TFMR Podcast #36 - Alasdair Macleod of GoldMoney.com

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Earlier this week, I spoke with Alasdair Macleod of GoldMoney. He's written several, extremely valuable articles recently and I thought it would be great if we could hear directly from him. Fortunately, for all of us, he gladly obliged.

The primary focus of our discussion was this great piece that Alasdair posted earlier this week: http://www.goldmoney.com/gold-research/alasdair-macleod/gold-futures-market-heading-for-crisis.html. So that you can look it over while listening, here's a C&P of the entire thing:

Gold futures market heading for crisis
2012-DEC-10

I thought I had a good idea what disasters we might face in 2013, and then I saw the most recent US Commodity Futures Trading Commission’s Bank Participation Report for gold and silver. On the basis of recent BPRs these markets are heading for a crisis, which is generally unexpected. I shall break the reader in gently by looking at gold first.

The first chart below shows US banks’ net short exposure to gold up to December 4. Between February and August the US banks managed to reduce their net shorts from 104,717 to 57,689 contracts against a background of a declining gold price. This is logical, to be expected and sensible position management. However, when the gold price turned up after the August BPR, net shorts rapidly rose to new highs, and over the last month unexpectedly increased again while the gold price actually declined. This is a sign that the US banks, of which only five made returns for December, are having difficulty keeping a lid on the market that emotionally at best is neutral, but most probably somewhat oversold. This differs from an over-bought market with potential profit-takers to shake out, as was the case when gold traded at $1,900 per ounce and the same banks were able to bring the gold price back under control.

The next chart is of Non-US banks’ net shorts, which tells a very different story. From October 2011 these banks increased their short positions, with a sudden jump between August and October, before sharply reducing their net positions to 44,707 contracts this month. It appears that some of the shorts have ended up on the US banks’ books, pushing their shorts to uncomfortable levels as shown in the first chart.

The jump in these net shorts between August and October was comprised of sharp rises in both longs and shorts involving swap dealers and the other commercials. Longs more than tripled from 9,199 to 34,881 and shorts rose even more from 49,772 to 113,445 on a rising gold price. The likely explanation is that buyers materialised through some of these non-US banks, who hedged by buying futures contracts. A dealer or dealers at one or more other non-US banks saw the price go against their shorts and tried to kill it by massive intervention. Subsequently, when the US banks sold the market down from the October rally these non-US banks took the opportunity to reduce their shorts to more normal levels.

This information is particularly revealing, given that the Commitment of Traders Report shows a substantial reduction in the Commercials’ net position by 34,551 contracts for the week to the same date as the BPR, giving an impression of a market being brought back under control. The BPR suggests otherwise.

Silver

While there is a large stock of gold that can theoretically become available at higher prices, the same cannot be said for silver. We shall look at the position of the US banks first. The first silver chart shows that even though silver is trading well below its 2011 highs, US banks’ net shorts are substantially higher than might be expected. The long figure is down to only 625 contracts, while the shorts are 40,198, so these less-than-four-banks that reported last week have a net short exposure of nearly 200,000,000 ounces, or twice the estimated annual supply of silver available to investors after industrial demand is allowed for.

The final chart shows the non-US banks’ net shorts. Unlike their exposure to gold, these banks are in the same deep trouble as the US banks, having made the mistake of turning a broadly level book as recently as the August BPR into a record net short position on the August-October price rise. This is a vicious bear squeeze on them, which added to the US banks’ position amounts to a total short of 290,000,000 ounces. This figure compares with net shorts of only 120,000,000 ounces when the price was successfully taken down from its all-time highs early last year.

Conclusion

The silver does not exist to cover these short positions, and it will take very little further buying to set off a crisis in this important market. In the case of gold, there have always been central banks with physical bullion available to ease market shortages, but so far as we are aware the strategic silver stockpiles of previous decades are exhausted. There is therefore no price at which these shorts can be closed.
Bank positions in both silver and gold seem to have been adversely affected by “events unknown” from the August BPR onwards. All attempts by the banking community to regain control of these important markets appear to have failed.
Since the date of the latest BPR (December 4), there have been three serious attempts to reduce these short positions and each time the same $32.60 level has held firm. This suggests that a buyer or buyers larger than the banks are prepared to take them on by buying the dips. This price action supports anecdotal evidence that physical bullion in important markets such as London is in short supply.
On this evidence, and assuming the trend continues, there will shortly come a time where NYMEX will be forced to declare force majeure in this market, which they can do under their rule book. The consequences of this extreme action could well be destabilising not only for the price and demand for silver but also disruptive for gold.
Therefore, we must add the breakdown of precious metals markets to the list of systemic dangers we face in the New Year.

