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Monday, February 28, 2011

Peter Schiff on CNBC: Inflation, the collapsing US Dollar and rising interest rates in other countries


Peter Schiff comments on the sweeping inflation raging around the world and the impact it is going to start having on the US dollar. As we have been talking about on this blog for the past year, inflation - not deflation - is going to be our central story.

Speaking of other nations raising interest rates, Russia unexpectedly raised their prime rate again. It now stands at 8%.

And as Schiff says... higher rates will becoming to North America before long.

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CNBC: Silver to go to $130?



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Saturday, February 26, 2011

Silver, the Opportunity of the Decade - Part 5: The Short Squeeze

This is the 5th part of a series on Silver, The Opportunity of the Decade.

You can read Part 1: Shrinking Supply and Rising Demand here.

You can read Part 2: The Comex, what is it? here.

You can read Part 3: The Comex Silver Cartel here.

And you can read Part 4: Evidence of Gold and Silver manipulation surfaces here.

To understand what is happening with Silver, JP Morgan and their massive short position right now it is important to understand the enormous impact of the revelations from whistleblower Andrew Maguire.

Although he first approached the CFTC in November 2009, news of the allegations did not surface until March 2010 when Maguire joined up with Adrian Douglas of the GATA to go public.

The detailed revelations of exactly how the manipulation were being carried out created a firestorm of attention around what some have called "the largest fraud in history involving countries, banks and government leaders."

You can hear a detailed radio interview with Maguire conducted by King World News in March 2010 by clicking here. Maguire explains his motivation for coming forward, the details of his revelations to the CFTC and the significance of this issue to the financial system.

It's a extremely important piece to listen to. If you are interested in this topic I highly encourage you to click on the link and hear this charade explained and it's importance detailed. Later next month I will be posting excerpts.

It's also important to stress that this story is far from over. The CFTC investigation is drawing to a close. And while that investigation is important, it will not be the focus of today's post.

Today we are looking at the impact on the main player behind the manipulation: JP Morgan.

The commodities division of JP Morgan is headed by a woman named Blythe Masters (pictured above). British-born Masters is one of the most powerful women on Wall Street and is widely recognised as one of an elite group dubbed the "JP Morgan mafia" that fostered the creation of the complex credit derivatives at the heart of the current crisis ripping through Wall Street.

Many of the highly qualified mathematicians and academics who worked on the credit derivatives market in the early days have gone on to run hedge funds and into high-powered jobs at other investment banks, but most of them started out at JP Morgan.

Blythe, and a team she headed, created in 1997 the credit default swaps and the credit derivatives that were intended to remove risk from companies' balance sheets. The idea was to separate the default risk on loans from the loans themselves.

Warren Buffett has publically called these derivatives "financial weapons of mass destruction". Many others blame these tools as the reason the financial system collapsed in 2008.

So despised is Masters in the financial world that the Guardian newspaper said that "if Buffett has called these derivatives 'financial weapons of mass destruction', then Blythe Masters is one of the destroyers of worlds."

And now Masters is the central figure behind the allegations of Gold and Silver price manipulation by JP Morgan.

As Maguire's allegations became public and the CFTC launched it's investigation into the activities of JP Morgan, Master's division came under stress.

Commodities trading, the target of new rules from the regulators, can be volatile and unpredictable - “a dangerous business,” as Goldman Sachs Group Inc. Chief Financial Officer David Viniar put it three years ago.

And in an August 2010 article, Masters was quoted as saying, “It is a very, very difficult thing to trade for a living. And it is very difficult to put on risk and try to generate results for the company that you work for in a difficult trading market where chitchats and loose lips and talk leads to widespread dissemination of both fact and rumor.”

Masters comments came on the heels of a series of dismissals from the firm that began on July 21, 2010.

In a Bloomberg article, an internal conference call was repored upon in which Masters sought to reassure her team after “extremely difficult” dismissals, defections and a first half in which some results were as much as 20% below expectations.

“We made a bit of a rookie error” that left the firm "vulnerable to a squeeze,” Masters said.

And it appears that 'rookie error' and resulting 'squeeze' were just the first baby steps in a plan of attack that would start to mount and grow for the fall trading period leading up to the December delivery contracts on the COMEX.

Rumours began circulating on the internet that a coordinated attack was being created, led by those who had been dismissed or resigned from Master's team.

Messages began appearing on chatboards which included this open letter and challenge to Blythe Masters:

  • Blythe,

    This is what I am hearing from your former traders (who made “very interesting career decisions”). Well it seem that they are on to a new scheme to corner the Comex and drive the price of silver up $10 to $15 dollars in a matter of weeks.

    The strategy is as follows. We know that Comex only has 105 million ounces of silver of which only 50 million ounces are availabe for delivery. (I personally don’t believe the Comex numbers are anywhere near that high, but that is neither here nor there for now.) Well, all it would take is 10,000 contracts on the Comex to buy up all the “available silver” at the Comex and 20,000 contracts to deplete it completely. The current front month March OI is north of 78,000.

    Watch the OI closely. Blythe’s former traders are advising major hedgefunds and billioniare investors to buy up as many contracts as possible as March 1 approaches and deposit the cash needed to stand for delivery for the month of March. The purpose is not necessarily to bust the Comex but to force the Comex to pay a premium (some as much as 30 percent) for cash settlement. Think about it. If a group of hedgefunds gets together and bankroll $1 billion, they can buy more than 30 million ounces of silver. Of course, the contract sellers like The Morgue cant deliver the silver so a cash settlement is the only recourse. So what’s wrong with $200 million in profit on a $1 billion investment that takes less than 4 weeks total?

    Guess what Blythe? Your former traders are advising everyone they know to put on this trade come the first week of February. Is this what happened in the Decemeber contracts? Is this why silver went from $22 on September 30 to $29 by December 1? How much do you think silver will spike in February as we approach March 1? The traders think silver will be north of $45. Heck it went over $9 as we approached December and everyone who got a pay off in terms of a premium cash settlement will be back for more. And they are all gonna be bringing friends to partake in the bounty.

    Your former traders are telling everyone who would listen that all they need to do is purchase a huge amount of March contracts near the end of February and stand for delivery and they will all make 20 percent in a matter of days. Is this what you are hearing Blythe? If so, shouldnt you let the price of silver move up so that you can get some physical to deliver before March 1?

It is an intriguing rumour.

Were certain big private investors and huge funds managers thinking the same?

By the actions in silver paper and physical market since September 2010, many believe there may be creedence to this.

Since Sep 8th 2010, Comex customers started leasing huge amounts of physical silver to Comex dealers and paper speculators started smelling blood by increasingly buying Dec 2010 silver futures contracts.

In period of Sep 17th 2010 to Sep 29th 2010, Comex customers leased – in 5 out of 9 working days, a total of 3.1 million ounces of physical silver to Comex dealers.

In this same time period, Comex dealers delivered 4.1 million ounces of physical silver to owners of Sep 2010 silver futures contracts.

This means that Comex dealers had only 1 million ounces of their own physical silver, even though at the same time, they reported to have around 53 million ounces in their warehouse.

