Gold and Silver: Backwardation and Manipulation

In this article we will take a look at some alternate but constructive views of Fekete's recent articles on gold backwardation, covered in earlier articles in this series. I want to note it appears to be a perfect storm shaping up, although it not yet outside the grasp of short-term government manipulation, especially if there is the hint of a panic, or "gold fever" developing. The price of gold and silver are both up over the past week as both metals are in (temporary for now) backwardation, but the price does not have a high degree of relevance. All eyes are on the gold basis will probably drive the price which you can learn about by reading the below mini-series.

Part I: "The End for the Dollar and all Fiat Currencies (1/5)"Part II: "The Next Bubble to Pop! (2/4)"Part III: "On Gold and Market Manipulation (3/5)"Part IV: "The Significance of Gold Backwardation Explained (4/5)"Supplement to explain futures market basics and backwardation: "The Money Matrix - What the Heck Are Derivatives? (PART 10/15)"

Now some news. Three-month Treasuries slipped negative for the first time ever on December 9 per Bloomberg. The UBS banker "analyst" cheerleading the masses towards buying Treasuries sounds like he is smoking crack. "Everyone wants to be in bills going into year-end. Buy now while the opportunity is still there." Let's see, no interest and I will actually lose money by buying? No thanks! Even gold's naysayers realize holding paper cash is smarter.

A wild rumor of the IMF* dumping 3,000 metric tons of gold around December 10 was unleashed at the gold world on December 8. This is probably just a hoax similar to many prior IMF scares, though the size of it is shocking; the last hoax** was 400 tons, but the IMF only claims to have 3,217 total tons. However:

1. The IMF (for all intents and purposes a US puppet) does not have the required Congressional permission to sell (although the recently discovered bailout principle spells out this could happen quickly),
2. The IMF probably does not have that much gold, or perhaps any gold per the research and correspondence with the stalwart yet "fringe" GATA (Gold Anti-Trust Action Committee),
3. The IMF itself has criticized its own fallacious accounting practices, and
4. There is a huge difference between the IMF selling on the open market, or completing an international transaction with China, which would be dollar-bearish and gold-bullish, respectively. [FYI, China is ALWAYS rumored to be searching for... you guessed it! 3,000 tons of gold! See this 2005 article from the nation's mouthpiece, the People's Daily and this November 2008 article from HK's The Standard.]

*[Under the IMF's Articles of Agreement Schedule C, item 1 (p49/85), linking of a member's currency (its "par value" or face value) to gold is prohibited. This means that the IMF is in direct violation of the Constitution of the United States of America (which actually also forbids the existence of the doomed Federal Reserve Note) by stating in Article 1, Section 10 that our country can not "make any Thing but gold and silver Coin a Tender in Payment of Debts." Today's Keynesian economists and investors should read these documents. The IMF Articles of Agreement is a relic of a bygone age (1970s) plagued by its refusal to acknowledge gold as money. For instance, note iron reporting rules required of members in Section 5(a), p19-20, are morbidly focused on monitoring and controlling gold. (Why? Gold is Money.) The Constitution is a shining if neglected example of how the government's role in a free market economy (last seen in the early 1900s) is confined to an honest monetary system and setting up anti-fraud laws.]

**[An example of a hoax and blatant attempt "The International Monetary Fund will probably sell 5-10 million ounces of gold to fund a program of debt relief, but will not disrupt the markets with its sales." ex-Goldman Sachs, ex-Citigroup, ex-Secretary of Treasury, now close Obama advisor Robert E. Rubin, on March 17, 1999. No gold was sold, although the market price of gold sure suffered! Rubin is Director and Senior Counselor of Citigroup (C), where he was the "architect" of Citigroup's strategy of taking on more risk in debt markets, which by the end of 2008 led the firm to the brink of collapse and an eventual government rescue. From November to December 2007, he served temporarily as Chairman of Citigroup. From 1999 to present, he earned $115 million in pay at Citigroup. Obama: "Change" We Can Believe In.]

(Sources for the above: IMF Articles of Agreement (1978) and Gold Wars by ex-Rothschild Swiss banker Ferdinand Lips (2001), pages 135 and 178.)

Ex-Chase Manhattan banker and owner of goldmoney.com, James Turk issued a helpful letter, stating what the Reader should already realize from this series. "Backwardations are no big deal in most commodities, but they are indeed a very big deal for gold."

