Rational Minds Prevail

Tue, Aug 2, 2011 - 10:49am

As hoped for, rational minds prevailed in the overnight trade and gold has been pushed to a new, all-time high near 1644. Apparently, guaranteeing a 20% increase in the U.S. national debt over the next two years is sufficient reason to buy more gold. Really? Ya think?

And don't think it's going to stop there. Predictably, all The Regime and The Republocrats did was buy time. The debt ceiling is unlikely to be reached again until after the 2012 elections and there will be no pesky, evil, mean scary spending cuts until after the election, too. (If ever!) As you continue to prepare yourself for the economic chaos that lies ahead, keep the metaphoric image of the "coin drop game" in your head. The process of moving toward the end of the great keynesian experiment quickens exponentially with the compounding of interest and declining tax revenues. The "coin" dropped further down into the funnel yesterday and is spinning faster today. Continue to prepare. I don't know when the end is coming, I just know that it is.

Alright. I want to give you a couple of charts but then I want to spend some time talking about silver. First up, here's a 12-hour POSX. Note that The Pig probed the low end of its current range last week. Having held, it's likely headed now back toward the middle of the range and will oscillate there for a while.

This gold chart is fascinating. Rarely do you see the blatant actions of The Cartel all on display within one, little 2-hour chart but here it is. Having done their job by keeping gold in check all last week, they'll soon fall back and find a new line to defend. Looking at the action this morning, it looks like they already are. I've said for weeks that I was looking for 1650 as a short-term goal and it looks like we might get there as soon as later today. We'll see. Either way, gold is cooking and should be bought and held. As you know, I have an intermediate target of 1800 by Halloween or so. Right now, even that looks conservative but I'm sticking with it.

Speaking of goals, for the past several weeks, I've been looking for silver to trade to 42-42.50. All of my charts tell me it's headed there. Fundamentally, however, it's having one hell of a time pulling it off. Why?

The criminal element of the CME/COMEX/CARTEL really did a number on silver back in early May and it is going to take quite a bit more time to recover. Several limiting factors are now in play:

1) Psychological Damage. The Master Plan of the Sunday Night Massacre followed by all the margin hikes sufficiently spooked a lot of speculators. Also, since it is patently obvious that the CFTC is utterly worthless and unable/unwilling to prevent the C/C/C from pulling the same stunt any time of their choosing, money is reluctant to get back into the game.

2) Financial Damage. The manipulation of the silver Comex is designed to scare off investors. The rational person (which I'm not) will choose not to play and invest in a market where the deck is so obviously stacked against you. The events of May have scared off a lot of rational investors.

3) Margin Damage. After five hikes in nine days, the amount of money it takes to buy silver on the Comex is now considerably higher than it was back in the spring. Why trade silver when you can get twice as much leverage in something else?

All of this is combining to restrain silver by keeping a lid on open interest. The total open interest is slowly creeping up but not fast enough to sustain rallies and push rapidly higher. Buyers come in and drive the price higher but, since there is rarely any follow-through buying, the EE simply steps in once things have quieted down. They begin selling their newly-minted paper silver and back down goes price.

So, what does this mean? HellifIknow! I still think silver is headed to a short-term top near 42. From there, I expect some consolidation for a week or two or three before taking a stab at 45. The key is the open interest and that is a two-sided deal. Right now, the open interest is only about 119,000 contracts. This is good because it has a lot of room to grow and it will be difficult for the EE to create a significant selloff with silver primarily in "strong hands". 119,000 is bad because it shows a continued lack of buying interest in silver. If you're wondering, the open interest in late April was between 145,000 and 150,000 contracts. That 20% difference is the primary reason silver is $40 and not $50. Let's watch the OI numbers this month. With a little more time and data, we should be able to make some end-of-year price predictions by about Labor Day.

For today, silver is holding above $40 as I have a last of 40.15. Closing above $40 would be a good thing to root for today. Closing above 40.60 would be our next target as we wait for silver to finally generate enough momentum to go tackle the highs of last week and, eventually, the 42-42.50 we've been waiting for.

That's all for now. Have a fun and happy Tuesday! TF

p.s. I posted this note and then proceeded to check my inbox. Look what I found! A new Sprott Update!

The Real Banking Crisis

By Eric Sprott & David Baker

Although the adjacent questionnaire is facetious, it does ask the right questions. If you’re a wealthy European depositor today, what do you do with your money? Do you really continue to keep cash in a Greek or Italian bank account?