Why would you borrow 3.1 million oz and pay a leasing fee if you own 53 million oz of silver yourself?

How else would you explain, silver open interest contracts (OI) jumping in period of 2 months (from mid Sep 2010 to mid Nov 2010) by over 30,000 contracts which represents around 150 million ounces of silver?

Note, that entire Comex silver inventory at that time was reported to be around 110 million ounces of physical silver (now below 105).

This is why analysts say the price of paper silver jumped in this same period of 2 months by around 45%.

So what happened with the Dec 2010 Silver Futures?

5,428 contracts stod for delivery of physical silver with owners delivered money on their trading accounts on Nov 29th 2010.

Then, in the next 3 days, 3,583 of these contracts settled in cash.

3,583 out of 5,428 (66%) fully paid Dec 2010 silver futures contracts settled in cash by Dec 2nd 2010.

Speculation has it taht premiums were paid in a range from 10-30% for each of the clients holding these contracts.

For a comparison, in Sep 2010 only 483 contracts out of 3,002 (16%) fully paid Sep 2010 silver futures contracts settled in cash by Sep 2nd 2010.

Settled silver futures contracts in cash jumped from 483 in Sep 2010 to 3,583 in Dec 2010 which is a jump by 3,100 contracts equaling 15.5 million ounces of PHYSICAL silver or 642%.

Since some big players clearly seemed to have figured it out.

What an easy profit it is for them to just buy silver futures contracts and negotiate for premiums and pocket easy money in less than a month.

Attention then turned to the March 2011 silver futures contracts.

With the limited supplies of silver and the escalating demand for physical, JP Morgan could be put in a squeese again.

Those who watch the market speculated that by the 1st week of Feb 2011, spot price of silver would drop down to around $25 (more likely down to $27.5) and from 2nd week of Feb 2011 until the end of Feb 2011 they believed the price would rise to the upside of $35 (more likely around $32). This analysis was almost bang on.

A similar pattern (albeit driving the price of silver higher and higher) is predicted for the June, Sept and Dec, 2011 delivery periods as well.

Next we will look at what did happen in the February bidding for the March delivery contracts and what lies ahead.

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Friday, February 25, 2011

Silver, the Opportunity of the Decade - Part 4: Evidence of Gold and Silver manipulation surfaces

This is the 4th part of a series on Silver, The Opportunity of the Decade.

Read Part 1: Shrinking Supply and Rising Demand

Read Part 2: The Comex, what is it?

Read Part 3: The Comex Silver Cartel

I received a number of email queries that indicate it would be worthwile to provide some evidence of the existence of a Cabal manipulating the price of Gold and Silver. It's important to cover this before going into our discussion of the short squeeze in Silver that has been playing out recently.

Much of the information here has been gathered by the Gold Anti-Trust Action Committee (GATA), a registered U.S. Internal Revenue Service tax-exempt educational and civil rights organization that advocates and undertakes litigation against illegal collusion to control the price and supply of gold, silver and related financial securities.

For years there have been allegations that there existed illegal collusion to control the price and supply of gold, silver and related financial securities.

Though the gold standard was abandoned during World War I, restored briefly in the 1920s, and then abandoned again during the Great Depression, that was not the end of government efforts to control the gold price.

Throughout the 1960s the United States and Great Britain attempted to hold the price at $35 in a public arrangement of the dishoarding of U.S. gold reserves. This arrangement came to be known as the London Gold Pool.

As monetary inflation rose sharply, the London Gold Pool was overwhelmed by demand and was shut down abruptly in April 1968. Three years later, in 1971, the United States repudiated the remaining convertibility of the dollar into gold - convertibility for government treasuries that wanted to exchange dollars for gold.

At that moment currencies began to float against each other and against gold - or so the world was told.

Since then there have been those who claim that Central Banks had undertaken to surreptitiously continue that suppression of gold and silver gold prices. They have been branded as conspiracy theorists, dismissed and ridiculed as tin foil hat wearing wingnuts and derided as 'gold bugs'.

But the gold price suppression scheme became a matter of public record in January 1995, when the general counsel of the U.S. Federal Reserve Board, J. Virgil Mattingly, told the Federal Open Market Committee, according to the committee's minutes, that the U.S. Treasury Department's Exchange Stabilization Fund had undertaken gold swaps. Gold swaps are exchanges of gold allowing one central bank to intervene in the gold market on behalf of another central bank, potentially giving anonymity to the central bank that wants to undertake the intervention. The 1995 Federal Open Market Committee minutes in which Mattingly acknowledges gold swaps are still posted at the Fed's Internet site and you can see it here.

Then, in July 1998, Federal Reserve Chairman Alan Greenspan told Congress: "Central banks stand ready to lease gold in increasing quantities should the price rise." Greenspan himself, supposedly the greatest among the central bankers, had come out publically and contradicted the usual central bank explanation for leasing gold (which was supposedly to earn a little interest on a dead asset) and he had admitted that gold leasing is all about suppressing the price.

Greenspan's admission is still posted at the Fed's Internet site which you can read here.

Then, on February 28th, 2003, Barrick Gold (then the largest gold-mining company in the world) confessed to the gold price suppression scheme in U.S. District Court in New Orleans. In filing a motion to dismiss Blanchard & Co.'s anti-trust lawsuit against Barrick and its bullion banker, JPMorganChase, for rigging the gold market, Barrick's claimed that in borrowing gold from central banks and selling it, the mining company had become the agent of the central banks in the gold market, and, as the agent of the central banks, Barrick should share their sovereign immunity and be exempt from suit.

This stunning admission/confession to the gold price suppression scheme is posted at GATA's Internet site which you can read here.

In January 2009 a remarkable 16-page memorandum was discovered in the archive of the late Federal Reserve Chairman William McChesney Martin. The memorandum is dated April 5, 1961, and is titled "U.S. Foreign Exchange Operations: Needs and Methods." It is a detailed plan of surreptitious intervention to rig the currency and gold markets to support the dollar and to conceal, obscure, or falsify U.S. government records and reports so that the rigging might not be discovered. This document remains on the Internet site of the Federal Reserve Bank of St. Louis which you can read here.

In September 2009 a New York financial market professional and student of history (Geoffrey Batt) posted three declassified U.S. government documents involving the gold market on www.zerohedge.com.

The first document was a long cable dated March 6, 1968, from someone named Deming at the U.S. Embassy in Paris to the State Department in Washington. It is posted at the Zero Hedge which you can read here. The cable described the strains on the London Gold Pool to hold gold to the official price of $35 per ounce. Six months later the London Gold Pool collapsed.

Significantly, the cable is a detailed speculation on what would have to be done to control the gold price and particularly to convince investors "that there is no point any more in speculating on an increase in the price of gold" and "to establish beyond doubt" that the world financial system "is immune to gold losses" by central banks.

The cable recommends creation of a "new reserve asset" with "gold-like qualities" to replace gold and prevent gold from gaining value. To accomplish this, the cable proposes "monthly or quarterly reshuffles" of gold reserves among central banks - what the cable calls a "reshuffle club" that would apply gold where market intervention seemed most necessary.

