The Evil Empire seems to be rather unhappy with the results of a manipulative counter-attack it mounted against silver vigilante rebels who are driving up the price of silver. Last Monday and Tuesday we observed a classic downward silver price management episode. It came complete with a big hike in maintenance margin requirements, sudden dumping of huge numbers of transient short contracts into the market, the triggering involuntary margin calls, the closing of those same ultra-transient short contracts into the margin calls, and a vast reduction in the price of silver that abruptly reversed as soon as the Empire's shock troops withdrew from the battlefield.
A question and answer appearance of one of their own Field Marshals, Fed Chairman Benjamin Bernanke, managed to inadvertently cause their "deathstar" to blow up in their faces. The Evil Emperor, whomever he may be, was sure to be very unhappy. The manipulation just didn't work nearly as well as it would have a few months ago. Now, the Empire appears poised to attack the rebellion again, only few days after its last attack turned out to be a terrible failure. At the close of business on April 29, 2011, the COMEX performance bond committee raised the performance bond for silver, yet again, this time by a huge $1,250 per contract. The same metric had already been increased by $700 on Monday afternoon, but-- as noted above-- that first increase wasn't sufficient to allow the dark side to prevail.
We don't like short-term investing, but we do know that this second performance bond increase also will be an abysmal failure when looked at long term. Well capitalized long term buyers do not become run when the object of their desire becomes cheaper. When a wise investor is buying, he welcomes declines in value. This is because while he is in buying mode, a lower price allows him to buy more of what he wants.
Many people think the COMEX performance bond committee is worried about a COMEX based silver default. We don't think so. If the performance bond committee was worried about that, it knows that raising the performance bond wouldn't help. Buyers who take delivery must deposit 100% of their contract price. A performance bond increase, just a few days prior to a delivery period, would not discourage delivery-oriented investors one bit. Raising performance bonds almost always does temporarily reduce the spot price of whatever commodity is the object of the action, including silver.
According to CME, Inc., the company that owns COMEX, “in the event of a default, as of June 30, 2010, it can draw on all or a portion of the following resources to satisfy the outstanding obligation:
Aggregate Performance Bond Deposits
|Aggregate Performance Bond Deposits||$88||876||000||000|
|Market Value of CME Pledged Shares/Trading Rights||$378||912||000|
|Security Deposit Requirement||$2,845||000||000|
One hundred billion dollars? Most of it can't be legally used and/or it would be highly unethical to use. For example, using the proceeds of performance bonds placed in the wheat market to bail out defaulting silver short sellers would be extremely unethical. In my opinion, CME Group, Inc. actually has about $11 billion to fall back on in the event of a default. But the issue is irrelevant. The nexus of the silver vigilante movement is London's so-called OTC market, and not on the regulated futures exchanges in New York. Delivery demand at the regulated exchanges has been relatively small. There is no reason to believe that May will be any different.
The best efforts of silver price manipulators at futures exchanges are fruitless acts of desperation. By artificially reducing the COMEX price, manipulators will help silver vigilantes obtain larger quantities of deliverable physical silver, using the same money. That means the lower prices will not stick. The silver rebellion seems rather well planned, in that the rebels are attacking the Empire off the regulated exchanges, and without the use of leverage, unlike the Hunt Brothers back in 1980.
Outside the exchanges, manipulators cannot enlist allies to help change rules as it suits them, as they did in 1980. The silver vigilantes do not appear to be leveraged at all, and are immune from any of the shenanigans that may take place at the regulated futures exchanges. The traditional tools of precious metals market manipulation requires over-leveraged long buyers to work effectively.
Precious metals price managers are probably ready to deal with “pie-in-the-sky” speculators. The vigilantes cannot simply be chased out. The new opposition is aware of the traditional methods, and have the resources to keep buying, no matter what the manipulators do. Even if the silver manipulators engineered the collapse of stock, bond and commodities markets-- which would require cooperation from other entities not involved in precious metals manipulation-- it wouldn't help them. We are relatively certain that the rebels are already aware of-- and have taken steps to prevent -- any losses from the end of quantitative easing, for example.
COMEX committees could raise performance bonds to 100% of the contract price, declare “liquidation only”, delist the silver contract from the exchange, or take whatever other steps they want to take. None will help extract the manipulators from their predicament. The main effect of such actions would be to catapult the price of silver and other precious metals further upward in the long run. It will be interesting to watch how the America's Orwellian style “Ministry of Truth” spins this one.
The manipulators are powerless to stop this juggernaut. They will lose huge sums of money-- the end result is set in stone. They have already lost. That they continue fight, in spite of the inevitability of their loss, indicates a stubborn bull-headed character that is not accepting the reality of the current situation. Or, perhaps, it is a strong conviction that, in the end, counterfeited money will be handed to them by the Federal Reserve to bail them out. But, whatever is motivating them, they can accomplish exactly nothing by mounting these continued price attacks.
Smart people know when to exit losing propositions. Sometimes, the smart thing to do is to turn and run as fast as one's legs will move. There was wisdom in the Far East on Monday morning, that was absent when Europe and America woke up. The Asian short sellers appeared to be closing positions en masse, as quickly as humanly possible, at whatever price had to be paid to get rid of them. That was a smart thing to do. It is what the manipulators in America and Europe cannot bring themselves to do. They have had it their own way for so many years that they still do not understand that the tables have been turned.
European and American price manipulators gathered together their best storm troops, in the form of "Imperial" trading bots, and the Empire launched a massive counter-attack agaist the rebels on Monday and Tuesday morning. It didn't work. After the post-FOMC chat by Ben Bernanke, the price of precious metals, and especially of silver exploded back upward, yet again. We expect another massive price attack in the next few days.
The Empire may have dabbled for decades with the Dark Side, and it was able to sustain its manipulations in darkness. It stands no chance against a courageous rebellion that has harnessed the full power of the Light. This war which is now raging gives traders who don't mind high-risk short term gambles (and potentially huge gains or losses), huge opportunities to earn profits. Our prior articles, “Will Silver Prices Explode – Again” (Feb. 7, 2011), “Capitalizing on the Rise in Silver Prices” (Feb. 27, 2011), and “Trading The Big Dips In Silver” (March 7, 2011), are just as valid today as they were when the first one was published 2 months ago, at a time when silver was selling for only $27 per ounce.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Long precious metals.