European bank depositors all face a tough decision today – to withdraw their deposits, or not withdraw and take their chances. Their response to that decision may determine the financial future of the Eurozone. Since 2008, EU Government bailouts have transformed a traditional banking crisis into a full-blown sovereign crisis. The European Central Bank (ECB) has managed to keep the Eurozone banking system going for now, but the constant threat of depositor bank runs makes its future extremely uncertain. A bank run on deposits forces banks to liquidate assets to raise cash. Governments and central banks will go to extreme lengths to avert such a scenario, because a liquidation reveals what an asset is really worth – and they are likely worth far less than what the banks are claiming they’re worth on their balance sheets today.

Bank runs have wreaked havoc in Europe over the past three years. In Iceland, it was a UK-led bank run on its second largest bank, Landsbanki, in early October 2008 that led Landsbanki to block over 300,000 UK depositors from accessing their accounts in its online bank called Icesave. Fear of widespread deposit losses compelled the British government to promptly freeze the assets of Landsbanki in retaliation, inciting an effective lock-down of foreign capital in and out of the country.1 You certainly didn’t want to have an Icelandic chequing account when that happened – especially considering that the Icelandic Krona proceeded to lose 58% of its value by the end of November 2008.2

In Ireland, it was the withdrawal of almost €4 billion in deposits in less than three weeks that compelled the Irish government to nationalize Anglo Irish Bank in January 2009.3 Large depositors lost faith in the Irish government’s bank account guarantee and began to pull their cash out of Irish banks in droves. As a Trinity College Dublin professor was quoted at the time, "This is a nightmare scenario for the [Irish] government… they can’t stop further withdrawals from the bank unless we close the borders and turn into Cuba."4

Ireland experienced a second bank run in late 2010, when more than €67 billion was withdrawn from Ireland-based institutions in October alone.5 Ireland’s top six domestic banks, two of which are currently in the process of being shut down, have now lost more than €90 billion in corporate deposits since the crisis began in 2008.6 And the withdrawals continue – in May 2011 it was reported that Irish resident private-sector deposits had declined by 8.7% over the past 12 months.7 Private sector deposits from non-Irish Eurozone residents declined by 9.7% over the same period, while deposits from non-Eurozone residents were reportedly down 28.2%.8Ireland’s experience makes it fairly clear: when depositors sense danger, and they are free to move their money elsewhere – they typically do.

The Irish deposit withdrawals have left Ireland’s banks in the hands of the ECB, which graciously bailed the country out back in November 2010, and has now lent Irish banks more than €103 billion as of the end of June 2011.9 This, in addition to the €55.7 billion the Irish banks have received from their own central bank, is amazingly still not enough to recapitalize the Irish banking system, which at the time of writing still requires an additional €24 billion of capital to remain solvent.10

In Greece, bank withdrawals have proven equally as damaging. Greek banks have seen deposit outflows of around 8% thus far in 2011, with an acceleration of outflows in May and June. Moody’s recently warned that such flows could cause a "severe cash shortage if they rapidly increased beyond 35% of deposits".11 Last week’s €109 billion bail-out suggests that may have already happened.

Just as with Ireland, the ECB has kept the Greek banks afloat, funding them almost €100 billion in 2010 and an additional €103 billion thus far in 2011.12,13 The recent bail-out will buy Greece time, but deposit outflows could still derail the ECB’s efforts to save the Greek banking system if they continue unchecked.

Although we don’t have the data for Spain or Italy, it does not escape us that those countries’ governments are likely highly aware of the effect a bank run could potentially have on their fiscal stability. Italy is a much bigger fish than Ireland or Greece. Its €1.8 trillion of borrowing in nominal terms is more than the debt of Greece, Spain, Portugal and Ireland, combined.14 Italy and Spain are too big to fail and too big to bail-out, so the future of the Eurozone will be seriously compromised if Italian and Spanish depositors take flight with their euros. To that effect, we found it very instructive to read about new provisions that the Eurozone’s rescue fund, the EFSF, recently incorporated into the latest Greek bail-out. Included among them is the ability for the EFSF to buy sovereign bonds in the secondary market, give EU states "precautionary credit lines" before they are shut out of credit market, and "lend governments money to recapitalize their banks".15 The sovereign crisis, at its root, is still a banking crisis. The banks hold loads of Eurozone sovereign debt. If depositors withdraw capital, those banks must sell some of those sovereign bonds to stay solvent. The EFSF provisions are there to provide the banks with the liquidity they need to survive deposit withdrawals. The question now is what will happen if the EFSF runs out of the funds to do so.