These "reshuffles" sound like the central bank gold swaps of recent years.

The idea, the cable says, is for the central banks "to remain the masters of gold."

Also in September, Batt disclosed a memorandum from the Central Intelligence Agency dated December 4, 1968, several months after the collapse of the London Gold Pool. You can read here. The CIA memo said that to keep the dollar strong and prevent "a major outflow of gold," U.S. strategy would be "to isolate official from private gold markets by obtaining a pledge from central banks that they will neither buy nor sell gold except to each other."

And:

"to bring South Africa to sell its current production of gold in the private market, and thus keep the private price down."

The third document, and most interesting, was written on June 3, 1975. 1975 was four years after the last bit of official fixed convertibility of the dollar and gold had been eliminated and the world had been told that currencies henceforth would float against each other and gold and gold would be free trading.

The document is a seven-page memorandum from Federal Reserve Board Chairman Arthur Burns to President Gerald Ford. It is all about controlling the gold price through foreign policy and defeating any free market for gold. It is posted at Zero Hedge as well and you can read it here.

Burns tells the president: "I have a secret understanding in writing with the Bundesbank, concurred in by Mr. Schmidt" (that would be Helmut Schmidt, West Germany's chancellor at the time), "that Germany will not buy gold, either from the market or from another government, at a price above the official price of $42.22 per ounce."

Burns adds, "I am convinced that by far the best position for us to take at this time is to resist arrangements that provide wide latitude for central banks and governments to purchase gold at a market-related price."

The GATA have amassed numerous other documents on this subject. What you see here is only a small sampling of what they have found.

All of the documentation leads them to suggest that suppressing the gold price is clearly part of the general surreptitious rigging of the currency, bond, and commodity markets by the U.S. and allied governments.

They do this surreptitiously because the market rigging is the foremost objective of U.S. foreign and economic policy, and because this rigging cannot work if it is exposed and the markets realize that they are not really markets at all.

This rigging, however, is increasingly being exposed and understood.

It is widely acknowledged that annual world gold production is about 2,400 tonnes, that annual net world gold demand is about 3,400 tonnes, that gold production has been falling as demand has been rising, and that the thousand-tonne gap between production and net demand has been filled mainly by central bank dishoarding and leasing.

What do you suppose the gold price would be if central banks were not supplying more than a quarter of annual demand?

That dishoarding was not all innocent management of a foreign exchange reserve portfolio. Much of it was meant as market intervention -and after all, market intervention is exactly why central banking was invented.

Intervening in markets is what central banks do. They have no other purpose.

Central banks admit intervening often in the currency markets, buying and selling their own currencies and those of other governments to maintain exchange rates at what they consider politically desirable levels. Central banks admit doing the same in the government bond markets. There is even evidence that the Federal Reserve and Treasury Department have been intervening frequently in the U.S. stock markets since the crash of 1987.

Ben Bernanke went on 60 Minutes earlier this year and openly admitted the US Federal Reserve's intent was to raise stock values and create a 'wealth effect' to lift the country out of the current Great Recession.

Which brings us to Silver.

This intervention exists in Silver as well as Gold and dramatic evidence proving this came to light in November 2009.

Andrew Maguire, a metals trader in London, turned whistleblower and provided detailed information of how traders working for JPMorganChase manipulatesthe precious metals markets and how they make money doing it.

Maguire contacted the Commodities and Futures Trade Commissioin (CFTC) enforcement division and reported this criminal activity.

He described in detail the way JPMorgan Chase signals to the market its intention to take down the precious metals. Traders recognize these signals and make money shorting the metals alongside JPM. Maguire explained how there are routine market manipulations at the time of option expiry, non-farm payroll data releases, and COMEX contract rollover, as well as ad-hoc events.

On February 3, 2010 Maguire gave two days' warning by e-mail to Eliud Ramirez, a senior investigator for the CFTC's Enforcement Division, that the precious metals would be attacked upon the release of the non-farm payroll data on February 5, 2010.

On February 5, as market events played out exactly as predicted, further e-mails were sent to Ramirez while the manipulation was in progress.

Maguire wrote: "It is common knowledge here in London among the metals traders that it is JPM's intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits. I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC's allowing by your own definition an illegal concentrated and manipulative position to continue."

Maguire's bombshell revelations lead to a formal investigation by the CFTC and open allegations by the CFTC that JP Morgan and HSBC have engaged in "fraudulent efforts to persuade and deviously control the price of silver."

As the bright lights of media attention began to focus on the allegations and CFTC investigation, JP Morgan came out and admitted it's massive short position and activities in the Silver market.

What has played out since then has been a dance between JP Morgan, the CFTC, the Silver market and a series of hedge funds seeking to take advantage of JP Morgan being caught with their "hand in the cookie jar", so to speak.

In the process, Silver has shot up over 110% since the revelations were made public.

More tomorrow.

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Thursday, February 24, 2011

Royal Canadian Mint comments on the demand for Silver

Evening Gang. Part 4 is not ready tonight, but what a wild day for those of us who do follow silver. If you click on the image above, it will enlarge for you showing you how silver was raided today.

Why the massive drop?

Is the silver supply issue suddenly all better?

Did we suddenly discover a couple billion ounces laying around somewhere?

Did the U.S. suddenly balance its budget?

Are all of the U.S. states suddenly solvent?

Nope... it was a raid, pure and simple. Designed to drive away the massive open interest of buyers who are still standing for delivery of physical silver in March.

Today was options expiry for Silver and the Cabal launched a massive attack to drive the price down. As you can see in the graph, we went from over $33.20 down to $31.70, a huge drop of $1.50 in a very short period of time.

In any other era, this would have sent Silver cascading lower still and kept it down for months afterward. It is truly a testament to the paradigm shift we are seeing in precious metals that not only did Silver not cascade downward in price, but that it actually rebounded and, as this is written, sits at $32.52.

The Comex is facing a dilemma. And it all has to do with sourcing physical silver (more on this in Part 4 of our series).

How difficult is it to find large amounts of silver?

King World News had a great interview with David Madge, director of bullion sales at the Royal Canadian Mint.

When asked if the RCM is having trouble acquiring silver Madge responded,

  • “Demand right now for silver is through the roof and it shows no signs of slowing at this point. Sourcing silver is becoming very difficult. We are competing with a great many players when it comes to purchasing silver and many of these players are bidding the price higher.”

Madge goes on to say,

  • “Our advantage is that we have had long-term relationships with our suppliers and that has helped us in this situation. We have been able to leverage off of those relationships to get supply, but it still remains a big challenge sourcing material. We’re looking at ways of mitigating our risk regarding supply of silver.

    We are anticipating it to become even more difficult to secure supplies in the future. This is based on what we are seeing firsthand and what our suppliers are telling us. We work closely with these banks to secure silver and they tell us there is a lot of competition.”

When asked what this means for the price of silver and how long this condition is expected to persist Madge stated,

  • “I think you are going to see the premiums go up in order to secure silver. At some point some players will be priced out of the market. I don’t think this is a short-term situation, I think there are a lot of issues going forward and this may be the new norm.”

