The Latest Sprott Newsletter

Wed, Mar 28, 2012 - 3:02pm

Please take the time to read this. (Note that I've added my own emphasis to a few points.) If you'd like to subscribe for yourself, click the link below:

The [Recovery] Has No Clothes
By: Eric Sprott & David Baker

"I believe that there have been repeated attempts to influence prices in the silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told by members of the public, and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act (CEA) have taken place in silver markets and that any such violation of the law in this regard should be prosecuted."

- Bart Chilton, Commissioner, U.S. Commodity Futures Trading Commission (CFTC), October 26th, 2010

What a difference a month makes. Now that Greece has been papered over, the bulls are back in full force, pumping up the equity markets and celebrating every passing data point with positive exuberance. Let's not get ahead of ourselves just yet, however. Very little has actually changed for the better, and it's certainly too early to start cheerleading a new bull market.

Take the latest US unemployment numbers, for example. There was much excitement about the latest Bureau of Labor Statistics (BLS) report which announced that US unemployment remained unchanged at 8.3% during the month of February.2 The market was particularly enamored by the BLS's insistence that non-farm payrolls increased by 227,000 during the month, as well as its upward revision of the December 2011 and January 2012 jobs numbers. Lost in all the excitement was the Gallup unemployment report released the day before, which had February unemployment increasing to 9.1% in February from 8.6% in January and 8.5% in December.3 Granted, the Gallup methodology is slightly different than that used by the BLS, but even if Gallup had applied the BLS's seasonal adjustment, they would have still come out with an unemployment rate of 8.6%, which is considerably higher than that produced by the BLS.4 We all know which number the pundits chose to champion, but the Gallup data may have been closer to the truth.

For every semi-positive data point the bulls have emphasized since the market rally began, there's a counter-point that makes us question what all the fuss is about. The bulls will cite expanding US GDP in late 2011, while the bears can cite US food stamp participation reaching an all-time record of 46,514,238 in December 2011, up 227,922 participantsfrom the month before, and up 6% year-over-year.5 The bulls can praise February's 15.7% year-over-year increase in US auto sales, while the bears can cite Europe's 9.7% year-over-year decrease in auto sales, led by a 20.2% slump in France.6, 7 The bulls can exclaim somewhat firmer housing starts in February8 (as if the US needs more new houses), while the bears can cite the unexpected 100bp drop in the March consumer confidence index9, five consecutive months of manufacturing contraction in China10, and more recently, a 0.9% drop in US February existing home sales.11 Give us a half-baked bullish indicator and we can provide at least two bearish indicators of equal or greater significance.

It has become fairly evident over the past several months that most new jobs created in the US tend to be low-paying, while the jobs lost are generally higher-paying. This seems to be confirmed by the monthly US Treasury Tax Receipts, which are lower so far this year despite the seeming improvement in unemployment. Take February 2012, for example, where the Treasury reported $103.4 billion in tax receipts, versus $110.6 billion in February 2011. BLS had unemployment running at 9% in February 2011, versus 8.3% in February 2012.12 Barring some major tax break we've missed, the only way these numbers balance out is if the new jobs created produce less income to tax, because they're lower paying, OR, if the unemployment numbers are wrong. The bulls won't dwell on these details, but they cannot be ignored.

Then there are the banks, our favourite sector. Needless to say, the latest Federal Reserve's bank stress test was a great success from a PR standpoint, convincing the market that the highly overleveraged banking system is perfectly capable of weathering another 2008 scenario. The test used an almost apocalyptic hypothetical 2013 scenario defined by 13% unemployment, a 50% decline in stock prices and a further 21% decline in US home prices. The stress tests tested where major US banks' Tier 1 capital would be if such a scenario came to pass. Anyone who still had 5% Tier 1 capital and above was safe, anyone below would fail. So essentially, in a scenario where the stock market is cut in half, any bank who had 5 cents supporting their "dollar" worth of assets (which are not marked-to-market and therefore likely not worth anywhere close to $1), would somehow survive an otherwise miserable financial environment. The market clearly doesn't see the ridiculousness of such a test, and the meaninglessness of having 5 cents of capital support $1 of assets in an environment where that $1 is likely to be almost completely illiquid.