In our view, the depositors that chose to transfer their money out of their local Eurozone banks deserve some recognition, because they ‘get it’. The EU banks are still the root of this problem, and depositors are right to question the security of their deposits held with them. We have always postulated that the real problem in our financial system is too much leverage in the banking system. We are continually reminded of this fact every Friday when US bank failures are released. When you compare the failed banks’ assets to the cost the FDIC pays to make their depositors whole, it reveals how many times the banks have lost their equity capital. The key to remember here is that banks lend out our money and keep very little in reserve. If we assume they keep 5 cents of capital for every 95 cents they loan out – a 25% ‘implied write-down’ in Chart A would mean that the bank has effectively lost its capital six times over.

The banking situation in Europe is no different from that above – EU banks are also highly levered, but their situation is further complicated by the fact that what was once the most liquid and secure loan on European banks’ balance sheets – sovereign debt – is no longer liquid and secure. This makes EU banks extremely vulnerable to deposit withdrawals as it forces them to approach the ECB for help to maintain liquidity. There is only so much the ECB can do – if a true ‘liquidity event’ takes place, we can all rest assured that there will be no buyers of distressed assets in the sizes that European banks hold today, sovereign bonds, or not.

We discuss the EU banking crisis this month to remind everyone that we have very recently lived through two instances where the entire financial system almost collapsed. The first took place during the height of the 2008 crash. The second transpired in May 2010 when the ECB stepped in with its $1 trillion bailout package to avert disaster. All financial bailouts up to this point have been instigated with a desire to avert the first domino from falling. They have been instituted to avert contagion – a total financial meltdown that would effectively turn the global banking system into an Icelandic money trap – where no money can get in, or out.

We still don’t know if a financial collapse can be averted in Europe because investors and depositors are not all naïve to reality. The financial malfunction is ongoing and will not be prevented through these continual perverse financial machinations. If Eurozone depositors move their capital – more bailouts will be required, thereby increasing the sovereign debt levels and exacerbating the seemingly hopeless situation that much more.

As the questionnaire above suggests, we believe a growing number of European depositors are transferring their money out of EU banks, and many of them are reinvesting their capital into gold and silver for safety. It does not surprise us to see gold hitting all-time highs in euros and dollars. It’s worthwhile to acknowledge that those investors in Iceland and Ireland who had the foresight to convert their cash to gold before their countries’ respective bank runs have all fared extremely well in both nominal and real terms. We believe that gold and silver are the ultimate alternative for a chequing account in a vulnerable banking jurisdiction, and whether the ECB prints more euros or eventually defaults, both outcomes will continue to support a robust demand for precious metals as an alternative currency.

For more information about Sprott Asset Management’s investment insights and
award-winning investment capabilities, please visit www.sprott.com.

About the Author

turd [at] tfmetalsreport [dot] com ()


SRV - ES339
Aug 2, 2011 - 11:16am

Friday Jobs Report

Thanks for the PM update Turd,

Any idea why PMs have held so well through the resolution of the debt ceiling fiasco?

Looking for a hit Thursday night leading up to the Jobs Report, and have some cash on the side for a silver buy on the dip... what do you think?


Aug 2, 2011 - 11:18am

Question for TF or others in the know

When TF speaks of "closing above $40" or any value, does he mean the pit close (which is 1:30 I believe?) or the overall market close for the day? (4:30 I believe?).

Also - does anyone have a timeline of when all the various markets open/close? I remember seeing this here before but failed to save/bookmark it. It was very useful.

After the Storm
Aug 2, 2011 - 11:19am

Riddle Me This Turd and Co.

Why is open interest for Sept gold over 9000? This is unusual. Active months being August, October, and December usually Sept is much more quiet. Usually when August liquidates(in July), this liquidation causes the punctuation on the summer sell off. But, usually when traders liquidate August they move into either October or December. This year heavily December....but also over 9000 into Sept. Very unusual.

