Exchange Traded Fund

Following hot on the heels of his blockbuster physical gold ETF, which at times has been trading at a premium as high as 30% over NAV, indicating the willingness of investors to pay over fair value just to know that their asset claims wouldn't be diluted to nothingness on a moment's notice (here's looking at you GLD), the Canadian asset manager is launching a comparable physical ETF, this time investing with silver: the Sprott Physical Silver Trust. This is not looking good for the LBMA and JPM - since the silver market is allegedly even tighter than gold, yet just as manipulated by JPM and the LBMA (as evidenced by our earlier post on intraday gold prices) and locating physical can be far more problematic, the elimination of a few thousands tonnes of the precious metal out of circulation is sure to create quite a few sleepless nights for Jamie Dimon's PM manipulation club, who may suddenly find itself with a massive short position covered by even less actual deliverable, bringing the much anticipated monumental short squeeze one day closer. For all those wondering just how the silver market is manipulated and why control over the precious metal is so critical, we refer to a previous post: A Deep Insider's Walkthru To Silver Market Manipulation.

They call the yellow metal the barbaric relic for a reason. Obama has not suddenly turned into a paragon of fiscal rectitude, and Ben Bernanke still has the keys to the printing presses. Politicians of both parties see the only way to win elections is to inflate. The output of gold has fallen by 12% annually for the past decade, compared to a doubling of production costs to $500/ounce. Barrick Gold (ABX) isn’t opening a new mine at 15,000 feet in the Andes because it likes the fresh air. (GLD), (UGL), (ABX).

For those who doubt the validity of the market rally, the chart below should justify their concern. The entire rally, commencing with the test of 1,000 in ES a week ago, through today has occurred on irrelevant volume. Compare the accumulation volume in the downward channel from 1,120 through July 5, and then compare to the volume on the upswing which has cut more than half the drop's losses. And somehow the shorts get scared to cover all positions in this manipulated no-volume rally.

Some market views from Minyanville:"On July 1 when the market was down over 300 points and it felt like the world was just about to end, we put out the following alert: Taking Profits in Inverse ETF Positions in which we closed our inverse ETF positions. The Dow Jones Industrial Average has rallied almost 600 points in just seven trading days since that call. The inverse ETFs that we covered for substantial profits had a powerful reversal just as warned. In that alert we also wrote the following: “The market is getting very oversold and the risk is high being long or short right here. On 5/6/10 the market looked like it was ready to collapse. We then had a powerful rally off the “Flash Crash” lows. The markets then made a new low on 5/25/10 before staging another rally. On 6/8/10 the market made another new low and looked like it was about to collapse but once again staged a powerful rally. Each time the market looked like it was about to fall off a cliff, it had some outside force help it rally." Well, that big rally is happening now because once again a powerful “outside force” intervened to stop prices from collapsing. Folks, these aren't natural, free-flowing markets we're dealing with here. If they were, then the market would more than likely have crashed to the July 2009 lows by now."

An industry that was sweating bullets poured tens of millions of dollars into lobbying efforts to render this bill toothless. The new restrictions on credit amount to a de facto quantitative tightening that will shave a few dozen basis points off of our long term GDP growth. For the banks that are left it means lower earning, higher cost operations deserving of shrunken multiples. Toss all this in with the unknown amounts of toxic waste that still lurk on bank balance sheets, and I want to avoid the sector like a blind date who shows up with bleeding sores on her face.

It is beginning to look like a big unwind in the markets. Perhaps ”rewind” is a more appropriate term.

I don’t often rely on technical analysis in my observations, but take note when my own short term opinion is lacking.

According to one technician we follow, GRI,: “ The drop under 122400 alerted for a bear turn and possible follow though down to the 1220-120560 zone.” Well, the guy was and is pretty good, so here we are… now what?

With regard to Gold appreciating during deflation. Generally speaking, it will sell-off if deflation is perceived as being under control. That being said, Gold competes with money as a store of value when deflation threatens to unravel into a default. Greece fallout would be a classic example of that. Gold is a reflection of fat tail risk, something we understand.