That anyone still takes these tests seriously is somewhat of a mystery to us, and we all remember how Dexia fared a mere three months after it passed the European "stress tests" last October. There has since been some good analysis on the weaknesses of the US stress tests, including an excellent article by Bloomberg's Jonathan Weil that explains the hypocrisy of the testing process.13 Weil points out that stress-test passing Regions Financial Corp. (RF), which has yet to pay back its TARP bailout money, has a tangible common equity of $7.6 billion, and admitted in disclosures that its balance sheet was worth $8.1 billion less than stated on its official balance sheet. An $8.1 billion write-down plus $7.6 billion in equity equals bankruptcy. But the Federal Reserve's analysts didn't seem to mind. It came as no surprise to see that Regions Financial took advantage of its passing "stress test" grade to raise $900 million in common equity on Wednesday, March 14, which it plans to put toward paying off the $3.5 billion it received in TARP money. Well played Regions Financial. Well played.

Our skepticism would be supported if not for one thing - the recent weakness in gold and silver prices. Given our view of the market, the recent sell-offs have not made sense given the considerable central bank intervention we highlighted in February. Although both metals have had a dismal March, we must point out that they were both performing extremely well going into February month-end. Gold had posted a return of 14.1% YTD as of February 28th, while silver had appreciated by 32.5% over the same period. And then what happened? Leap Day happened.

In addition to being Leap Day, February 29th also happened to be the day that the European Central Bank (ECB) completed its second tranche of the Long-Term Refinancing Operation (LTRO), which amounted to another €529.5 billion of printed money lent to roughly 800 European banks. February 29th also happened to be the day that Federal Reserve Chairman Ben Bernanke delivered his semi-annual Monetary Policy Report to Congress. Needless to say, during that day gold mysteriously plunged by over $100 at one point and closed the day down 5%. Silver was dragged down along with gold, dropping 6%. Any reasonably informed gold investor must have questioned how gold could drop by 5% on the same day that the European Central Bank unleashed another €530 billion of printed money into the EU banking system. But all eyes were on Bernanke, who managed to convince the market that QE3 was off the table for the indefinite future by simply not mentioning it explicitly in his Congress speech. Given that Treasury yields have recently started rising again and that US federal debt is now officially over $15 trillion, do you think QE3 is officially off the table? We don't either. Just because Bernanke signals that the Fed is taking a month off doesn't mean they're done printing. It doesn't mean they have suddenly become responsible. It's simply a matter of timing.

Looking back at the trading data on February 29th, the sell-off in gold and silver appears to have been an exclusively paper-market affair. We were surprised, for example, to note that between the hours of 10:30 am and 11:30 am, the volume of the COMEX front month silver futures contracts equaled the paper equivalent of 173 million ounces of physical silver. Keep in mind that the world only produces 730 million ounces of physical silver PER YEAR. The problem from a pricing standpoint is the simple fact that the parties who were on the selling side of those 173 million paper ounces couldn't possibly have had the physical silver to back-up their sell orders. And the way the futures markets are designed, they don't have to. But if that's the case, how can the silver price be smashed by sell orders that don't involve any real physical?

Looking at this issue from a broader perspective, we've discovered that silver is indeed in a unique situation from a paper-market standpoint. We compared the daily paper-market futures volume of various commodities against their estimated daily physical production. We discovered that silver is disproportionately traded 143 times higher in the paper markets versus what is produced by mine supply. The next highest paper market commodity is copper, which is traded at roughly half that of silver on a paper market volume basis.

Commodity Daily Paper Volume Traded Units Exchanges Daily Physical Production* Trading Volume / Production Volume
Oil 1,122,369,441 Barrels ICE, NYMEX, ICE Brent 78,000,000 14.3 X
Aluminum 7,234,954,585 Pounds Shanghai, LME 154,440,000 46.8 X
Gold 16,051,790 Ounces Comex 230,000 69.7 X
Copper 7,242,499,591 Pounds Shanghai, Comex, LME, MCI 96,400,000 75.1 X
Silver 286,120,771 Ounces Comex, MCI, Tocom 2,000,000 143.0 X
Source: Barclays, Sprott Research


Source: Barclays, Sprott Research

We don't know why the paper market for silver is so huge, but we have our suspicions. Silver is obviously a much, much smaller market than that for copper, gold or oil. It could very well be that paper market participants like silver because they don't need as much capital to push it around. The prevalence of paper trading in the silver market is what makes the drastic price declines possible by allowing non-physical holders to sell massive size into a relatively small market. It's not as if real owners of 160 million ounces of physical silver dumped it on the market on February 29th, and yet the futures market allows the silver spot price to respond as if they had.