____________________________________________________________________________

Finally, following the podcast, you should take a few minutes to review some of the other, enlightening articles that Alasdair has written lately:

http://www.goldmoney.com/gold-research/alasdair-macleod/the-value-of-the-dollar.html

http://www.goldmoney.com/gold-research/alasdair-macleod/the-coming-silver-price-eruption.html

http://www.goldmoney.com/gold-research/alasdair-macleod/shadow-banking-the-next-landmine.html

http://www.goldmoney.com/gold-research/alasdair-macleod/understanding-asian-gold-demand.html

http://www.goldmoney.com/gold-research/alasdair-macleod/gold-bullion-flowing-from-west-to-east.html

TF
 


50 Comments

Turd Ferguson's picture

This week's CoT

MODERATOR

Alasdair and I spent a but of time discussing the rising Large Spec long interest in silver and wondering what this week's CoT would show.

The new report just came out and it shows that the Large Specs did, finally, do some selling but not much. For the reporting week, they sold 1,656 longs and added a paltry 110 shorts. The updated gross long position is 48,548 contracts, which is still UP from the 47,236 they were long at the recent price peak of 10/2/12. The Silver Cartel added some more fresh shorts, too, to the tune of 514. This brings their gross short position to 97,438 contracts, also UP from a total of 93,628 on 10/2/12. So...price has fallen over $2 in the 10 weeks since the latest price peak but The Bad Guys have had to ADD 3,800 new shorts over the same time period. That is definitely NOT how it is supposed to work for them.

The rest of the silver CoT and the entire gold CoT this week are unremarkable.

The Green Manalishi's picture

We need more Englishmen here!

;)

Although he could be Scottish with a name like Macleod.

Heads up for the Brits next week

The South Sea Bubble

Melvyn Bragg and his guests discuss The South Sea Bubble, the speculation mania in early 18th-century England which ended in the financial ruin of many of its investors.

http://www.bbc.co.uk/programmes/b01pcs5g

gdog's picture

Third...

Well, it's a start.  Thx Turd for all you do sir.  

To add a little value to this post I'll share a positive story.  I went to visit my folks last night.  Growing up, the way my dad and I connected was through debate, often political debate.  Mainly macro level topics that often lacked definitive answers.  The last year or so I've been following the economy out of curiosity which lead to sheer terror.  I quickly changed my investment strategy inline with most here, out of 401k and into phyz.  Having learned much from non MSM sources, I desperately wanted to share my knowledge with my family.  My journey through the five stages was not pretty.  I often sounded frantic, which I was and for good reason, but the WAY I was communicating this message did not resonate with my folks.  Being good and understanding parents, they just p00-p00'd my ideas.  e.g. "that's nice dear..."  Having had a good deal of time to absorb and learn from others experiences (thx to all who add value on this site and others)  I've developed a level of comfort with the earth shattering topics we discuss daily.  Last night though was a turning point for my folks.  I talked about the bond market & interest rates and their impact on the economy (learnings from ZH), the coming inflation which naturally lead into PM's as a store of wealth.  I talked about the central banks and governments around the world being major buyers of PM's and the Chinese encouraging our citizens to buy PM's.  I mentioned that they don't ever hear that here do they?  Given the economic realities we face...QE, they found that strange.  Last night they finally agreed to allocate a percentage of their investment portfolio to PM's.  No doubt their going to be talking to their friends about PM ownership now as well.  I've had a few friends already start stacking.  But my folks with their strongly embedded beliefs about the economy and our government was a major win in the never ending debate between my father and I.  They've asked for my assistance in developing a strategy with them and I'll happily oblige.  I think the tide is turning my friends.  More and more people are waking up to the realities we face in the months and years ahead.  It made me so happy to watch my folks wake up.  I'll sleep better at night knowing my folks are protected.  

