A Simplot Scenario for Silver

419
Mon, Dec 3, 2012 - 10:54am

When both Andrew Maguire and Ted Butler write about the same thing over weekend, one should probably sit up and take notice.

In this case, what they were discussing was a possible, end-game scenario for the silver manipulation. The commercial short position has grown so extreme AND the physical supply has grown so tight that, suddenly, these two great minds were exploring the available options for JPM et al as they attempt to extricate themselves from what is growing into an unmanageable and untenable position.

Andy commented that in his "thirty years of experience, he'd never seen a more dangerous situation developing" and that, soon, the only possible way out would be a "back door solution". This "almost certain" resolution would hinge upon the cash settlement of futures contracts that would position paper traders on the sidelines before the "gap higher" next trading day in the new, physical market.

Andy's commentary had already roused my attention and then I read Uncle Ted's weekly review. In it, he discusses the "Maine Potato Default" of 1976. First of all, here are two links that can provide some background for you: https://www.time.com/time/magazine/article/0,9171,947729,00.html & https://news.google.com/newspapers?nid=1988&dat=19760526&id=a2YiAAAAIBAJ&sjid=06wFAAAAIBAJ&pg=1377,2637833

Here's the introductory paragraph of Ted's analysis:

"Since the problem is JPMorgan’s 38,000 contract net short position in COMEX silver, that problem will disappear if the regulators, as is within their powers, decree that a market emergency exists and orders all silver contracts to be unilaterally closed out and settled at an arbitrary price. In an instant, JPMorgan will be let off the hook and the problem, from a regulatory perspective, will exist no more. Yes, it would represent a contract and market default and reflect badly on the regulators, but it would resolve the extreme market structure issue immediately. Further, this is not a resolution that would be without precedent. Almost 40 years ago, the predecessor of the NYMEX defaulted on their important Maine Potato contract because the largest short seller, the late J.R. Simplot, couldn’t deliver as promised. All open contracts were artificially closed out at a set price and that was it. Yes, it was a scandal and a black eye on the world of commodity trading, but not one in ten million even remembers it today. The scandal led to a cessation in the trading of Maine Potato futures and a similar COMEX forced settlement today most likely would lead to the termination of silver futures trading in the US. One could argue that silver trading today is more important than potato trading was in the 1970’s, but my point is that to the average citizen, a COMEX silver shutdown would be forgotten in time and life would go on." Subscribe and read more at: https://www.butlerresearch.com

So why do I bring this up? A number of reasons.

  1. We KNOW that this silver manipulation cannot go on forever. In fact, the increasing physical supply tightness makes this eventuality a possible near-term event.
  2. A Comex/CME cash settlement screw job would not be surprising at all. If you don't believe me, ask anyone who had an account with MFGlobal for their opinion.
  3. Though painful to the short-term reputation of the Comex, the CME and the Silver Cartel (mainly JPM), the event would barely register in the financial press and would soon be forgotten. If you don't believe me, ask yourself the last time you saw a headline on the LIEBOR Scandal.
  4. Though there would likely be a significant runup in paper price and other warning signs of this impending "default", paper traders had better be fully aware of this possibility/probability.
  5. The Maine Potato Default of 1976 clearly shows that there is precedent for this kind of event.
  6. In this scenario, holders of all types of paper silver (futures contracts, paper certificates for physical, ETFs) will cash settled and be left on the sidelines, holding the bag, out of the market and unable to participate in the next-day reset in price.

Once again, your only solution is the purchase and delivery of physical metal. Period. End of story. Yes, it's fun to trade and the leverage applied may allow you to increase the stack of your fiat. However, there is no substitute for physical metal. Holding physical metal is not just the only way you are guaranteed to participate when the Silver Scheme finally unravels, it is also your only protection against the other financial calamities that are just around the corner.

It's nice to see a bounceback in price this morning, though we are clearly seeing some continued volatility. I expect our support levels to continue to hold and I expect a "Happy Tuesday" rally tomorrow as the banks will want to cover some of last week's shorts ahead of the CoT survey. Both charts got painted with ugly, engulfing candles back on Friday so we need to see a rally this week in order to invalidate them and discourage some momo-chasers from piling in. Rest assured, though, I still expect December to be a solidly bullish month that will set the stage for a powerful 2013.

Lastly, just another reminder of the free webinar on Wednesday. It's scheduled for noon EST and will last 15-25 minutes. It will begin with a brief commentary from Andrew Maguire. He'll discuss the metals markets and the increasing role that the HFTs are playing. Then, Paul Coghlan will give a presentation of his technical analysis methods. This will be extremely valuable information so I strongly encourage you to listen in. The entire presentation will also be recorded for playback by those who are unable to listen live. To access it, though, you must pre-register. You can do so by clicking here: https://www1.gotomeeting.com/register/240678176

OK, that's it for now. I hope everyone has a great Monday!