Same goes for gold. Although gold paper-trading isn't as lopsided as silver's, it too suffers from the same paper-selling issue. Indeed, as we discovered for February 29th, it appears to be one large seller of gold that single handedly downticked the spot price by $40/oz in roughly ten minutes.14 The transaction represented approximately 1.8 million ounces, representing roughly $3 billion dollars' worth of the metal. Who in their right mind would even contemplate dumping $3 billion of physical gold in so short a time span? Dennis Gartman's Letter on March 2, 2012, also mentioned an unnamed source who described an order to sell 3 million ounces of gold that same day, with the explicit order to sell it "in just a few minutes". As the Gartman Letter source states, "No investor or speculator would 1) handle it this way and 2) do it at the fixing only… This [has] happened this way three times in the last year, yesterday being the fourth time. Ben Bernanke had done nothing yesterday to trigger this the way it happened. I [have done] this now for 30 years and this was no free market yesterday."15

The following three charts show the price action and volume for the February, March and April Comex Gold contracts. You'll notice that the February contract stopped trading on February 27th to allow time for settlement between the buyers and sellers who intended on closing the contracts in physical. The March contract had hardly any volume at all, leaving the majority of gold futures that traded on February 29th taking place in the April contract. This speaks to our frustration with futures contracts. The majority of trading that produced the February 29th gold price decline took place in a contract month that won't settle until April 26th at the earliest, giving plenty of time for the shorts to cover and exit without having to back their sales with physical delivery.




All of this nonsense brings us to the crux of our point. If we are right about gold and silver as currencies, and if we are right about the continuation of central bank printing, both gold and silver will continue to appreciate in various fiat currencies over time. If there is indeed some sort of manipulation in the futures market that is designed to suppress the prices for both metals so as to detract from the mainstream investor's interest in them as alternative currencies, then both metals are likely trading at suppressed prices today. This means that there is an opportunity for investors to continue accumulating both metals at much cheaper nominal prices than they would do otherwise. While the volatility of the price fluctuations may be unsettling, they ultimately won't change the underlying fundamental direction of both metals, which is upwards.

The equity market rally that began in late December appears to be generated more by excess government-induced liquidity than it does by any raw fundamentals. We continue to scour the data for signs of a true recovery and we are simply not seeing it. Until those signs come through, we would be very wary of participating in the equity markets without a strong defensive stance. We would also expect the precious metals complex to enjoy renewed strength as the year continues. One bad month does not change a long-term trend that has been building over 10 years. Gold and silver will both have an important role to play as the central bank-induced printing continues, and we expect more on that front in short order.

PS - if there is any group that can effectively address silver's continued paper market imbalance, it is the silver miners themselves. Despite the best efforts of a select few at the CFTC, it is unlikely that there will be any resolution to the CFTC's investigation announced back in September 2008.16 Silver miners have the most to lose from the continued "fraudulent efforts" that Commissioner Bart Chilton refers to in the opening quote above. They also have the most to gain by confronting the continued paper charade head-on.

1 Chilton, Bart (October 26, 2010) "Statement at the CFTC Public Meeting on Anti-Manipulation and Disruptive Trading Practices".
U.S. Commodity Futures Trading Commission. Retrieved March 15, 2012 from:
2 BLS News Release (March 9, 2012) "The Employment Situation - February 2012". Bureau of Labor Statistics. Retrieved March 15, 2012 from:
3 Jacobe, Dennis. (March 8, 2012) "U.S. Unemployment Up in February". Gallup. Retrieved March 16, 2012 from:
4 Carroll, Conn (March 9, 2012) "Why is Gallup's unemployment number so high?". The Washington Examiner. Retrieved March 17, 2012 from:
5 SNAP/Food Stamp Participation (December 2011) "More Than 46.5 Million Americans Participated in SNAP in December 2011". Food Research and Action Center.
Retrieved on March 20, 2012 from:
6 Oberman, Mira (March 1, 2012) "US auto sales accelerate despite fuel price jump". Associated Foreign Press. Retrieved March 20, 2012 from:
7 AAP (March 16, 2012) "Europe new car sales down 9.7% in February". Australian Associated Press. Retrieved March 20, 2012 from:
8 Homan, Timothy (March 20, 2012) "U.S. Housing Heals as Starts Near Three-Year High: Economy". Bloomberg. Retrieved March 21, 2012 from:
9 Reuters (March 16, 2012) "March consumer sentiment dips, inflation view up". Reuters. Retrieved March 20, 2012 from:
10 Mackenzie, Kate (March 22, 2012) "China flash PMIs *down*". Financial Times. Retrieved March 23, 2012 from:
11 Schneider, Howard and Yang, Jia Lynn (March 21, 2012) "Housing report disappoints as existing-home sales dip in February". Washington Post. Retrieved on March 22, 2012
12 BLS News Release (March 9, 2012) "The Employment Situation - February 2012". Bureau of Labor Statistics. Retrieved March 15, 2012 from:
13 Weil, Jonathan (March 15, 2012) "Class Dunce Passes Fed's Stress Test Without a Sweat". Bloomberg. Retrieved March 15, 2012 from
14 CIBC Sales Commentary Mining Morning Note (March 1, 2012)
15 The Gartman Letter L.C. (March 2, 2012)
16 Silver Market Statement (November 4, 2011) "CFTC Statement Regarding Enforcement Investigation of the Silver Markets". U.S. Commodity Futures Trading Commission.
Retrieved on March 20, 2012 from:

About the Author

turd [at] tfmetalsreport [dot] com ()


Mar 28, 2012 - 3:07pm



I used to think this first thing was nuts.

Yet I have been sucked in over time.

And yes, now I can proudly say.....I am indeed nuts.

Mar 28, 2012 - 3:17pm


Congratulations Bugzy! It's good to know that I'm not the only one who refreshes the front page multiple times a day. :)

Mar 28, 2012 - 3:25pm
Animal Sacrifice
Mar 28, 2012 - 3:31pm



Mar 28, 2012 - 3:35pm

You guys are funny

Gonna have to chew on this article...this is some good stuff. Thanks Turd wish I had something more of substance to say, but i learn a lot so far!

Mar 28, 2012 - 3:40pm


I love point 14

The transaction represented approximately 1.8 million ounces, representing roughly $3 billion dollars' worth of the metal. Who in their right mind would even contemplate dumping $3 billion of physical gold in so short a time span?

I guess they are all above the law

Dr G
Mar 28, 2012 - 3:42pm

Love the newsletter. The

Love the newsletter. The Regions Financial example is a microcosm of everything that is wrong with our current banking/financial sectors. They are insolvent and still bleeding money, unable to payback any of the bailout the TAXPAYERS gave them, yet pass a "stress test" to obtain greater funds. They raised $900 MM in one frickin' day (based on passing a false stress test!!) and THEY ARE BANKRUPT WITH A NEGATIVE BALANCE SHEET. Amazing. I'm in the wrong profession. I should be a crooked bankster and fleece everybody. They don't even hide in the shadows anymore. Unreal.

And just a big LOL at paper silver trading at 143x it's mining production. What a crock. It literally boggles the mind that it is allowed to happen in the first place and continues to occur. The upside to that philosophy is that physical silver is NOT worth $32/oz, yet that is what we are paying for it today. So carry on.

Mar 28, 2012 - 4:36pm
Mar 28, 2012 - 5:01pm


At first glance, it appears the the WOPRS are simply liquidating April gold but NOT rolling into June....yet. April12 contracted by 45,000 yet June12 only went up by 25,000. The resulting net 20,000 loss in OI brings total gold OI down to just 417,000. WOW!

Can't wait for the CoT on Friday!

Be Prepared
Mar 28, 2012 - 5:15pm

In an Insane World... A Bank CEO really should be payed more

Bank of America CEO Brian Moynihan's pay quadruples

Brian Moynihan, chief executive of Bank of America, got a substantial raise in 2011. (Gerry Broome / AP Photo)

By Tiffany Hsu

March 28, 2012, 11:58 a.m.

In a year when Bank of America’s stock plunged 58% and the company announced plans to lay off 30,000 employees, chief executive Brian Moynihan’s compensation package more than quadrupled to nearly $8.1 million.

Here’s why: In 2011, the Charlotte, N.C.-based bank recorded $1.4 billion in profit after losing $2.2 billion the year before. So far this year, the stock is up more than 70%.

So although the bank’s compensation and benefits committee kept Moynihan’s salary the same at $950,000, he also landed $6.1 million in performance-reliant stock. Then there’s the $420,000 worth of tax and financial advice, along with use of the company’s aircraft, that’s also part of his package.