All the best, -G    

So It Goes's picture

Top ten

Top ten baby - I'm paying attention.

LCS today - picked up a few "peace" dollars.  Will make nice presents.

Keep stacking.

rocoach's picture

Breakdown

What does he mean by the "breakdown of precious metals markets"?  Does he mean the price of PMs will breakdown (plummet), or does he mean that PMs will not be traded at all - there will literally be no market for them?  And if so, how will PMs be valued and how will we be able to buy and, more importantly, sell?

tyberious's picture

Awesome!

The was really enlightening and detailed on process. My take away is, that there is no way out for the cartel?

Nigel Black's picture

Excellent Podcast

Thank you so much for posting that.  I really enjoyed it.

Mr. Fix's picture

Keep the podcasts coming,

I can actually listen while  I'm working.

heyJoe's picture

Great Podcast Turd

Folks need to be patient and keep stacking.

hammerman's picture

turd... just got word

the sell off in the stock market will start beween 2 pm Mon and 1 pm Tues....   I been harping on you to sound the warning bell for awhile....   how bad will PM's get hit is your call?   SPX 1317 is gonna be here soon....   bobbay...  why you sleep all day?

zman's picture

Good stuff, one of the best

Good stuff, one of the best podcasts!!  After this week I really needed to listen to some rational talk.

Turd Ferguson's picture

Thank you

MODERATOR

Much appreciated. Glad you enjoyed it.

Zoltan's picture

Excellent Podcast

Thanks Turd.

Z

Ilya Repin's picture

Great interview TF. Thanks

Great interview TF. Thanks for bringing us such a great guest :)

Terp's picture

Thanks guys!

Always a pleasure and educational!

Terp's picture

Curious...

Sorry if this has already been asked elsewhere...

Do you guys (anyone) think that TPTB will LET it run up to $60 (for example)? Or keep it in this trading range and then pull the plug so that nobody (in paper) will make money?

I suppose another possibility would be to discourage traders, as they have been, and one day let their buddies know to go all in and let the price soar, leaving most of the rest in the dust, and then end the trading...

I don't have any paper silver right now, but I do have some Scuba gear to look for my coins if the price gets high enough.

Anyway, my main question is: Do you guys think they will let the price run up that high before ending the trading?

Thanks!

Enjoyed the podcast and will listen again tomorrow =)

ltcolkilgore's picture

Derivatives...

Must admit, I never gave that much thought, the last couple of minutes left me a little scared...

I think we all want to see silver price rise but not with that outcome, I guess we can't stop what's coming though...

Byzantium's picture

But the problem is.....

Until these longs actually take delivery, then it is a paper game, and the cartel always wins the paper games.

On the bright side, something caused them to panic and cover their shorts in April 2011; but are we agreed on what that was? If I recollect correctly, JPM was told that position limits would be enforced, and the EE barricades just crumbled. The mistake was quickly rectified, the system closed ranks, and now it won't happen that way again, no?

Which leads us back to the Comex longs taking delivery as our only other prospect, but they never bloody do!

¤'s picture

Throwing Pigatha A Lifeline.....and Goldman Sachs

What Are Derivatives?

Could Derivatives Cause The Dollar To Collapse?

Banks Derivative Exposure

Many of us have heard the word Derivative, and usually it has a bad connotation. Derivatives are associated with the AIG bailout in 2008, where AIG had such a huge exposure to derivatives that the infrastructure of AIG almost collapsed, forcing a government bailout to prevent Americans from losing their money invested at AIG. But what exactly is a Derivative?

Derivatives Are Wall Street’s Version Of Gambling

A derivative is an investment that is not based on anything “real”. Rather than investing in a stock, or a commodity. An investment is based more on a concept. It is a legal bet on the future value or performance of something. In many ways it is similar to betting on a horse race, or a football game. It’s like Wall Street’s very own casino. A derivative could be betting on how interest rates will perform in the future. Or on what credit instrument is likely to default. In some scenarios, with a stable economy and proper checks and balances in place, derivatives can be relatively benign. However, without those checks and balances, a derivative can be very risky and potentially financially devastating.