In riding the gold bull this decade there are a few guys I correspond with as we try to ride this beast. A couple were around in the 70's gold bull. These guys, to be clear, do not believe in manipulation, or comex defaults, or any of the "conspiracy" stuff talked about regularly here. But the open interest of Sept has them scratching their head. Wondering. The conclusion is that someone might want delivery. If that is the case it would be significant. In my opinion very significant. Someone wanting their gold now, Sept.

Maybe some traders just opened positions in Sept because of the debt ceiling issues. Maybe they will roll on into Dec. or cash out. But unusual they didn't use Oct. or Dec. But, maybe someone wants the real stuff. It has us watching to see. Have you heard anyone mention this? Is it more normal than we think? Do you have any opinion on this?

Thanks All

Eman Laer
Aug 2, 2011 - 11:29am

Peter Schiff just said

Schiff was interviewed recently and said that he believes Obama is in for a surprise because Schiff believes this debt ceiling increase will not be enough to cover our borrowing through the 2012 elections.

Video unavailable
Bay of Pigs
Aug 2, 2011 - 11:35am


I hate to be a dick (and sometimes I am), but this kind of analysis from Sprott is bulletproof, IMO. That is why I flame the likes of KidD and OFlanagan. Nothing personal, I just think they are just wrong about him, his company and his motives. I've followed his outfit for over ten years, and they know exactly what they're talking about. People in Canada respect the guy and for a very good reason. He's made them a shit pot of money the last decade.

Bank Runs Bitchez.

Aug 2, 2011 - 11:36am

Viper ?

Are those "market time bars" at the bottom of the Kitco black, live charts useful ? The Greenwich time is a little faint, though ! Monedas 2011 Talent on loan from Satan !

Aug 2, 2011 - 11:45am

Silver: Newton's First Law of Motion

John Nyaradi's ETF Edge Archives | Email alerts

Aug. 2, 2011, 10:32 a.m. EDT

White hot silver

Commentary: Using Newton’s first law of motion to spot winners

By janyaradi[at]gmail[dot]com (John Nyaradi)

BEND, Ore. (MarketWatch) — Newton’s first law of motion states that the velocity of a body remains constant unless the body is acted upon by an external force. In the arena of exchange-traded funds, sectors and ETFs with strong momentum can often continue on strong trajectories, and July’s “sector of the month” was silver, as the white metal has been white hot.

Precious metals, and silver, in particular, were the leading sector in July in response to the debt ceiling crisis and a “flight for safety” from a potential U.S. default.

Up some 18% for July and approximately 29% year to date, the white metal, sometimes referred to as “poor man’s gold,” has put in an impressive performance in spite of the precipitous decline it experienced earlier this spring.

While gold gets most of the press, it’s up “only” 14% so far for 2011, and so silver has really offered “margined” returns compared to a similar investment in gold.

Many factors have propelled silver on this upward trajectory including uncertainty over the deficit ceiling... (con't.)


Bay of Pigs
Aug 2, 2011 - 11:45am

@after the storm

If your friends don't believe in manipulation of these corrupted bankster dominated markets, they are blind fools.

WTF? What the hell are they looking at? I mean really, are they serious?

Aug 2, 2011 - 11:47am
Aug 2, 2011 - 11:49am

Playing Devil's advocate - please poke holes in it.

I own physical. In fact, bought some more this week. But I guess you could call me a cynical investor....and anytime I come across something that seems to logically make sense in opposition to the position I have already taken....I do consider it instead of blindly accepting the pre-held position that I'm right no matter what, damn it.

So, here are some counter points I've come across in research as to why we're NOT going to have hyperinflation and the US Dollar is not going to collapse. I submit:

1. The vast majority of the printed money from the QEs is still being held by the banks. The currency has not reached consumers....so, much of this printed money is not making it out into the economy. The banks are most likely using this cash to make risk free profits by buying US Treasuries. It is a fact that bank lending is down quite substantially when compared to previous recessions and depressions. So, consumers not being able to spend money out in the economy will keep hyper inflation from happening.

2. China, the largest holder of US debt wants to keep rates low so US consumers will continue to buy their exports.

3. China has no choice but to hold on to US debt due to their substantial trade surpluses.

Here is a link if you'd like to see more counterpoints to the "here comes hyperinflation and gold is going to the moon" theme: https://www.avaresearch.com/article_details-826.html

Please make comments on these points or this article as I would love some holes poked in these facts or other comments.


