A couple of luminaries share their perspectives on recent developments in the precious metal space. First, we have Jim Rickards sharing his thoughts on what today's Comex margin hike means for trading. And second, and just as important, is Peter Schiff, who grades WB president Robert Zoellick's call for a new gold standards, and its implications for the future. Both are as always insightful and enlightening.
Jim Rickards - Three’s Company, Silver Margin Change
There's been a lot of buzz about today's price action in gold and silver. Beginning with the Monday push upwards based on the Zoellick op-ed in the Financial Times, the market surged upward through most of the day today and then hit a serious air pocket with gold falling 2% and silver falling almost 5% in a short period of time late in the trading day.
On a technical basis, there's nothing surprising about that; we've seen similar moves before and I expect to see them again. The overall trend has been upward with higher highs and higher lows. The market seems to find a strong bid at progressively higher levels even after sharp corrections. Nothing too disturbing there and nothing to indicate that primary trends are not still intact.
What was noteworthy was the catalyst for the pullback, specifically an increase in margin requirements for silver futures contracts. There was no comparable change in gold futures margin but as often happens in markets there was instantaneous contagion from silver to gold notwithstanding the different circumstances. Again, no surprise that the markets correlate to a great extent even when the news only affects one market or the other.
This is a pointed reminder to the readers and listeners of King World News and something we have discussed before. Most markets consist of two parties, the buyer and the seller. But in futures markets there's a third party in every trade which is the exchange and more specifically the rule making bodies and margin setting panels on each exchange. They act not in the best interests of buyers or sellers but in the best interests of the exchange itself and its statutory duty to maintain orderly markets. Of course, the word "orderly" can be in the eye of the beholder. What may be an "orderly" price spike to a long may be a "disorderly" rout to a short. Either way, the exchange has the last word. They have many tools at their disposal. They can increase initial margin (what you put up when you open a contract) increase the frequency of variation margin (make you post intra-day instead of end of day) and require "trading for liquidation only" which means longs can go short and shorts can go long but no one can expand a position or increase the open interest. Finally, an exchange can suspend physical delivery and allow offsets and rolls only. All of these rules have been invoked many times and will be again.
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And Peter Schiff:
On Sunday, World Bank President Robert Zoellick wrote a remarkable article in the Financial Times of London. (FT subscribers, click here to read. Others, click here for a summary.) He called for a renegotiation of the global monetary order and - incredibly - the introduction of a new gold standard. In response, gold broke $1,400/oz on Monday.
This is a tremendous breakthrough for gold investors. For the head of the World Bank to make such a statement is unheard of in modern times. Among top bureaucrats and their economist friends in academia, the gold standard has always been a taboo - mostly because it prevents governments from using the "inflation tax" to finance military expeditions and entitlement programs. So, for such a high-ranking official to publicly express support for gold-backed currency, the dollar system must be nearing its end.
In fact, since the Fed's announcement last week of a new round of stimulus using $600 billion freshly printed dollars, world leaders from Brasilia to Tokyo have been protesting like never before.
This may be remembered as the moment the world rose up and said, "enough!"
While Zoellick danced around the edges of calling for a true gold standard, I believe that the transition is already taking place. Investors and foreign central banks are re-monetizing gold as they move their savings out of the dollar. In Zoellick's words: "Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today." That's why gold is breaking one record after another, and will continue to do so for the foreseeable future.
If gold were officially remonetized, the price would have to be about 47 times higher to pair central bank holdings with the assets of the global banking system (according to 2008 estimates from the McKinsey Global Institute). To look at it another way, central banks would be in the market for about 42.6 million ounces of gold to back up all the fiat money in circulation. Martin Wolf, columnist for the FT, asserted that a new gold standard "would generate huge windfall gains to holders of gold."
It has only been since 1971 that the world money system has functioned without a gold-backing. I believe this experiment is rapidly coming to a close. Commentators are right when they say there is no currency ready to take the dollar's place as the global reserve - but there is a metal with a great track record that has been waiting patiently in the bullpen.
It is hard say when the Fed's monetary Ponzi scheme will fall apart, but many of its biggest "investors" are wisening up. I strongly recommend preparing for a dollar collapse before it's too late. When the president of the Washington-based and Washington-funded World Bank speaks out against the dollar system, what more warning do you need?