So here you have the Royal Canadian Mint telling us that they expect it to become even more difficult in the future to secure supplies of silver. As King World notes, this is an extremely important testimonial regarding how tight the silver market is because the information is coming directly from the Royal Canadian Mint itself.

Although I haven't posted Part 4 (The Short Squeeze) yet, we are closing in on the cut off for March delivery for physical silver from the COMEX and open interest for the delivery of physical silver remains massively high.

As mentioned yesterday COMEX silver inventories are at 4 year lows. Total dealer inventory is now 42.16 million ounces and total customer inventory is now at 60.68 million ounces, giving a combined total of 102.847 million ounces.

Today's open interest stands at 28,000 contracts. To give you a sense of how massive that is, 28,000 contracts = 140,000,000 oz's still standing for delivery.

And if the Royal Canadian Mint is having difficulty sourcing additional silver, you know the COMEX is in a desperate position.

Tomorrow should be an interesting day indeed on the silver markets.

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Wednesday, February 23, 2011

Silver, the Opportunity of the Decade - Part 3: The Comex Silver Cartel

For those coming to the blog later in the day, this is the third post on silver today. Please check out the two earlier posts below this one.

This is the 3rd part of a series on Silver, The Opportunity of the Decade.

Read Part 1: Shrinking Supply and Rising Demand

Read Part 2: The Comex, what is it?

In Part 2 the COMEX was explained. Today we are going to talk about the cartel that manipulates the COMEX.

Ted Butler is a trader who has studied the COMEX and has produced some revealing details about the Exchange. This is a portion of an article he has written. You can read more articles on silver by Ted Butler here.

Most of us understand what a cartel is, namely, a single entity or small group, acting in consort, for the designed purpose of imposing a price on a commodity different than what the free market may dictate.

Prominent examples would include DeBeers in diamonds, and OPEC in oil.

I'm not going to debate the legality or nuances of cartels. The point is they do exist and unrecognized cartels do the most harm, precisely because few are aware of their existence.

One such cartel exists on the Commodity Exchange, Inc. (COMEX) silver market. The reason most people don't see it, is because the COMEX Silver Cartel is a short side cartel, unlike the long-side cartels that we are all familiar with.

While DeBeers and OPEC work to lift the price of their products, the COMEX Silver Cartel works to lower the price of silver. Unfortunately, because of this general unawareness, the COMEX Cartel has been wildly successful in depressing the price of silver.

The basic definition of how a cartel works is having sufficient control, or dominance of a market, so as to be able to dictate the price of that market.

In crude oil, OPEC controls roughly a third of total world production (25 million barrels per day versus 75 million bpd world production), but its dominance determines the price of all production. Sometimes, the oil price is low, and sometimes, like now, the price is high. But the price is always a function of how the cartel is behaving. OPEC's dominance is clearly visible.

In silver, if you look in the right place, you will just as clearly see the COMEX Silver Cartel's dominance.

The right place to look for the existence of the silver cartel is in the Commodity Futures Trading Commission's weekly Commitments of Traders report, long form version.

When you look at these reports you will see that 4 or less large traders hold a net short position equal to 32,000 contracts, or the equivalent of 160 million troy ounces of silver.

The gradual drain of COMEX silver inventories seen in recent months continues and COMEX silver inventories are at 4 year lows. Total dealer inventory is now 42.16 million ounces and total customer inventory is now at 60.68 million ounces, giving a combined total of 102.847 million ounces.

Yet... as we just said, there is a net short position equal to 160 million troy ounces of silver, more than exists in the entire COMEX.

This is the largest naked short position that the world has ever seen in commodities.

The 160 million ounce net short position by the 4 or less traders who make up the COMEX Silver Cartel is slightly misleading. First off, 4 or less traders is an intentionally ambiguous term, ostensibly designed to shield the identity and market position of specific traders, or a specific trader. 4 or less, could mean 1 or 2. And in a recent investigation by the CFTC, those 2 traders were identified as JP Morgan and HSBC.

Put that concentrated 160 million ounce short position into context.

It is an amount greater than the annual combined production of the two largest producing countries, Mexico and Peru. It equals 30% of total annual world mine production. It is 37% of the entire COMEX futures position, the world's largest precious metals exchange. It is greater than all the visible silver inventory in the world.

JP Morgan and HSBC have a more dominant position in COMEX silver, as a percent of the market, than OPEC has in oil.

But while OPEC produces a real product, the COMEX Silver Cartel appears to only deal in paper.

But silver paper sales are sales, even if they are unbacked short sales, in terms of price impact.

But shorts are different, and someday the day of reckoning will arrive. Someday, the silver cartel will have to put up, or shut up. That day will be like no other. In this sense, the silver cartel has done, and will do, more harm to the rest of the world, than any cartel that has ever existed. That's because it has so distorted the silver market, that its aftershocks will be felt for decades.

The shocking thing about the uneconomically large and concentrated position of the COMEX Silver Cartel, is that its very existence and behavior is expressly forbidden by the Commodity Exchange Act (CEA). The position limit regulations, and the clear intent of those regulations, that the COMEX Silver Cartel are violating, are straight-forward. The CEA never intended for speculators to control a bigger position than the largest producers and consumers of a commodity. In fact, the larger real producers and consumers of a regulated commodity (the CEA specifies agricultural products and metals as regulated commodities) must apply for an exemption from position limits, in order to control a larger amount. Any exemption from the (speculative) position limits granted to a real producer or user of a commodity is capped at what amount that producer or user, actually makes or consumes, over a 12 month period of time. (As an aside, this is the aspect of commodity law that is violated by 'hedging' more than one years production).

Since JP Morgan and HSBC control a position greater than what entire countries produce in a year (forget individual companies), and the cartel's position is much greater than the total visible world inventory of silver, it is clear they are violating the intent and clear specifics of the CEA.

In other posts the CFTC investigations have been covered, so we won't dwell on that part today.

What is of interest is that world events have aligned to create a massive demand for both Gold and Silver.

And the conditions now exist that there might, one day, not be enough physical silver available for delivery on the COMEX.

Talk of a default on the COMEX is premature but the scale of current investment demand and industrial demand, especially from China, is such that it is important to monitor COMEX warehouse stocks.

The Hunt Brothers were one of a few dozen billionaires in the world in 1979 when they attempted to corner the market. Today there are thousands of billionaires in the world, any number of whom could again corner the silver market. Also, today unlike in the 1970s, there are sovereign wealth funds and hundreds of hedge funds with access to billions in capital.

The possibility of an attempted cornering of the silver market through buying and taking delivery of physical bullion remains real and would likely lead to a massive short squeeze which could see silver surge as it did in the 1970s.

In fact, it has been suggested that such a massive short squeeze is currently being executed which is the reason behind the intense volatility in the silver markets and over 106% increase in the price of silver since August 2010.

Part 4 will look at that short squeeze.

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Eric Sprott on Silver

Multiple posts on Silver for you today.