I am more convinced than ever that a Treasury bond short will have its day in the sun. The next financial crisis will be a chain reaction that has already started in small, peripheral European countries, will spread to large European countries, and then eventually hit Japan and the US. Debt service will soar from the current 11% of the federal budget to a gob smacking 28% as early as 2014. Washington is doing nothing to avert the impending crisis.

The charts for almost all ag products, like corn, wheat, and soybeans, are making potential one year double bottoms. Bad weather is now threatening in Canada. The world is both eating more food, and more calorie intensive foods, like beef and pork, thanks to rising emerging market standards of living. A further boost from the Yuan revaluation. The new family of ag ETF’s will be a game changer. (CORN), (CANE), (WEAT), (SOYB).

Gold traded in a wide range on Tuesday as markets reacted to frightening news. Slowing growth from China shocked the market, driving oil prices more than $3 lower,dropping the Standard & Poor 500 ~30 handles and leaving gold and the dollar as the prime beneficiaries. More contagion fears from Europe and paltry consumer confidence reports didn’t help matters either. Gold sold as low as $1228 per 100 troy ounces on Tuesday before ultimately closing just over $1246, a $4.80 gain for the day.

For all football fans out there, we have a suggestion: take a gold bar, put a number 10 jersey on it, and let it play on the Argentinian football team: the theatrics in the price of gold are only comparable to the ridiculous Latin American dives one observes on the pitch (for those unsure what we are talking about we have enclosed an informative video). Gold plunging from $1262 to $1240 in a few minutes compares only to a sweeper almost, but not quite, hitting Messi's leg. The rest is pure Oscar-worthy genius. Our advice: just like on the football field, enjoy the theatrics in the gold price, but don't take your eye off the big picture - in the end, no matter how many yellow cards Messi gets for fake diving, Argentina will win the World Cup. As will gold (which incidentally is what the Cup trophy is made of).

Margin calls from losing positions have forced hedge funds to free up cash by covering shorts in natural gas. Real demand isn’t coming until we have vastly more pipelines, power plant conversions, and above all, storage, than we have now. Until then, the big production companies are going to race to out produce each other, praying they can use volume to offset price cuts, creating a huge weight on prices. (CHK), (DVN), (UNG).

When foreign labor costs reach half of those at home, manufacturers quit exporting jobs. Chinese wage growth at the current rate takes them up to half our minimum wage in only five years. Recent indications that the Chinese will allow the Yuan to float, and therefore go up, will only accelerate this trend. (FXI), (EWY), (VNM),

On June 17, we wondered whether the "parabolic blow off in gold accumulation by ETFs is about to cause a gold price explosion?" Sure enough, yesterday, Goldman Sachs came out with a bullish report on gold in which the firm stated that should gold purchasing by ETFs continue at the recent pace, then gold at $1,400 is a virtual certainty. A quick look at the closing NAV in the gold holdings of GLD, as a proxy of the broader Gold ETF community, indicates that $1,400 - here we come. Just overnight, GLD added another 5.2 tonnes of gold, bringing its new total to a fresh all time high of 1,313.13 tonnes, a whopping 76 tonnes higher than a month ago. As the indexed chart below demonstrates, what we thought could become a positive feedback loop whereby non-physical ETFs scramble to at least catch up to a par NAV, is already in process: the ETF accumulation by GLD, which is now the 6th largest gold-owning entity in the world, has become a self-fulfilling prophecy. If the ETF is indeed purchasing said gold in the open market, there is no way this would not be moving the price much higher, absent massive synthetic shorting by the LBMA. Yet at some point, internal risk controls at even a firm with infinite margin like JPMorgan will take over, and force the bank to cover its record short exposure. When that happens, the already disclosed demand by entities such as ETFs and Central Banks, will catch up with the most manipulated and distorted supply curve in the history of economics.

Nothing like a little flash crash in nattie on no news to spice up the day of 10% staffed trading desks. Margin calls anyone?