The World’s Derivative Exposure Is Like A Time Bomb Waiting To Go Off

Currently, the derivative exposure around the world is entering a danger zone. The true exposure to derivatives can’t be fully ascertained but is somewhere between 600 trillion and 1.5 quadrillion dollars. That kind of money is unfathomable. To put it into perspective, the world’s annual GDP is only 70 trillion dollars. In the U.S. there are four banks that make up 93% of the total banking industry. Take a look at their exposure to derivatives according to an article by “total economic collapse”:

JPMorgan Chase

Total Assets: $1,812,837,000,000 (just over 1.8 trillion dollars)

Total Exposure To Derivatives: $69,238,349,000,000 (more than 69 trillion dollars)

Citibank

Total Assets: $1,347,841,000,000 (a bit more than 1.3 trillion dollars)

Total Exposure To Derivatives: $52,150,970,000,000 (more than 52 trillion dollars)

Bank Of America

Total Assets: $1,445,093,000,000 (a bit more than 1.4 trillion dollars)

Total Exposure To Derivatives: $44,405,372,000,000 (more than 44 trillion dollars)

Goldman Sachs

Total Assets: $114,693,000,000 (a bit more than 114 billion dollars – yes, you read that correctly)

Total Exposure To Derivatives: $41,580,395,000,000 (more than 41 trillion dollars)

All I can say to these numbers is wow. AIG’s exposure to derivatives was on a much smaller scale than the above mentioned financial institutions. There is not enough money in the world to bail these banks out should derivatives go south. It’s like Warren Buffet says: derivatives are “financial weapons of mass destruction.” If these banks go down because of poor investment decisions, it could take the U.S. dollar down with them.

tpbeta's picture

Very interesting podcast

Thanks Turd.  Fascinating. Even if he was talking his book and therefore requires a pinch of salt, it was very logical and well thought out.

S Roche's picture

On The Other Hand...

http://goldchat.blogspot.com.au/2012/12/plenty-of-silver.html - Adrian Ash and Eric Sprott, no lightweights.

Martin Armstrong describing how it was done in the 90s: http://goldchat.blogspot.com.au/2012/02/martin-armstrong-on-metals-manipulation.html Note that they fiddled with inventories in an attempt to mislead the market.

It will be interesting when the facts of the present situation in silver are ultimately known. 

Pheeb's picture

Probably Nothing

Just added 2 Gold Canadian Maples today.  The date on the coins is 2013.  2013?  Seems odd to me.  Don't you date it in the year of print? Maybe it is like cars, to make it seem like you are getting next years model?  Just seems odd.  To me.  What is the benefit to the mint of casting these coins with fraudulent dating?  I bought them from Kitco.  It is probably nothing. 

Regards.

Al Huxley's picture

@Byzantium re: But the Problem Is

I agree, the distortion in the market is because the pms, by their nature, are the only ones where the paper version is an acceptable substitute for the real thing, as long as confidence in the current fiat regime persists.  The bullion banks, central banks and governments exploit that ruthlessly, each for their own ends, and it's going to take a delivery crisis to make this issue apparent to the broader public, at which point the collective 'ah-ha' will be gargantuan, as everybody suddenly realizes the obvious after the fact.  But the only thing that will force a delivery crisis will be an underlying CURRENCY crisis - eg a real breakdown in the fiat regime such that markets somewhere start requiring, in some way or another, a tangible backing to the currency they're accepting for whatever it is that they're selling.

Logically, the crisis will have to be triggered by a creditor nation or nations - China, India, Brazil, etc. and will have to be at a point where they feel the benefit of the current regime is outweighed by the cost, since it will probably be a 'bumpy' transition at best.  So in the interim, the paper trading will continue, with gradual offloading of physical metals to those who see the end-game earlier.

So that said, I really enjoyed the podcast, and the views expressed are similar to my own - it really looks like the banks are getting in fairly deep this time, with the recalcitrance of the long-side to capitulate and let the banks cover their short positions.  So I'd like to think that they're exposed to a short-squeeze, and that this squeeze means the next upside move is going to be a biggy.  But since they're still free to short to infinity as long as no crisis forces delivery, I think there's a pretty good chance that they'll in fact do this, and we'll get the big selloff before the final transition to a physical-based pm system.  The only thing I see preventing that scenario is the risk they take that forcing the paper price down to flush out the spec paper longs exposes them to having to deliver large amounts of physical to creditor buyers who aren't playing for USD profits, but for longer-term control of the global economy.

