"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat

Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput


Thursday, April 18, 2013

CME to Launch New Mini Silver Contract in June

The CME Group announced today that they will be launching a new 1,000 ounce silver contract in June of this year. The September 2013 contract will be the launch contract.

As some of you may know, a full sized silver contract at the CME is 5,000 ounces.

The CME appears to be after some more smaller spec business. The interesting thing about this contract is that is will be fully fungible. That is a big deal if you ask me. If you accumulate FIVE of these smaller contracts, you can exchange them for one full sized contract.

I am going to be extremely interested to see how the volume and interest does in this contract. It might be a way that some of those who are interested in playing the silver paper game can get involved. Oftentimes, the extent of the price swings in silver and the relatively high margin rates can put the benchmark contract out of the reach of many smaller players.

I have not had time yet to see if a single contract will be able to be held into delivery. My guess is that it will require FIVE as I am unsure whether there are any 1,000 ounce bars at the warehouses that could be used to satisfy the delivery requirements any way.

Keep in mind, this is for trader primarily, not those who are only interested in the actual metal. One neat thing about this new size is that it might enable some smaller holders of the metal to hedge their holdings if they are expecting a period of price weakness....

Random Thoughts

Reports coming in from nearly all corners of the planet, but especially from Asia, continue to reveal massive buying of physical gold. Last evening, what was obviously a huge bear raid that occurred during the early Asian session, was repulsed by very large buying above the recent low.

That is very interesting and has my attention. In a sense, we seemed to have gotten our second test of the low, a test in which that low held once again. With the wild price swings being made in this market, it is hard to be too dogmatic, but the way this market is acting, based on the news of strong physical offtake down near the $1350 level, I am greatly tempted to say that a low is in.

Here is what I am currently seeing here. We certainly have the strong demand for physical - the big question I have is whether or not this is sufficient to take the market higher WITHOUT the strong investment demand from the hedge fund crowd that we have seen for so many years. Remember, that crowd is selling right now in the paper markets.

What spooked a lot of the gold analysts were those speculative outflows from the gold ETF, GLD. There was also large scale buying of put options there as well. As a side note, I asked then and continue to ask now, who has been buying all that gold that was being sold out of the GLD?

So once again we are back to witnessing the same battle that we have seen for over a decade now - the clash between the physical gold market buyers and the selling of the paper markets by the hedge funds.

How this might translate to price action is a market that stops moving lower but also one in which it cannot scoot higher either. There is an uneasy truce between bull and bear. Bears cannot break it down any further based on the amount of physical offtake but bulls need more recruits to their side from the hedge funds to have any upside fireworks occur. Thus we move in a broad range between the recent bottom and $1400 on the top.

Obviously, for gold to now recapture any bullish excitement, the handle of "13"needs to be replaced by the handle of "14" at a bare minimum. If that occurs, we will see some short covering begin among those who have sold down below $1350. They are counting on fresh selling into rallies to support their side of the argument and if they suspect that their allies might be wavering, fear of larger losses will send some of the packing.

It will all eventually come down to CONFIDENCE. When enough people around the globe, begin to lose confidence in their own currencies (and bond markets) and the policy of their respective Central Banks, the gig will be up. The large physical buying of gold is evidence enough that a growing number of people are increasingly concerned about the health of their domestic currencies.

When will the paper markets begin to reflect that again? The answer is unclear; but I am convinced it will happen. Keep in mind that the current monetary system as we know it, and I am talking about Bretton Woods, is not even a century old. As flawed as that was, at least there was some place for gold in that system. Since 1971 however, the entire system has been supported by nothing other than CONFIDENCE.

In effect, we are a little over a generation (40 Years) in an EXPERIMENT by Central Banks with a monetary system held together by nothing but sentiment! Think about that for a moment and let it sink in. This is why I believe these monetary masters are pulling out all the stops to somehow keep the public from any sort of nervousness, concern or panic. Yet, in spite of all that, we keep getting hot spots that continue to flare up.

This brings me back to the paper markets -

 In the SHORT term the paper market can be used to push prices all over the place, sometimes disconnected from reality, because of the vast sums of money that are involved due to the proliferation of hedge funds who borrow gazillions of the stuff for next to nothing and then stuff it into various markets around the globe.

This gargantuan sum of hot money, every bit of which has been given to us by the Federal Reserve and the Bank of Japan, is a rolling juggernaut that crushes whatever is on the other side of it. Whether it is exiting a market or entering a market, its appearance produces all manner of price distortions, both on the way up and on the way down.

Eventually, the fundamentals reassert themselves however. They have to or the paper market ceases to be of any value in the real world whatsoever. Remember, there are thousands of commercial entities that must rely on that paper market to hedge both long and short positions as part of their overall risk management programs. Wild swings in price, disconnected from reality, destroy hedges put in place by commercial entities because MARGIN requirements, though lower for bona fide hedgers, still must be met EVERY SINGLE DAY at the settlement process.

A hedge position can thus be blown to pieces by this sloshing wave of speculator  activity requiring large margin calls and causing financial duress for a commercial hedger. This defeats the very purpose for which they employ the futures markets in the first place, THE MITIGATION OF RISK. The last thing any entity engaged in the use, production, selling, purchasing, etc., of any commodity wants is to stay up nights losing sleep over fears of an obliterated hedge position.

If the paper markets become so volatile and so disorderly, eventually these commercials will begin to look for other mechanisms to offset risk other than the futures markets.  This will reduce the size and scope of the commercial participants in these markets leaving them more and more to the speculators. The problem with that is that this crowd, thanks to the algorithms, tends to move to the same side of the market, meaning that there will be fewer and fewer large traders to take the other side of their trades. Can you even remotely imagine what that will do to market volatility and to the eye-popping, stomach wrenching price swings??? It will for all practical purposes, render many of these markets untradeable.

I will go on record here and now stating the NUMBER ONE SOURCE OF MARKET INSTABILITY is the zero interest rate policies of the Western Central Banks, (and the Bank of Japan). It is these institutions which have created this gigantic pool of hot money and who continue to increase it month after month all the while producing a near zero interest rate environment in which it is impossible to obtain a decent rate of return on investment capital for most people. This tsunami of hot money crashing ashore and then receding back only to crash ashore again and recede back out again, repeat ad nauseaum, ad infinitum, is what has given rise to the insanity that we now daily witness in the paper markets.

Rather than having a calming or stabilizing influence on the markets, the “masterminds” behind it have re-defined the world volatility. This wall of money is so fickle, so unwed to any deep-seated conviction, that it is a beast, a truly out-of-control behemoth that can easily devour the entire financial global system.
Just watch the extent of the price moves in various markets and tell me that this is "normal" behavior. Those of us who have been doing this for a long time can tell you that we can recall periods of extreme volatility but those periods were more or less exceptions from the norm. They tended to be of rather short duration and burned out quickly. What we have nowadays is apparently now the NORM and periods of relative quiet are the exception!
The Central Banks, in an attempt to prop up their rotten Dagon, are fighting furiously again the results of excessive debt by vainly trying to encourage more of it! They are attempting to counter the forces of deflation by employing what they can to foster the forces of inflation. This is the war that is raging in the financial markets and is why this volatility will be with us until one side or the other vanquishes its opponent.

Thank you Mr. Central Banker. Job well done. Keep telling yourselves how successfully your policies are working.