Many of you already know about Eric Sprott. Sprott is a chartered chartered accountant who entered the investment industry as a research analyst at Merrill Lynch. In 1981, he founded Sprott Securities (now called Cormark Securities Inc.), which today is one of Canada's largest independently owned securities firms. After establishing Sprott Asset Management Inc. in December 2001 as a separate entity, Eric divested his entire ownership of Sprott Securities to its employees.

Sprott Asset Management recently established the PSLV fund, the only closed-end ETF silver fund backed 100% by physical silver.

Recently Sprott made an appearance at Casey Research Gold and Resource Summit where in addition to providing a succinct summary of all his monthly letters from the past year (whose forecasts are all gradually panning out), he spoke about the prospects for gold, and particularly silver.

The key statement from his presentation possibly answers why more and more distributors are reporting indefinite lack of physical silver inventory:

"There's $22 billion of silver available in the world, of which the ETFs already own half, and between you guys and us we probably own the other half... Which means there's nothing left."

Above is a portion of his presentation for you.
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Counterfeit Silver Coins surfacing in Seattle



Saw this story on KOMO-TV out of Seattle and thought it was worth passing on.

As the banking cabal's determined raid on silver is rebuffed today and Silver climbs higher, take note of this story if you are thinking about buying Silver.
  • PORT ANGELES, Wash. - Counterfeit coins by the thousands are turning up in Washington state, and authorities are warning coin collectors to be on the lookout for them.

    All or most of the counterfeits appear to be from China.

    "Stacks of ingots, bars, all kinds of stuff - they make everything from pennies all the way up to silver dollars," says Port Angeles police officer Duane Benedict. "China is making these things by the thousands."

    Several of the fake coins were recently sold to a Port Angeles business, EZ Pawn, for $400. They would have been worth more than $1,500 had they been real, Benedict said.

    Officer Benedict got a call from EZ Pawn.

    "They brought me in there to look at something they thought was fake. So I was pre-warned. But I picked it up and said, 'What's fake about it?'"

    The 20 counterfeit U.S. Morgan silver dollars were supposedly from a century ago. Brian Winters of EZ Pawn has bought coins for years - and even he was fooled.

    Unlike most counterfeits, the coins did not all have the same dates. One was a super rare 1893S, worth thousands and thousands.

    It was at that time Brian pulled out a loupe and looked at a real coin and a suspect one. He found the "T" and the "I" too thick. All the coins were fake.

    The real coin weighed in at 26.7 grams. The fake was two grams lighter.

    For those of us without a gram scale - there are other tests for detecting the counterfeit coins.

    The real ones have a high-pitched ring when they're dropped. The counterfeits land with a thud.

    Also - a strong magnet will detect small amounts of iron in counterfeit U.S. coins. If a supposedly "silver" coin has even a little bit of attraction to the magnet, then it is a fake, Benedict says.

    The counterfeits aren't just limited to silver dollars. Other coins - including Indian head pennies - also have turned out to be fakes.

    And EZ Pawn says they're continuing to see fake coins brought in by other customers.

    And Benedict warns businesses to be suspicious if someone uses only coins to pay for merchandise.

    "Use caution if someone brings in a lot of coins to buy something, and look them over carefully," Benedict said.

If you want to know how to test Morgan US dollars to see if they are fake, above is a youtube video showing how they are tested. The technique can be applied to other coins as well.

Hope to post Part 3 of the Silver series later today as well.

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Tuesday, February 22, 2011

No post today

Been busy so my apologies, no post tonight.

For the silver fans, the open interest is still huge for March delivery so the consensus is you should see silver get hit hard tonight in a desperate attempt to shake those standing for delivery.

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Monday, February 21, 2011

Silver, the Opportunity of the Decade - Part 2: The Comex, what is it?

Last December, when President Obama announced a tentative deal with Congressional Republicans to extend the Bush-era tax cuts at all income levels for two years, you could clearly see the writing on the wall.

Extending those tax cuts will cost $900 Billion - equal to QE2. In essence we had QE3.

And as the political realities of the mounting debt issues of the US Federal Goverment met head on with the burgeoning debts of the individual US States and cities, there is no practical way out of the debt problem – none.

QE4, 5 and 6 are all but assured.

And it's not just America.

China has been printing money too...

The UK has been printing money...

Japan has been printing money...

India has been printing money...

And so has the EU...

As I wrote last May, the story of the coming decade is one of soverign debt and how nation's respond to it.

I wrote then that this is already creating a mini-panic and rush on precious metals, a trend which will only intensify. Almost a year later, that demand has most definately intensified.

For large scale buyers of precious metals, the primary source to acquire Silver is via the COMEX.

So before talking about what is happening in Silver, we must first understand the COMEX and how it works.

What is the Comex?

There used to be two exchanges in New York. The New York Mercantile Exchange and the Commodity Exchange, Inc (COMEX). In 2006 these two exchanged merged and became one. It is now the New York Mercantile Exchange (NYMEX) but is divided into two parts, the NYMEX Division upon which is traded such commodities as oil, gas, palladium and platinum and so forth, and the COMEX Division on which gold, silver copper and aluminum is traded. On this exchange are traded 'Future Contracts' of gold and silver.

Futures Trading

Futures trading is the basic action of entering into a legal contractual agreement with another (known or usually not known) individual to exchange money or assets of some value at some time in the future and with the pre-determined price (called a futures price) based on the underlying asset. Such an asset could be stock, an interest rate even or, in this case gold or silver.

So traders agree to exchange gold/silver (or equivalent cash flows) at a future date.

When you enter into these contracts you are betting that the value or price of that asset or stock or gold is going to be at a certain value at a predetermined time in the future. At that time, when the contact is completed and 'settlement date' arrives, you or the other party cough up with the difference between what was originally paid and what the settlement price is.

One of the perceived advantages of futures trading is that you do not have to put up all the money needed for the contract but usually only a percentage. Usually around 10%. This means that people can trade with a smaller amount. It is rather like going to the races and placing a bet for 1000 dollars but only putting 100 dollars down. If you lose you have to come up with the 1000 dollars of course but if you win you have only needed 100 dollars to play the game. There are some other factors, of course, but that's the primary gist.

Both parties of a futures contract must fulfill the contract on the settlement date. The seller then delivers the commodity to the buyer, or, more often than not, it is a cash-settled future, and cash is transferred from the futures trader who sustained a loss to the one who made a profit.

Incidentally, you can bet both ways of course, that the price will go up or down.

To take actual phyical delivery of the silver in a contract, you will need to wait until the term of the contract expires and you can take delivery. This is called taking a long term. Various entities, such as banks for example, take a short term. They have no intention of taking delivery and so, with the ten percent leverage mentioned earlier, they can take enormous amounts of contracts and sell them short, keeping the price down and, in effect, manipulating the gold and silver price.

But if you intend to take possession you will have to ante up the whole amount required to complete that contract and you would have to wait until the contract expires before you can organise and take delivery.

For example, if a contract was bought today, and the price on the gold contract was between $695 - $735 per ounce, the full value of the contract you bought would be $69,500 - $73,500 per 100-troy ounce. Likewise if the price on the silver contract was between $9.74 - $9.16 per ounce, then it would be $48,700 - $45,800 per 5,000 troy-ounce contract.