Turk uses the London Bullion Market Association's Gold Offered Forward (GOFO) rates here to determine technical backwardation, while Fekete was looking at intraday trading sessions. My thoughts are that it's ok to disagree, but geez guys, the overall message is the same. Analyst Rob Kirby understands this as well and issued an article "Backwardation: Facts from Fiction" that may be useful to the Reader.

[For the Reader, NYMEX Gold Session Futures chart, Silver Session Futures chart. Gold spot price chart. Silver spot price chart. When the spot price is greater than the futures price, backwardation exists.]

Trader Dan Norcini of jsmineset.com also reviewed Fekete's note and issued a statement and charts here on December 5. Again gold is unlike wheat or copper, it has a fixed supply of bars mined from the earth for the past 6,000 years plus new supply from the mines at 1-2% of the total and are just traded back-and-forth on the COMEX. People do not save wheat; they eat it. People do not save copper; they use it for electrical conduits and other industrial uses. People DO save gold. Norcini explains why for gold backwardation is unusual:

If spot gold is trading at $750 and the futures market is trading at $745, that is a $5.00 per ounce risk free profit just sitting there waiting for a type of arbitrage. One could immediately sell his physical gold at the $750 price and immediately buy it at $745 in the futures market with the intent of taking delivery to meet his contractual obligations and pocket $5.00 ounce for however many ounces one wished. Buy 5 million ounces of gold at $745 and sell that same amount of gold for $750 and you have gotten yourself a cool $25 million profit less the delivery expenses, etc. Not bad. That is why such a thing does not occur very often nor does it last for long. Too many would jump on the chance for a no-risk trade of such nature. Why then are they not doing so? Antal has answered that question they are not willing to part with their gold for paper profits! That is what makes this development so noteworthy.

If you prefer talking heads, here is a Business News Network video where the analyst concluded that the reason behind the "desire of protection of wealth." [Note: This YouTube user "GoldtotheMoon" has an incredible amount of goldbug videos, many helpful.]

Now for more on the alleged market manipulation of both gold and silver. For gold, the authority is the Gold Anti-Trust Action Committee (GATA). You can visit their site here. On silver, use the silverseek.com link below; the chief source I follow is Theodore Butler. Although I take exception to details (so picky!), I have bought into both overall theories since August, which was when global physical coin markets starting going haywire. No other explanation made any sense then or now. Since then, of course, the cover on government intervention in the economy has blown off for all to see, to put it mildly. As I wrote in "A Money Matrix Addendum: Citigroup and GATA Call for an End to the Suppression of the Gold Market":

Fiat currency is a scheme perpetrated by central banks and the tacit (or is it helpless?) permission from their governments. Fiat currency is almost completely worthless and has no intrinsic value. Ultimately electronic and paper fiat money will be worthless. All of the world's fiat money is actually a form of debt, and it results in never-ending currency debasement, of which one way is expanding the money supply, aka "printing more money," aka inflation. To make their scheme work, they intervene in the precious metal markets to manipulate the prices of silver and especially gold. By keeping the prices of real honest money suppressed, they try to make their fiat currency look stronger.

I want to highlight an enlightening article that supports the above theory from Gene Arensberg of www.resourceinvestor.com. In his article "'On the Fly' Gold and Silver COT Information" on December 10, Arensberg has done a masterful job of demonstrating the control of the gold and silver markets. [COT stands for "Commitments of Traders" which report open interest and trading positions for the futures and options markets in the US. The reports are issued by the US Commodity Futures Trading Commission (CFTC), a government agency. The CFTC's mission is "to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and option markets." As you will shortly see, they are doing a horrible job, similar to the SEC missing the Madoff collapse. Here is why the CFTC motto is: "NOTHING TO SEE HERE! Please disperse!"

On gold, Gene Arensberg writes:

As of December 2, as gold closed at $783.39, the CFTC reported that 3 U.S. banks had a net short positioning for gold on the COMEX, division of NYMEX, of 63,818 contracts. The CFTC also reported that as of the same date all traders classed by the CFTC as commercial held a collective net short positioning of 95,288 contracts. That means that justthree U.S. banks accounted for 66.97% of all the commercial net short positioning on the COMEX for gold futures. Here's what the three U.S. banks' positioning looks like on a graph: (chart courtesy Arensberg)

Arensberg then concludes with the revelation that the current short position totals over twice the contents of the COMEX warehouses. Do they really have this gold and why is the "market" concentrated in the hands of so few banks? [Here we learned short positions are the "deliverers" or sellers of gold, while the longs are the "receivers" or buyers.] My comment is to look at the dip into the "long" side by these banks in roughly June 2008. See how the price fell? Nothing to see here! Disperse, disperse!