TF

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turd [at] tfmetalsreport [dot] com ()

  419 Comments

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ancientmoney
Dec 5, 2012 - 7:52am

@bron, victor

It is in times of stress that we'll see what really turns out. The TBTF banks are called that for a reason. They have proven themselves above the law. The wording in these ETFs simply makes a clearer path for them, legalities or not.

I understand, at least somewhat, the LBMA/OTC markets. In my opinion, at some level, they all collude with COMEX to manage the PMs and their prices, at least those in public view.

There may be pricing arrangements for certain people/entities to which we will never publicly see, as the real physical markets are opaque.

Time will tell all.

Counterfiat
Dec 5, 2012 - 3:31am

Your just desserts.

FREECAKE is sweeter! Afterall you can't eat...

Strongsidejedi
Dec 5, 2012 - 12:43am

@Victor

Many thanks for that quick comment on the OTC and Comex.

Butler gets alot of attention, but I'm not really buying ANY of the talk about "manipulation".

The reason isn't that I disbelieve the players are in the market. These organizations are clearly in the markets.

The issue is that I can not discern "manipulation" versus "legitimate participation".

The obfuscation of our current markets clouds the definition of "legitimate participation". This is the white collar crime that is so dastardly in its appearance. While a "legitimate player" can appear upright and in the black, we have found that some "legitimate players" are in fact a bunch of lying sociopaths who have defrauded nations.

In this context, the gold market appears rather odd.

victorthecleanerancientmoney
Dec 5, 2012 - 12:31am

OMG

COMEX is the source of PM pricing

Please stop spreading these falsehoods. Gold and silver are traded as currencies over the counter (OTC) in the interbank market - that's what's called the 'London Market', and that's where the spot price is set. COMEX is a sideshow, something like a second rate casino in a side street. There does not even exist any COMEX spot price!

This is what Ted Butler has never understood and what he still keeps repeating wrong (and so many people just parrot him without thinking). The OTC market is more than a factor of ten bigger than COMEX. When the price OTC drops, all institutions that trade both OTC and at the COMEX will go long OTC and short COMEX and capture the arbitrage; conversely, when the OTC market rises, they will go short OTC and long COMEX - both as far as COMEX volume permits. Ted Butler sees only the COMEX positions and thinks there are two large players who manipulate the market by going naked short. This is complete nonsense. What he is seeing is half an arbitrage position. (The other half is OTC and not being disclosed.)

Yes, it is well possible that the gold market is being 'managed' for a political purpose - by the way, it is not being 'suppressed' as you can easily see from the nice and stable rising trend:

But the gold market is way too big to manipulate by going naked short COMEX (or long if you want to make the market rise). This would be outright foolish. If you wanted to 'manage' the gold price, you could try to influence the credit volume in the OTC market, for example, by gold leasing and by trying to control GOFO. Or you could try to influence how the banks hedge their currency positions. But naked short COMEX is ridiculous.

Victor

Bron Sucheckiancientmoney
Dec 4, 2012 - 11:14pm

@ancientmoney

You Americans and your COMEX, like to think the world revolves around it. Yes the PM market would be thrown into turmoil, but sorry mate the over the counter market is much bigger than you think and it will continue. FYI, Perth Mint refines and sells 300 tonnes of gold a year and we have never used COMEX or any futures market. COMEX closure won't mean anything to us. The bullion bank trading desks (which run 24 hours) will adjust to a COMEX closure and the spot market (which trades concurrently with COMEX during US hours) will just take up the slack.

Plenty of traders in the US have Reuters and Bloomberg screens and on those is quoted a over the counter spot price that has nothing to do with COMEX. It will continue to be quoted and indeed all of the bullion dealers in the US will revert to that rather than COMEX to work out what SLV shares are worth.

"the wording of the prospectus allows the custodian to take the silver or gold, and replace it with fiat"

No it does not. The word "allows" means legally they can. You have not provided any wording direct from the prospectus that says that. I give up arguing this point with you and leave it to the readers to make they own call as to whether you have proven this.