These figures would not include any commission charges incurred going through a broker of course and are just an example to illustrate how it works.

Of course, if you did not want to take possession of the metal you could simply enter a position without posting the full contract value, but instead post around 10 percent (The actual percentage may vary depending on your broker and other factors). This is the "margin" which is posted "in good faith". Price can go through some dramatic changes in the any futures market and if the price of gold drops significantly you might be called upon to add funds to your account to maintain your position. (called a maintenance margin) or you might find your position is liquidated. There is usually a risk maintenance level and if your account falls below that level then you would need to top up your account with the requisite funds.

Now, when the time comes to take delivery you will get a Notice of Delivery and the full amount will be debited from your account. So you would be required to have the full contract value deposited in your account with your broker at the price the contract was originally purchased. There would be a few days of processing at the end of the contract but then you would be able to take possession, usually a couple of weeks later.

You can do this in three ways.

You will receive a receipt, which in effect is like a stock certificate, and you could store that. The gold would be in storage in a vault and you would be up for some storage charges, This premium, compared to the gold price, will be minuscule. The gold is kept in storage for you and you can take physical delivery anytime you want of course. This is the first method.

The second is that you could have the gold bullion shipped to a warehouse. You can be put in touch with the vault that contains your gold (generally in or around New York, US) and have brinks or an Armored car transfer your gold to a warehouse or bank of your choosing. There would be more costs involved with this but, again, the charges would not be very much compared to the value of the gold bullion.

Of course you can avoid doing any of this by simply depositing the full value of the contract when you establish the position. Note, you can decide not to take delivery of course at any time and close out your metals position and take a profit or loss depending on the price movement.

However, IF you want to take it out of the Comex warehouse and have it stored elsewhere then it would be your responsibility to organise this. This would be typically done through a security shipping service and arranged storage at a bank vault.

If your intent is to actually receive the physical metal, it is held in storage at specific "delivery points." It is your responsibility to make the arrangements to do this. There are fees associated with removal from the storage facility. In addition, if the metal is taken out of storage, it cannot be sold for delivery on the exchange without being re-assayed.

Tomorrow we'll talk about the banking cabal manipulation of the Comex, something you will see on a massive scale in overnight trading of silver tonight in a desperate attempt to bring the price of silver down.

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Sunday, February 20, 2011

First R/E, then Silver: The Opportunity of the Decade - Part 1: Shrinking Supply and Rising Demand

I have been meaning to do a couple of indepth posts on the subject of silver and what's happening at the Comex and I am going to start with part 1 today.

But first real estate.

The endless pumping goes on.

First up is John Geha, President of Coldwell Banker Canada. He's telling Canadians that you shouldn't expect housing prices to drop anytime soon and that "it is a healthy market for the first-time buyer."

Of course... when does the chief salesman of a product ever tell you that it's a bad time to buy his wares?

The problem, of course, is that he's presented as an 'expert' instead of the salesman he is promoting his own product.

Speaking of promoting your own product, In its latest report the CMHC says Canadian housing prices will move in line with inflation for the next two years.

Again... do you think you will ever hear them tell you that prices are going to tank and not to buy a house right now?

Now for Silver.

If you look to the right hand side, overnight silver is continuing it's dramatic climb. As I write this, Silver is up $0.30 and sits poised to crack the $33 mark (it's at $32.96 right now).

Something dramatic is playing out in Silver right now. Understanding what is going on and the dynamics behind it you will, hopefully, come to appreciate why I believe Silver could explode exponentially in value and why it represents one of the greatest investment opportunities of the decade.

Silver: The Opportunity of the Decade - Part 1: Shrinking Supply and Rising Demand

For years, the data contained in the weekly Commitment of Traders Report (COT), issued by the CFTC, have indicated that several large COMEX traders have manipulated the price of silver and gold.

However two significant developments have evolved which have put a giant squeeze on the manipulations, a development which cold drive up the price of silver dramatically and break the cycle of price manipulation.

Over the past two years, the United States have ramped up debt levels. Leaning on their status as world reserve currency to use Quantitative Easing as a solution, confidence is being lost in the US dollar.

In response, China is starting to divest themselves of their massive holdings in US Treasuries and have become huge buyers of both Gold and Silver. Other nations are following their lead.

Recognising the same concerns, individual investors are also starting to load up on Silver.

Meanwhile, unlike Gold, the world supply of Silver is shrinking not rising.

This youtube clip outlines the facts (albeit in a sensationalized manner) and I invite you to check it out:

Given these conditions, the price of Silver should be much higher than it is today.

For years Silver traded in a range of 15:1 to Gold down to 10:1 to the price of Gold (which should put the price at $90 - $140 an ounce).

But Silver has been trading instead from 65: to 45:1 to the price of Gold.

Some analysts have argued that, based on mainstream estimates of total above and below ground Silver (17Boz) and Gold (8Boz), the Silver/Gold Ratio should be 2.1-1. With Gold trading at $1,300/oz Silver should really be trading at $619/oz.

If you were to consider the estimates of total above ground Silver (5Boz) and Gold (5Boz), then the Silver/Gold Ratio should be actually be 1-1. With Gold trading at $1,300/oz then Silver should really be trading at $1,300/oz.

Finally if you were to look at it based on estimates of total monetary bullion above ground Silver (1Boz) and Gold (3Boz), the Silver/Gold Ratio should then be 1-3. With Gold trading at $1,300/oz Silver should be trading at $3,900/oz.

But it isn't. And critics have argued that the reason is that a banking cabal is severely manipulation the price of silver to supress it's rise.

Evidence about that manipulation has lead the Commodities and Futures Trading Commission (CFTC) to conduct an investigation that is being conducted by the CFTC "Enforcement Division".

Although the final conclusions have been delayed by the CFTC, there is clear evidence to support the allegations of manipulation.

Now, with new CFTC position limits about to be imposed combined with (a) increased consumer demand, (b) increased investment demand and (c) decreasing supplies; a situation has been created whereby the banking cabal manipulating the Silver market have been put in a giant short squeeze.

This happened during the December delivery period on the Comex (which saw silver shoot up 70% in value from August to December) and appears to be occurring again for the March delivery period.

It's possible that the short squeeze in the silver markets could lead to the a busting of the banking cabals manipulations and turn silver loose to float to market valuations.

Tomorrow we will talk about the COMEX. Later we will cover the short squeeze now occuring on the COMEX and the rumours of a co-ordinated attempt to execute a short squeeze by some hedge funds.

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Saturday, February 19, 2011

Resignation

The Vancouver Sun had an interesting article this past week titled "Buying a house in Vancouver? Welcome to the money pit".

The article states what we all know; that there is no such thing as an affordable Vancouver house any more.

More strikingly, the article notes another truism. "Even if you manage to come up with a down payment, you'll likely be a single-digit interest rate hike away from bankruptcy, and someone you don't know will be renting the basement suite you had to build in order to quality for the mortgage in the first place."

Wow.

It's not that we don't already know this.

What is compelling is that, despite these conditions, there exists such a widespread sense of resignation and acceptance to this condition.

