We have long-discussed the currency debasement, fiat-fiasco thesis for owning hard assets and only last night noted the discussion between Biderman and Sprott [14] on the practicalities of this plan. What we found interesting was this week we have seen a number of quite bearish articles on the precious metals - most notably Bloomberg's chart-of-the-day has had two notes citing inventory build for Silver's imminent demise and lagging futures open interest as a sign of investor's losing conviction in gold. Given that we are fair-and-balanced we thought it worth sharing these technical insights and perhaps reflecting on what Eric Sprott noted (and Dylan Grice has previously highlighted [15]) as the only thing that could break his 'hard asset' thesis - that the political and banker elite "come to their financial senses".
4/18/12. Bloomberg. Silver-Inventory Surge Means Decline In Prices (no link - reporter here [16])
The CHART OF THE DAY shows silver futures are down 2.5 percent in April, trimming this year’s rally to 13 percent, as the inventories on the Comex in New York climbed 2 percent this month, touching 141.59 million ounces on April 13, the highest since September 1997. The price may slip to $29.90 an ounce from yesterday’s close of $31.674, according to Melek.
[17]
“This clearly shows that there is no ready market for the metal as investment and electronic demand are declining,” said Melek, the head of commodity strategy in Toronto and the second-most accurate price forecaster tracked by Bloomberg during the eight quarters through March 31. “We could see a downward pressure on silver.”
“Even though inventories were rising, commodities climbed higher as there was optimism in the market,” Melek said. “But now, with fear of a China hard-landing and the European crisis coming back to the forefront, people are going to take notice that the data is telling them something.”
4/20. Jesse's Cafe Americain. Comex Silver Inventory Watch - Heading Into May-July Delivery Period
The long term decline in deliverable supply at this price level could become quite interesting.
[18]
The only ways to obtain more deliverable inventory to meet a bulge in demand is to game the rules on the ability to take physical delivery or let the price rise by buying on the open market.
The push by the CFTC for position limits may tighten the ability to take delivery from 1,500 to 1,000 contracts, but hedgers will be exempt from position limits on the short side. And the big silver short JPM claims to be a hedger.
I keep hearing stories of negotiated prices above the public quotes to buy off large delivery claims. I would be interested to know if anyone has proof of this. We know there are large agreements being conducted around the publicly quoted prices all the time. The FX pit traders walked out in protest over a recent occurrence. It does not take an economist to understand what this does to price discovery and market efficiency.
The estimates I have seen of how much silver is real and how much is conflicting paper claims (leverage of unallocated claims) is up to 100:1. Some of those claims are reported to be covered by 'inventory in the ground' which is not readily available for delivery.
One can only wonder how well confidence in the Comex would receive another 'stolen assets' scandal like the confiscation of gold and silver that happened to customers of MF Global.
The central banks have long ago dispersed their caches of silver to the market, so they are not available to supply ready inventory at leased rates. One might look to SLV and wonder who audits its custodial integrity of unencumbered physical bars and how often.
As I recall the sponsor of the ETF is Blackrock, but the custodian and keeper of the vault holding the physical silver backing the ETF is JP Morgan. As you may recall, JPM is holding a massive short position on the silver futures, as best we can determine.
JPM claims they are a hedge on behalf of other parties. If they are using the SLV inventory as collateral in any way, then someone needs to be paid a visit by the SEC and CFTC because the owners of the shares have a superior claim to the metal. That smells like 'hypothecation' in the manner of MF Global. But I suspect that rather than blaming Edith O'Brien one might blame Bear Stearns.
I am not saying this is 'illegal' but it certainly warrants disclosure if it is occurring. And if the CFTC knows this and is sitting on the information in their four year old and still unreleased silver manipulation report, then Gary Gensler needs to appear before the Congress and answer some very tough questions about conflicts of interest and withholding of key market information.
Of course the prudential time to ask those questions and obtain the answers is now, and not after the carnage of a commercial failure devastates investors, global industry, and market confidence.
Will anyone listen to this? Did anyone listen to Harry Markopolos before Madoff's fund blew up?
These days it seems like the US financial markets are a train wreck happening in slow motion. Or almost like watching a B horror movie. You hear the music and you know what's coming, but there is no way to warn the campers.
4/11/12. Bloomberg. Gold Holdings Signal Slump
Reduced holdings of gold futures in New York are signaling a further decline for prices that already are headed for their first three-month slide in more than a decade, according to Credit Suisse Securities AG.
[19]
The CHART OF THE DAY shows a 3.6 percent drop this year in the open interest, or the number of contracts that have yet to be closed, liquidated or delivered.
That “lack of conviction” by investors may send gold down more than 8.1 percent in the next few months to below $1,525 an ounce on the Comex in New York, said Cilline Bain, a technical analyst at Credit Suisse.
"Investors are willing to stand on the sidelines expecting prices to drift lower,” Bain said in a telephone interview from London. “The interest is clearly not there.”
And lastly - as a reminder - Dylan Grice Explains When To Sell Gold [15].
In brief: "Eventually, there will be a crisis of such magnitude that the political winds change direction, and become blustering gales forcing us onto the course of fiscal sustainability. Until it does, the temptation to inflate will remain, as will economists with spurious mathematical rationalisations as to why such inflation will make everything OK. Until it does, the outlook will remain favorable for gold. But eventually, majority opinion will accept the painful contractionary medicine because it will have to. That will be the time to sell gold."