Let's look at silver: Arensberg continues:

For silver, it's even more startling. On December 2, as silver closed at $9.57, exactly 2 U.S. banks held a net short positioning of 24,555 contracts. The CFTC reports that as of the same date all traders classed as commercial held a net short positioning of 24,894 contracts. So, the 2 U.S. banks, with one particular Fed member bank probably holding almost all of it, held a sickening 98.64% of all the collective commercial net short positioning on the COMEX, division of NYMEX in New York. (chart courtesy Arensberg)

Arensberg comments that these two banks' (cough JP Morgan Chase cough those-damn-corporate-raiders-from-the-Great-Depression cough cough) "net short positioning is equal to about 153% of the amount of deliverable silver in ALL the COMEX members' accounts." Sure looks like total control to me! The above is a big reason why the gold and silver markets are so tight now. Who in the right mind would enter the market to play with these giants? Again, where is their silver? So the silvers futures market is not a real "market." More like a banker's paradise!

Arensberg also has a section on the coin market in terms of the premium paid. Historically speaking, the premiums have been within a few percentage points of the spot value. Not anymore, gold is about 6%, and the silver premium is pretty amazing, roughly 50% over spot! Try using the law of supply and demand to explain that!

Let me finish with a respectable opinion to the contrary from Mish Shedlock's blog. Try "No Fever Like Gold Fever: Response", "Nonsense About Gold Backwardation, Ameros,Yuan Devaluations, etc.", "Double Standard in Gold Hedging?". I already laced into these articles in the comments field in Part 4, but decide for yourself. Feel free to leave any comments or questions below.

[Update 12/14 - Fekete just posted another update entitled "Backwardation that Shook the World."]

Comments

[James W:]

I think your misreading Article 1 § 10 of the constitution.

The requirement for gold and silver coinage would seem to be placed upon the states not the federal government, along with prohibitions listed.


“No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.”
from fabric

2008 Dec 15 08:38 AM

[ManAboutDallas:]

Throughout all of History, every paper document describing the framework of a form of government has ended up on the ash-heap of expediency. The Constitution lays now in un-recognisable tatters, and was lucky to have lasted as long as it did.

2008 Dec 15 09:35 AM

[sandspider:]

A very fine article over all. Lots of information and explanations regarding the variances in the market. I enjoyed the read. Thank you.

2008 Dec 15 09:40 AM

[BillCu:]

Your partial quote of the U.S. Constitution left out the critical beginning of
Article 1, Section 10:

"No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."

The federal government is not restricted to gold and silver.

BillCu

2008 Dec 15 10:01 AM

[BillCu:]

Sorry, James W, I didn't see your post before I posted, but we both independently spotted the same thing.

BillCu

2008 Dec 15 10:03 AM

[GMiki1:]

Good piece. Also see all of Ted Butler's continuing, interesting commentaries on silver manipulation. The James Turk article is of interest for sure. It's going to be an interesting week. But aren't they all?

2008 Dec 15 10:27 AM

[goldis4ever:]

"The federal government is not restricted to gold and silver. "

Where do you see that?


On Dec 15 10:01 AM BillCu wrote:

> Your partial quote of the U.S. Constitution left out the critical
> beginning of
> Article 1, Section 10:
>
> "No State shall enter into any Treaty, Alliance, or Confederation;
> grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit;
> make any Thing but gold and silver Coin a Tender in Payment of Debts;
> pass any Bill of Attainder, ex post facto Law, or Law impairing the
> Obligation of Contracts, or grant any Title of Nobility."
>
> The federal government is not restricted to gold and silver.
>
> BillCu
>

2008 Dec 15 01:50 PM

[mv1001:]

James W:

Article 1, section 10 requires the states to allow only gold and silver coin as legal tender.

Article 1, section 8 grants to Congress the power to define money:
"The Congress shall have the power - To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures"

Congress has the sole power to define money, and the states can only accept gold and silver coin as legal tender. And, it is specifically prohibited that the states "emit bills of credit" (paper money) to be used as legal tender.

Taken together, it is clear that only gold and silver coin may be used as money in the united States, and that Congress has the sole power to define the weight and measure of the gold and silver coins. In other words, no paper money, and the States may not individually create their own coinage.

It wouldn't make sense if Congress could create paper money, with the States not allowed its use it as legal tender.