The article goes on to describe how attempting to cope by buying homes - which in another time would have been nothing more than teardowns - and turning them into reclamation projects as their only hope of owning in the city.

"Many are found on the edges of Vancouver, to the east and south, small postwar stucco bungalows and turn-of-the-century wood-frame piles that are short on bathrooms and bedrooms and need insulation and sometimes foundations because they've been long listing to starboard."

The article concludes by saying, "if you have just sold your soul for a local patch of dirt and fir floorboards, you'll soon discover that the only sure thing about real estate in the Vancouver area these days is that, like death and taxes, you're now the proud owner of a money pit."

So what do we have here? In a desperate attempt to own a home of their own, families are plunging themselves into massive debt to buy homes that require huge upgrades. Since they were so overextended to the home to begin with, odds are that they can't afford to do the proper renovations that are required.

The result... paying to the max for a home that doesn't even come close to being that 'dream' home you wanted to begin with.

But what of the other option?

Rather than capitulate and becoming a debt serf, why not take the sane option and stay the hell out of an irrational market?

Why is it that this option is simply not on the radar screen of so many people I know?

Like they say, common sense... is not all that common.

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Friday, February 18, 2011

Onni: 3 reasons to buy in 30 Days Campaign

If you click on the above image to enlarge it, you will see the latest attempt by the R/E industry to prey on your fears/desires to plunge yourself into irrational debt through the remaining 30 day window left open by Finance Minister Flaherty.

Today's entry is courtesy of Onni Group.

Note the disclaimer at the bottom of the ad: "These figures are based on a three year fixed term of 3.20%."

Curiously there's no corresponding chart showing you how f*cked you will be when you renew with a 30 year amortization at 5-8% (or higher).

Gee... I wonder why?

Meanwhile, the best way to summarize what today will bring in Silver...

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Thursday, February 17, 2011

Marketing? Or Manipulation?

A couple of years ago a friend, who was renting the house he lived in, was informed that the out-of-town owner had decided to sell.

What ensued was a very acrimonious relationship between the chosen realtor, the property management company and my friend, the tenant.

After several months there was finally an interested prospective buyer, a young Philippine family. A second showing was arranged and I was at the house when it took place. What happened next was one of the most sleaziest manipulations I had seen by a realtor.

The realtor arrived at the house with a work colleague and the property management representative (my friend knew about the showing).

Shortly afterward, the Philippine family showed up for their second viewing.

Five minutes later, the doorbell rang and the realtor stated that there was another interested party to see the house and that was them at the door. The property management rep, the Philippine family and my friend all knew nothing about this 'second interested party'.

A single male came into the house the realtor brought him upstairs to the kitchen (where I was). They stood there talking to each other in their native language. What struck me was that the man, supposedly there to view the house, wasn't the least bit interested in looking around.

As the Philippine family moved through the house, this man would move elsewhere. During the entire time he wasn't the least bit interested in the house.

Finally everyone went outside and the Philippine family and the property management rep left.

After talking for five minutes more, the realtor took out $50 and gave it to the man.

That night the Philippine family made an offer on the house and it was accepted.

Clearly it was a blatant attempt to create a false impression with the Philippine family that there was other interest in the house. No doubt the stereotypical R/E pressure tactic of 'buy now or miss out' was utilized.

It is the type of story that slanders and tars the entire industry with a bad name.

I was reminded of this as I watched another blatant manipulation play out over the past couple of days.

On Sunday Garth Turner altered his readers to a craigslist ad that had appeared in Vancouver.

The craigslist ad said:
  • PEOPLE NEEDED TO LINE UP FOR NEW CONDO PROJECT

    Just as the title says, we need people to hold spots and line up for a new condo project located in Burnaby (Kingsway/Willingdon Ave). Line up may start as early as weds/thurs night. Grand opening is Saturday February 19, 2011.

    Warm beverages and washrooms will be provided by the developer.

    Shifts are determined on how long you would like to stay. (preferably 8hours+)

    Get paid cash quickly for sitting in a line up!

    E-mail me your phone number + e-mail for more details. job-syk6p-2212992997@craigslist.org

You don't need to be a rocket scientist to figure out the purpose of the ad. A condo developer was going to create the false impression of a frenzy for a pre-sale offering.

In addition to craigslist, ads in asian publications started popping up too. As noted over at VREAA there was this one which, when translated, says "“need help to line up, tonight, urgent, contact Shirley 778-863-3870″

Then there was this one, “urgently required, night shift persons, 7, 8pm – 6am contact 604-715-9389″

And finally this one“Builders Assoc CNY Meetup, Feb 19, Bonsor Community Centre, 6550 Bonsor Ave, 27:30-22:00 hours, 604-888-8888″

And sure enough, last night on Global TV's evening news came this glowing story about the return of condo lineups and a frenzy to get a piece of the pre-sale action at a new condo project located in Burnaby at Kingsway and Willingdon Ave.


Industry defenders will tell you this is all shrewd marketing techniques designed to 'stimulate' sales in competitive market. They will rationalize other "explanations" for these ads. But can the rationale person conclude that it's anything but blatant manipulation?; a sham, designed to deceive and pressure prospective buyers?

And do you really want to do business with anyone employing these tactics?

Just make sure you're aware of what's going on and don't get sucked into to making a decision you will regret for the rest of your life.

And, for Gawd sakes, don't think you have to 'buy now or be priced out forever'.

Finally I bring all of this to you on a day when the Wall Street Journal reports that the average debt held by Canadian households has hit $100,000 and the crucial debt-to-income ratio is now at 150%.

The $100,000 figure represents a 78% increase over the past two decades. In 1990, average family debt stood at $56,800, with a debt-to-income ratio of 93%.

Meanwhile, Canada's savings rate has fallen to 4.2% of income, or about $2,500 per household. That is down from 13% or C$8,000 in 1990.

More significantly the number of households which have fallen behind in their mortgage payments by three or more months climbed to 17,400 in the fall of 2010, up nearly 50% since the 2008 recession began.

Average mortgage debt held by Canadians stood at $63,126 at the end of the third quarter of 2010 and 32,300 Canadians became insolvent in the third quarter of 2010, 12% higher than pre-recession levels.

The average level of assets held by Canadian households rose by 62.8% over the past 20 years, including a 73.2% increase in real estate, total debt rose by 77.7% which was led by a 87.9% increase in consumer credit and loans.

This is all going to end very badly.

Prepare yourselves accordingly.

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Silver Soaring

After fighting an intense battle all week, silver has just broken out and established it's highest intra-day price since March 7, 1980. As this was written, silver hit $31.30.

There are rumours of a fascinating battle playing out between hedge funds, the banking cartel who short and supresses the price with paper shorts and the Comex. I will try and post something on this before too long.

The last time silver was at this price level, the 10 Year bond interest rate was at 12.45% and gold was $600/ounce. In other words, by comparison, silver could still shoot much, much higher.

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Tuesday, February 15, 2011

Presto-Chango

I had to laugh this morning.

As many of you know I have been warning about cost-push inflation since Quantitative Easing began.