Along with various other components, Moynihan will have made nearly 317% more last year than the $1.9 million he pulled in during 2010, according to a BofA filing Wednesday with the Securities and Exchange Commission.

Other big executive raises: Disney chief Bob Iger got a 13.6% increase over 2010 with a $31.4-million compensation deal last year. Viacom chairman Sumner Redstone’s $21-million award in 2011 was 39% higher than the pay package the year before

Key Economic Events Week of 10/21

10/22 10:00 ET Existing home sales
10/24 8:30 ET Durable Goods
10/24 9:45 ET Markit flash PMIs
10/24 10:00 ET New home sales
10/25 10:00 ET Consumer Sentiment

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Key Economic Events Week of 10/21

10/22 10:00 ET Existing home sales
10/24 8:30 ET Durable Goods
10/24 9:45 ET Markit flash PMIs
10/24 10:00 ET New home sales
10/25 10:00 ET Consumer Sentiment

Key Economic Events Week of 10/14

10/15 8:30 ET Empire State Fed MI
10/16 8:30 ET Retail Sales
10/16 10:00 ET Business Inventories
10/17 8:30 ET Housing Starts and Bldg Perms
10/17 8:30 ET Philly Fed MI
10/17 9:15 ET Cap Ute and Ind Prod
10/18 10:00 ET LEIII
10/18 Speeches from Goons Kaplan, George and Chlamydia

Key Economic Events Week of 10/7

10/8 8:30 ET Producer Price Index
10/9 10:00 ET Job Openings
10/9 10:00 ET Wholesale Inventories
10/9 2:00 ET September FOMC minutes
10/10 8:30 ET Consumer Price Index
10/11 10:00 ET Consumer Sentiment

Key Economic Events Week of 9/30

9/30 9:45 ET Chicago PMI
10/1 9:45 ET Markit Manu PMI
10/1 10:00 ET ISM Manu PMI
10/1 10:00 ET Construction Spending
10/2 China Golden Week Begins
10/2 8:15 ET ADP jobs report
10/3 9:45 ET Markit Service PMI
10/3 10:00 ET ISM Service PMI
10/3 10:00 ET Factory Orders
10/4 8:30 ET BLSBS
10/4 8:30 ET US Trade Deficit

Key Economic Events Week of 9/23

9/23 9:45 ET Markit flash PMIs
9/24 10:00 ET Consumer Confidence
9/26 8:30 ET Q2 GDP third guess
9/27 8:30 ET Durable Goods
9/27 8:30 ET Pers Inc and Cons Spend
9/27 8:30 ET Core Inflation

Key Economic Events Week of 9/16

9/17 9:15 ET Cap Ute & Ind Prod
9/18 8:30 ET Housing Starts & Bldg Perm.
9/18 2:00 ET Fedlines
9/18 2:30 ET CGP presser
9/19 8:30 ET Philly Fed
9/19 10:00 ET Existing Home Sales

Key Economic Events Week of 9/9

9/10 10:00 ET Job openings
9/11 8:30 ET PPI
9/11 10:00 ET Wholesale Inv.
9/12 8:30 ET CPI
9/13 8:30 ET Retail Sales
9/13 10:00 ET Consumer Sentiment
9/13 10:00 ET Business Inv.

Key Economic Events Week of 9/3

9/3 9:45 ET Markit Manu PMI
9/3 10:00 ET ISM Manu PMI
9/3 10:00 ET Construction Spending
9/4 8:30 ET Foreign Trade Deficit
9/5 9:45 ET Markit Svc PMI
9/5 10:00 ET ISM Svc PMI
9/5 10:00 ET Factory Orders
9/6 8:30 ET BLSBS

Key Economic Events Week of 8/26

8/26 8:30 ET Durable Goods
8/27 9:00 ET Case-Shiller Home Price Idx
8/27 10:00 ET Consumer Confidence
8/29 8:30 ET Q2 GDP 2nd guess
8/29 8:30 ET Advance Trade in Goods
8/30 8:30 ET Pers. Inc. and Cons. Spend.
8/30 8:30 ET Core Inflation
8/30 9:45 ET Chicago PMI

Key Economic Events Week of 8/19

8/21 10:00 ET Existing home sales
8/21 2:00 ET July FOMC minutes
8/22 9:45 ET Markit Manu and Svc PMIs
8/22 Jackson Holedown begins
8/23 10:00 ET Chief Goon Powell speaks

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