So interesting times....  I hate the effect of the price weakness on the mining shares I own, but I love being able to buy physical metal on sale, and I get more piece of mind from physical metal savings than from paper mining share profits, so, good with the bad I guess.

Action's picture

SBSS

Ordered 2 x Trivium 1oz Silver Medallions today - 16 days left! http://www.silverbulletsilvershield.com/

S Roche's picture

The word is spreading...

Cheaper and cheaper US$ causing world inflation and currency wars as many industries become uncompetitive & layoff workers.

FleetFeet's picture

Argentina leads the way ?

This is from a post today, 12/14/2012  --  Emphasis added by me:  

The Argentine government continues to institute more rigorous capital controls to prevent wealth from fleeing the country. At this point only the richest and most connected Argentines have access to foreign currency markets. Even the purchase of gold has been “suspended.” The end result is that middle class Argentines are trapped into holding Argentine pesos, which everyone fears will be devalued in the near future. 

***    

North America & Europe are probably years away from the above measures, but it is where we are headed.  Plan accordingly.  

Bobbejaan's picture

Banks are 'too big to prosecute', says FSA's Andrew Bailey

Quote:
Banks are 'too big to prosecute', says FSA's Andrew Bailey

.

Andrew Bailey, chief executive designate of the Prudential Regulation Authority, admitted large banks had become too big to prosecute, raising 'very difficult questions' for regulators.

The largest banks have become too big to prosecute because of the impact criminal charges would have on confidence in them, Britain’s most senior bank regulator has admitted.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9743839/Banks-are-too-big-to-prosecute-says-FSAs-Andrew-Bailey.html

Counterfiat's picture

M & M

Got a question.

If the fed prints $85 b per mth, say a trillion per year, what M would this be as in M1 ect? (How much is this relative to China printing this year?)

What then is the % increase in the money supply?

Is this right, the US entire deficit is financed by money printing, over 40% of fed govt spending, and ZIRP is in place to nilate interest payments to zero?

Over all, government outlays were $3.5 trillion in the 2012 fiscal year, and receipts totaled about $2.45 trillion.

Gross external debt, $16.05 trillion / 103% of GDP (as of 10 Nov 2012)

The economy of the United States is the world's largest national economy and the world's second largest overall economy, the GDP of the EU being approximately $2 trillion larger. Its nominal GDP was estimated to be over $15 trillion in 2011, approximately a quarter of nominal global GDP.[1]

The People's Bank of China, the central bank, has set a growth target for M2 money supply at 14 percent for 2012...The broad measure of money supply, M2, which covers cash in circulation and all deposits, grew 12.4 percent year-on-year as of the end of January, the slowest rate since June 2001. http://www.china.org.cn/business/2012-02/16/content_24655832.htm

However

You can see the explosive growth in China’s money supply, climbing 79 percent since the onset of the global economic crisis. That’s five times the rate of U.S. money supply expansion! (to 2011)

So is this a game of BBQ chicken?

And has China been buying US T's, AND printing the money at home to spend anyway?

Meaning China has spent its money that it has made in the West, and wants to spend it a second time, but fed wants to 'spend' it for them via printing to hyper.

Would you like plum sauce with that? I've never seen lazy susan so busy!

Admiral Ag Bar's picture

Great podcast...it reinforced one of my big fears

If the EE's silver position is that important to protect, then maybe just maybe when this all goes down... the next financial crisis gets blamed by the MSM as the fault of the evil silver speculators.  Good luck trying to move your metal into a different asset class when you are considered by the sheeple as a financial terrorist.

Oh well... if you are awake, you must choose a side.  When this whole thing unwinds it is going to be both exciting to be on the right side and scary as hell as the SHTF.

I've lost hope that the 'normal' market forces will overpower the gold and silver manipulation.  I think the only thing that will set it free is the absolute collapse of the trading system.  I can see $0 for paper metals, as per TMosely's theory.

Keep fighting the good fight, Turd.

Orange's picture

Excellent

Excellent podcast.

Thank you Turd & Alasdair

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