James Conrad

Why Zombie Banks Won't Be Nationalized

The truth is a bit more complicated than this article suggests, but the author has come very close. Good insight.

The Manipulation of Gold Prices

Sharefin is so filled with zealous determination to attack this article, that he is capitalizing on a mistake I made in verbiage for the first paragraph.

First, when I say that the gold and silver shorting behavior is abnormal to commodity markets, I am talking about commercial short positions. The vast majority of speculators are always long on gold and silver. They are generally the victims, not the perpetrators. The so-called "commercials" are the short sellers, and they are heavily represented by the big bullion banks.
There is no other commodity, other than gold and silver, in which commercial short sellers create huge numbers of highly transient short positions in the middle of bull markets, ignore the fact that the market keeps rising, and keep adding to their short positions until the market comes crashing down. This has continued to happen in the midst of vastly increasing world demand for gold and silver. Take oil, as an alternative example. When demand was high, commmodity speculation was running rampant, and prices were exploding. Then, with demand destruction, prices crashed. In the gold market, we know that demand is soaring, but prices on the futures markets have, nonetheless crashed. This is abnormal price behavior. If this were only happening now, I would attribute it to the recent credit default event selling, but it is not unique to now. It has been happening, over and over again, for at least the last 21 years.

Here's an example of how the gold market is played. In the beginning of last week, with the prospect of an avalanche of delivery demands, records indicate that commercial shorts added about 5,000 transient short positions. This crashed gold to the $700 range. In "olden times", when the non-leveraged longs did not exist, this would have prevented most deliveries from happening, as the longs panicked and sold their positions back to the short sellers, being unwilling to take more loans in order to take possession of a declining metal. This time, however, when the short sellers finally realized that they were dealing with a different "animal" and that non-leveraged longs would be filing their delivery demands no matter what, the increase in open interest abruptly closed, and a mini-panic began, sending gold prices up by over $100 per ounce, in a matter of only 3 days.

This type of shorting behavior is not unique to last week. In July, just before the U.S. government initiated what I believe is its new policy of paying interest to foreign money center banks who agree to sequester eurodollars, 3 major gold shorting banks suddenly increased their short positions by close to 10 times what they were, just one month prior to that. It is now rather obvious that these banks had inside information from the U.S. Treasury or Federal Reserve. They knew what was going to be done to the dollar. No one without inside informatino would have increased their short positions by 10x, in a fast rising futures market, in the midst of exploding world demand, and at a time when no one else guessed that the dollar was going to rally. We can only guess the identity of these banks because, unlike futures markets in nations like Japan, U.S. futures regulator, CFTC, refuses transparency and will not agree to release the bank names.

Finally, some of you have commented that one should not buy gold futures, because you are afraid of counter-party risk. I do not agree. COMEX futures contracts are backstopped by the entire membership of the exchange, and it is doubtful that the U.S. government would allow the exchange to go bankrupt, even if it meant releasing a small portion of Fort Knox gold to save them from uncovered delivery demands. The same is even more true of NYSE-Liffe, which has the entire wealth of the New York Stock Exchange membership backing it up. So, I think you will get your gold or silver, if you pay in full for your contracts, and take delivery.

It is important to start buying gold and silver on futures exchanges for two reasons. First, it is the cheapest place to buy both metals. You can avoid all the hefty dealer markups if you buy futures and take delivery. Second, in order to end the manipulation more quickly, the short selling crew needs to be put out of business. They have accomplished what they have, over the last 21 years, by taking advantage of leveraged long desperation. If you are not leveraged, and have sufficient liquidity to really buy your contracts, you will be immune to their shenanigans. You can simply take delivery, put the gold into your safe deposit box or other safe place, and no matter how they manipulate the price in the short run of a few months to a year, the price will rise exponentially in the longer run. This is a mathematical certainty because of fundamentally flawed dollar dynamics, and a continuing worsening of the differential between world supply and demand for both metals.

Now that the European central banks are refusing to sell gold, the supply has dried up, which is probably why some of more honest portions of various investment banks are forcing COMEX to make deliveries. If people continue to force the short sellers to make deliveries, the game will be over, because naked gold shorts no longer have easy access to real metal. Last week's delivery demand avalanche was coupled with the exit of many leveraged longs. Furthermore, it follows on hefty demands for delivery in late September. Another episode, hopefully even bigger, in the February delivery month, will, in all likelihood, sink the gold manipulators, and catapult gold into the stratosphere.

Let me give you some facts about how to do this. First of all, you need to open a futures account. There are hundreds of brokers, but not all alleged futures brokers are really full fledged futures brokers. Many will refuse to facilitate delivery. For example, Interactive Brokers, OptionsXpress, ThinkorSwim, and many others only claim to handle futures. Such brokers refuse to deliver. RJ O'Brien, MF Global, E-futures, and many others on the other hand, DO facilitate delivery. Make sure you open your account at a brokerage houses that accommodates delivery, and doesn't just push you into the casino-like speculation game. Remember that in casinos, in the long run, only the house wins.

DO NOT BUY COMEX miNY contracts. They ARE NOT SUBJECT TO DELIVERY DEMANDS! MiNY COMEX contracts are cash settled. If you don't have enough money to buy a full contract, buy the NYSE-Liffe mini-Gold and mini-Silver contracts. With NYSE-Lifee, you can take delivery of 32.6 ounces of gold, and 1000 ounces of silver. However, if you do have the cash, the standard 100 ounces gold and 5,000 ounces of silver are usually cheaper per ounce, and you can buy them either on COMEX or NYSE-Liffe. ALL 100 ounce and 5,000 ounce contracts are subject to delivery demands.

Taking delivery and paying for temporary storage on gold, will set you back $25 plus about $12 per month storage for each bar at one of the COMEX warehouses. There will also be a charge from your brokerage house. Yes, I know, you won't leave your bars at the exchange, but, you will need to pay for a few days storage, before you pick them up, or have them delivered by Brinks, so they will hit you for the whole month minimum charge on each bar.

Brinks, and a number of other gold delivery agents can take the bars and deliver them to you anywhere in the USA, or even overseas, at a relatively low cost, compared to the value of the gold. You can contact them for more information, or ask your brokerage house. Jim Sinclair, at JSMineset.com, is currently putting together a summary of delivery charges, from the various gold/silver delivery services. The costs of delivery are a few dollars cheaper on NYSE-Liffe, at least at HSBC, but the difference is not significant.