Why the States? Because, the US was conceived as a union of sovereign states, and State law (not Federal law) was where contract law was to be defined. (Contracts being the essence of economic transactions.) Up till the adoption of the Constitution, the individual Colonies (and later, States) did indeed "emit bills of credit", which, like all paper money, suffered devaluation as more was printed. The authors of the Constitution wanted to avoid the problems of hyperinflation (google "not worth a Continental") and also wanted to have a uniform currency across the union.

There's nothing in the Constitution that lets Congress transfer its power to "coin money" to a private bank, and charge interest on the money so created. But, that's the situation we're in today. And, the Constitution is written so that powers not specifically granted to Congress are not retained by Congress, that is, the Constitution says what Congress may do, and if a power is not specifically allowed, it is by default prohibited. So, the fact that Congress was not granted the power to transfer its money-making power to another entity, means that it cannot, unless of course the Constitution is amended to allow such transfer of this power.

Yet, Congress went ahead and created the Federal Reserve anyway, and Wilson signed it into law.

2008 Dec 15 02:00 PM

[Smarty_Pants:]

"the CFTC reported that 3 U.S. banks had a net short positioning for gold on the COMEX, division of NYMEX, of 63,818 contracts."

WOW! That's over half a billion equivalent in margin. I didn't realize that a handful of big banks routinely constituted 20% to 30% of short interest nor the fact that they had gotten as high as 66% recently.

Looks like the December deliveries will lead to a real showdown in February as the deliveries there might empty the Comex warehouses of gold.

The question is, who blinks first? Seems to me that the big banks can't win this one. Either they give up capping the price of gold, or default on deliveries and destroy the credibility of the Comex gold market.

Outstanding article and collection of links. Lots to study and think about.

Thanks!

2008 Dec 15 04:06 PM

[Jake Towne:]

All -
I wanted to post some feedback from "Zorro" that I received at my webpage. Was wondering if any trader had a comment

Z: "As much as I hate to say this, Fakete is as uneducated about the futures market as Ted Butler.

The COMEX gold contract did not go into backwardation.....not for one second.
Backwardation is a lower price in each succeeding month not just for the next month out or for even just a few months out....all forward months must be lower to get backwardation.
This nonsense about gold deliveries is crap too. These guys keep harping on the COMEX delivery reports as if these were demands for delivery, they are not..... they are notices sent out to contract holders. The most recent list of notices shows there were only 255 notices of delivery sent out yesterday.
None of the 12,419 in cumulative notices have taken delivery and of all those notices, only 255 owners of long contracts remain in the December contract.
These guys need to get this right in their heads before they go blasting this trash all over the internet.
Cumulative notices (which are the numbers these guys are using to say has been demanded for delivery) are the amount of notices that have been sent out to traders over time. It is not how many contracts that are active and able to take (or have taken delivery) over time.
There are 255 owners of 486 active long contracts that can take delivery of December gold as of yesterday.....not over 11,000. "

Z: "I doubt it. If [Fekete] had, he would know what backwardation is. It certainly is not the occurance of lower pricing in a single forward month for a few hours in a day. If the same pricing were to make it to settlement (which it did not on the one date linked to) it would still be a far cry from backwardation. Backwardation is a lower price (not basis) in each succeeding month. Not one, two, or three.....but each succeeding month."

Me: I think non-trader brain understands your point, so you are defining backwardation not just as futures price > spot price for ANY given month, you mean that the December price needs to be > Jan price, Jan price > Feb price, Feb price > Mar price, etc. all the way through? I think I get it.

Perhaps you are right and this, shall we say, "backwardation" is merely just some temporary tightness in the overall market and not the imminent, dire end of fiat that Fekete predicts. Perhaps you and Fekete are both right.

2008 Dec 15 05:58 PM

[mark mchugh:]

Really good stuff Jake,

I can't dismiss what Jake Champion says either. Does anyone know where these notices of delivery are reported?

And another thing: Does anyone else find the COT a cryptogram?

Here's what I think is the thing right now: Hank and Ben are not going to allow gold to spoil their "deflation" party. I just don't think this is gold's moment. Patience.

2008 Dec 15 11:39 PM

[Jake Towne:]

Dear mark mchugh -
Jake Champion is me, the author.

Dear sandspider -
Thanks a lot for your comment, feel free to visit my website. Peace!


On Dec 15 09:40 AM sandspider wrote:

> A very fine article over all. Lots of information and explanations
> regarding the variances in the market. I enjoyed the read. Thank
> you.

2008 Dec 16 10:02 AM

[Conan the B...:]

Too bad I missed this article, I could have used it a few months ago.

What really amazes me is the adept way readers Read a given article but manage to come up with diametrically opposed interpretations.

So far so good.

Apr 08 01:30 AM