The flood of liquidity would find it's way into the markets, commodities would surge, and the cost of doing business would spike for business translating into higher prices. All while jobs numbers - and wages - stagnated.

NONE of this, however, would show up in our Consumer Price Index because in 1999/2000 government changed the way the CPI was calculated and gutted all the factors like food and energy from the calculations.

Thus we have a situation where inflation, when calculated like it was in the 1970s, 1980s and 1990s, is surging along at about 8% while 'official' government statistics peg it at 1-2%.

Yesterday our friends over at Financial Insights commented how inflation is raging in China and retail margins over here are facing a coming squeeze.

(A squeeze which isn't just coming, it's already here. We're finally seeing it translate into higher prices but make no mistake, that squeeze has been going on for months)

I commented on the post at FI and jokingly said that China would just have to change the way they calculate inflation like we did in 1999/2000 and... presto-chango... no inflation.

Turns out is wasn't all that much of a joke as China is about to do just that.

The old saying goes that there are lies, damn lies and then there are government statistics.

Remember that the next time you're wallet is bare and the government (and some bloggers) tell you there is no inflation.

As I said last Friday, combine this squeeze on basics with rising interest rates and new mortgage rules... and life for home owners with a mortgage here in the Village on the Edge of the Rainforest is going to get very, very difficult.

Once this process kicks into high gear, and the serious price inflation comes, I think we will all look back and be shocked that there were people who actually worried about deflation in 2008-2010.

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Monday, February 14, 2011

Entire MERS process ruled illegal

It's been a while since we talked about the US Foreclosure Crisis. And while there hasn't been much news, the issue hasn't gone away.

A detailed overview of the issue is outlined in this post.

As you may recall, serious questions were raised last year about MERS, the electronic clearing house for mortgage titles established by the real estate industry in the US.

The Mortgage Electronic Registration Systems (MERS) digitized the land title process to make thing 'simpler' for banks. By 'simpler', I mean 'cheaper' because it allowed big banks and to by-pass local state real estate laws, process and fees for title transfer.

Critics chared that MERS illegally broke the 'chain of title' process for mortgages in the US.

When a homebuyer signs a mortgage, the key document is the note, the actual IOU of the mortgage. In order for the mortgage note to be sold or transferred to someone else (and therefore turned into a mortgage-backed security), this document has to be physically endorsed to the next person. All of these signatures on the note are called the ‘chain of title.’

You can endorse the note as many times as you please... but you have to have a clear chain of title right on the actual note: I sold the note to Moe, who sold it to Larry, who sold it to Curly, and all our notarized signatures are actually, physically, on the note, one after the other.

If for whatever reason any of these signatures is skipped, then the chain of title is said to be broken. Therefore, legally, the mortgage note is no longer valid. That is, the person who took out the mortgage loan to pay for the house no longer owes the loan, because he no longer knows whom to pay.

To repeat: if the chain of title of the note is broken, then the borrower no longer owes any money on the loan.

MERS has argued that, under it's membership rules, that it can act as a ‘common agent’ for undisclosed principals and make the tranfers though it's database.

As reported by Bloomberg, U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, New York, in a decision he said he knew would have a “significant impact,” wrote that the membership rules of the company’s Mortgage Electronic Registration Systems, or MERS, don’t make it an agent of the banks that own the mortgages.

In short, MERS lacks the rights to transfer mortgages.

The key to all of this, of course, is that as mortgages were slice, diced and bundled into mortgage backed securities... the transfer of ownership was never done (legally) and now banks lack the legal standing to foreclose on these properties.

As posted last year, this is a major, significant story.

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Saturday, February 12, 2011

Your Life According to the Government


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Friday, February 11, 2011

Inflation

As faithful readers know, I have written a number of times about inflation.

Back on October 7, 2010 I wrote that while we would have deflation in some areas, we were going to suffer a concurrent bout of inflation too - producing a paradox that many have difficulty reconciling.

The vicious cycle created by the Federal Reserve’s Quantitative Easing monetary policy is kicking in.

We are seeing a huge influx of speculative money flows into the commodity sector pushing up food prices across the board.

At some point, sooner rather than later, the rising cost at the wholesale level as indicated by the CCI and the futures boards will translate into higher retail prices for consumers, who are already being pinched by stagnant wages and falling net worth.

The result – consumers are forced to retreat on spending with the next result – a slowing economy – with the next result – more Quantitative Easing – with the next result – more rising prices as currency induced inflation in essentials rises further will compound the problem exponentially as the cycle repeats itself.

Look at this chart which shows gains over the past year (click on image to enlarge):

Fed money is flowing pell mell into commodities which are now setting new records almost daily.

Look at that chart. In the past year everything, from metals to stocks to bonds to grains to energy, has experienced profound price increases.

Despite this, we are being told - on a daily basis - that inflation is too low.

This is, of course, because the way we calculate inflation has changed.

If you are a boomer in Canada, you remember gasoline priced in gallons. It was the 'unit of measure' we grew up with.

The recalculation of the Consumer Price Index is almost like saying in 1979 gas was $1.00 (per gallon) and today gas is only $1.21 (per litre). Therefore gasoline, as per it's 'unit of measure', hasn't really risen in price.

Riiight.

$1.21 a litre is almost $5.00 a gallon. It's not the same in any way, shape or form.

This nonsense that inflation is only running at 1-2% is only valid if you compare it to the 1970s by measuring inflation the same way then. If you do that, inflation in the 1970s was only running 1-2% then as well.

Calculate the inflation the way it was measured prior to the year 2000 and inflation is running at over 8%.

We simply changed the way we measure the price, and somehow rationalize the 'unit of measure' is the same.

Bottom line... inflation is trending now exactly like it was in the mid 1970s.

Inflation is raging across the globe.

The unrest and riots we are seeing are symptoms of that inflation.

History tells us inflation is best tamed early, but the US Federal Reserve is already late and demonstrating a remarkable callousness by doing the exact opposite of fighting inflation.

By the time action is taken to fight it, Inflation will have the momentum and it will take a vast overreaction on the part of the Federal Reserve to restrain it.

They'll have to drain enormous amounts of liquidity and tolerate vastly higher interest rates to be able to do that.

And you know that the Fed will hesitate, equivocate, and ultimately be late with their actions.

People are finally starting to notice, as this CNBC story notes.

Unfortunately the fact is all this commodity inflation hasn't really begun to work it's way to consumers here in North America yet. It has started, to be sure, but what we have seen is nothing compared to what is coming.

It's called currency induced cost-push inflation, inflation is caused by producers and merchants being forced to pass along through higher prices the rising cost of inputs to their products.

Your income isn't rising to keep pace with rising expenses and you get squeezed. Hard. And its not luxury items that are going up in price, its the staples. Bread, milk, gasoline, clothes, eggs, meat... the basics that no one can realistically live without.

Combine the squeeze on basics with rising interest rates and new mortgage rules... and life for mortgage holders in the Village on the Edge of the Rainforest is going to get very, very difficult.

Once this process kicks into high gear, and the serious price inflation comes, I think we will all look back and be shocked that people were worried about deflation in 2008-2010.

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Email: village_whisperer@live.ca

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