"you must therefore make assurances that all will be well, and that our bankers and their institutions are lawful souls"

I have never made those assurances and if you have a look at my personal blog you will see many posts where I discuss SHFT scenarios. Part of my job at the Perth Mint is to make sure our business is robust enough to withstand extreme situations. The inter-relationships in the bullion market are a lot more complex than you think and the potential failure points are many, but your theory of how the market will react is simplistic and uninformed.

ancientmoneyBron Suchecki
Dec 4, 2012 - 10:24pm

@bronsuchecki

You do not seem to understand the gravity of a force majeur in COMEX. The entire PM market would be thrown into turmoil, and because COMEX is the source of PM pricing (London fix takes its cues off COMEX), there would be no recognizable price--at least for quite some time. Paper trading would cease, even though there are other exchanges/mechanisms, because of the resulting confusion. SLV would be in a type of limbo.

Nobody will know what SLV shares are worth at that juncture, and it is entirely possible that the ETFs would be terminated, as people clamor for their investment back. The custodian has physical possession of their contents, and the wording of the prospectus allows the custodian to take the silver or gold, and replace it with fiat. There is no denying this. I know you don't want to believe your lying eyes, but it is plainly so written. Especially when you consider the gyrations it took for JPM to commandeer the silver owned by MFG's clients. The wording was NOT there, but the rulemakers and courts turned everything upside down to make sure JPM had first dibs. Given the wording of these prospectii, do you really think that JPM would not lay claim to the silver, when the SHTF?

I know you are in a position of high responsibility, and you must therefore make assurances that all will be well, and that our bankers and their institutions are lawful souls. I just do not see it that way. The path has been clearly laid, to make it easy for them to do what they are want to do.

Bron Sucheckiancientmoney
Dec 4, 2012 - 9:58pm

@ancientmoney

"rose-colored" & "apologist" - if you bothered to read the link to my blog I supplied you'll see you characterisation does not apply. I think it is funny that you assume just because someone disagrees with you on a point they must disagree with everything you say.

"do not tell me they are liable past anything but payment, for whatever they might do, in fiat."

I never said that. All the ETFs, including Sprott's, have the same wording about custodians being liable for losses at market value (whatever that is at the time). My issue with your first post was that you were implying to the reader that the GLD prospectus had legal wording that legally allowed the custodian to commandeer the metal. It does not.

"Yes, SHTF. Isn't that exactly what a force majeur on COMEX is? That's when I said it is likely the custodians (JPM and HSBC) would close down their respective ETFs and by following the rules of the pros[ectus, take the physical and pay for it with dollars"

Firstly, the custodian don't have any power to close down the ETFs, they are not "their" ETFs. Read the prospectus, it is the Sponsor and Trustee who "run" the ETF.

Secondly, you point about SHTF and stealing of metal are not specific to GLD and its prospectus - that argument also applies to Royal Canadian Mint whom I assume you would think would also in the scenario you are painting steal Sprott's gold and silver. You original post was about GLD specifically and its suspect prospectus. The argument you are making now is a generic SHFT one that applies to any ETF - you are backtracking.

"Believe me, if CME declares force majeur in silver (standing longs get paid in cash), then COMEX silver trading will be halted. This will be the end of paper silver trading, including SLV."

Nope. COMEX is not the entire gold or silver market and the worldwide spot over-the-counter market is much larger than COMEX. Also, the ETFs settle and acquire their physical in London, not New York. The ETFs will continue to trade based off the spot market. Yes liquidity in the spot market will be affected by a COMEX closure, but it will continue on.

"At that point, SLV must be wound down."

The ETFs do not have to be wound down if COMEX closes as I note above. Even if the spot market stopped trading, that doesn't mean the ETFs have to be wound down. They can continue to trade, it will just be that the Authorized Participants won't be able to make a market in the shares, but the shares will trade very much like a closed-end fund and will start to show premiums and discounts. Sprott's Trusts are closed-end funds without any creation/redemption mechanism and thus no direct link to the spot or COMEX markets but they still trade OK.

"It is all legal. It is written so in the prospectus. Don't need to complicate the matter. JPM will end up with whatever silver is left in SLV when the tent is folded."

There you go again with the reference to the prospectus. From page 5 (which does not list COMEX closure as a termination event):

"Upon the termination of the Trust, the Trustee will, within a reasonable time after the termination of the Trust, sell the Trust’s gold bars and, after paying or making provision for the Trust’s liabilities, distribute the proceeds to the Shareholders."

Trustee sells the gold, doesn't say the custodian gets it.

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Dec 4, 2012 - 7:11pm

This thread...

This is one of the best, if not the best thread I've ever seen here. I hope people are appreciative of the brain power operating on TFMR. Even with the people with whom I may disagree I have to stand in awe. Thanks, Turd, for making this happen.

Roark
Dec 4, 2012 - 6:26pm

@Prius Driver

Yup. But you know what? I make Ann Barnhardt look sane when it comes to guns. :) and from what I hear he wont be calling for quite a few years. Seems like the State of Calif also has an interest n the lad. LMAO!

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