing press"
... from 1980-1990 the price of gold, silver, and oil collapsed. This combined with President Regan's "Star Wars" program resulted the bankrupting and subsequent collapse of the USSR.
... circa 1999, something happened that you may never have heard of - Brookley Born (then head of CFTC) predicts that derivatives could cause a financial meltdown. Six months later, a wall street firm called Long Term Capital Management (LTCM) goes bust - and gets bailed out to prevent systemic collapse!
... by 2000, the price of gold was around $230+/oz and silver around $4/oz. Gordon Browne decides to sell the UK's gold, and around mid-year 2000, high tech stocks collapse - the Nasdaq goes from 6000 to 2000 and stays there for a decade. (... and by, the way, Warren Buffet decides to buy silver).
... by 2008, the housing market collapses - causing a liquidity crisis - resulting in stock market collapse - several large wall street firms get "bailed out". (Gold has been quietly climbing from $230+ to $950+/oz. Silver went from $4 to $19). After the collapse, silver drops to $9/oz and gold drops from $950+/oz to $750/oz. (Interestingly, there were several complaints of delays, and other difficulties that people encountered when trying to buy silver at the sub $10/oz price point from dealers. Silver was available on Ebay at $30+/oz).
... by 2011 (today), gold gets to $1600/oz, and silver gets to $50/oz (before being slammed down to $35, and is currently around $40/oz). All currencies today are fiat based (backed by the full faith and confidence of their various governments), and all governments are trying to devalue their currency to stimulate trade.
... and we see China come onto the world market. They import raw materials, and export finished goods to the entire world. The Chinese own over a $1 Trillion of US Debt. (The US dollar is a debt based currency).
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