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Key Economic Events Week of 1/27

1/28 8:30 ET Durable Goods
1/28 10:00 ET Consumer Confidence
1/29 10:00 ET Pending Home Sales
1/29 2:00 pm ET FOMC Fedlines
1/29 2:30 pm ET Powell presser
1/30 8:30 ET Q4 GDP first guess
1/31 8:30 ET Pers Inc and Spending
1/31 9:45 ET Chicago PMI
2/2 10:00 pm ET Chiefs win SB LIV

Key Economic Events Week of 1/13

1/14 8:30 ET CPI
1/14 9:00 ET Goon Williams
1/15 8:30 ET PPI and Empire Fed
1/16 8:30 ET Retail Sales and Philly Fed
1/17 8:30 ET Housing Starts
1/17 9:15 Et Cap Ute and Ind Prod

Key Economic Events Week of 1/6

1/7 8:30 ET US trade deficit
1/7 10:00 ET ISM Services PMI
1/7 10:00 ET Factory Orders
1/8 8:15 ET ADP employment
1/9 8:00 ET Goon Chlamydia speech
1/9 1:20 ET Goon Evans 2:00 ET Goon Bullard
1/10 8:30 ET BLSBS
1/10 10:00 ET Wholesale Inventories

Key Economic Events Week of 12/16

12/16 8:30 ET Empire State Manu Idx
12/16 9:45 ET Markit flash PMIs Dec
12/17 8:30 ET Housing Starts and Bldg Perms
12/17 9:15 ET Cap Ute and Ind Prod
12/19 8:30 ET Philly Fed
12/20 8:30 ET Final guess Q3 GDP
12/20 10:00 ET Pers Inc and Spending
12/20 10:00 ET Core Inflation

Key Economic Events Week of 12/9

12/10 8:30 ET Productivity and Unit Labor Costs
12/11 8:30 ET CPI
12/11 2:00 pm ET FOMC fedlines
12/11 2:30 pm ET CGP presser
12/12 8:30 ET PPI
12/13 8:30 ET Retail Sales
12/13 10:00 ET Business Inventories
12/13 11:00 ET Goon Williams speech

Key Economic Events Week of 12/2

12/2 9:45 ET Markit Manu PMI
12/2 10:00 ET ISM Manu PMI
12/2 10:00 ET Construction Spending
12/4 9:45 ET Markit Services PMI
12/4 10:00 ET ISM Services PMI
12/5 8:30 ET Trade Deficit
12/5 10:00 ET Factory Orders
12/6 8:30 ET BLSBS
12/6 10:00 ET Wholesale Inventories

Key Economic Events Week of 11/25

11/25 8:30 ET Chicago Fed Nat'l Idx
11/25 7:00 pm ET CGP speech
11/26 8:30 ET Advance Trade
11/26 9:00 ET Case-Shiller home prices
11/26 10:00 ET New home sales
11/26 10:00 ET Consumer Confidence
11/27 8:30 ET Q3 GDP 2nd guess
11/27 8:30 ET Durable Goods
11/27 9:45 ET Chicago PMI
11/27 10:00 ET Pers Inc & Cons Spndg
11/27 10:00 ET Core inflation
11/27 2:00 pm ET Beige Book

Key Economic Events Week of 11/18

11/19 8:30 ET Housing Starts & Bldg Perms
11/20 2:00 ET October FOMC minutes
11/21 8:30 ET Philly Fed
11/21 10:00 ET Existing Home Sales
11/22 9:45 ET Markit November Flash PMIs

Key Economic Events Week of 11/11

11/12 Three Fed Goon speeches
11/13 8:30 ET CPI
11/13 11:00 ET CGP on Capitol Hill
11/14 8:30 ET PPI
11/14 Four Fed Goon speeches
11/14 10:00 ET CGP on Capitol Hill
11/15 8:30 ET Retail Sales
11/15 8:30 ET Empire State Manu Index
11/15 9:15 ET Cap Ute and Ind Prod
11/15 10:00 ET Business Inventories

Key Economic Events Week of 11/4

11/4 10:00 ET Factory Orders
11/5 9:45 ET Markit Services PMI
11/5 10:00 ET ISM Services PMI
11/6 8:30 ET Productivity & Labor Costs
11/6 Speeches by Goons Williams, Harker and Evans
11/8 10:00 ET Consumer Sentiment
11/8 10:00 ET Wholesale Inventories

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