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  • Blatant Manipulation in the Precious Metal Market 15 comments
    May 14, 2011 4:06 AM | about stocks: GLD, SLV, SWC, PAL

    Recently the CME Group had been raising margin requirements on silver and other commodities almost on a daily basis. The relentless margin hacking up ultimately caused a plummet of silver price from near $50/oz, to around $35/oz, a roughly 30% drop, in less than one week. Such plummet in silver price was un-precedent. The plummet in silver price wiped out a lot of speculative silver investors.

    A number of precious metal analysts call the CME margin increase blatant market manipulation. I agree. It's blatant market manipulation conducted by the CME exchange itself. It is unfair. The policy change is clearly tilted in favor of one group of market participants against another group. Whether such blatant market manipulation has broken any SEC regulation, or whether some one should go to jail for it, I will leave it to lawyers to decide. But one thing is clear: The actions of CME had caused disturbing disruption in the precious metal and commodity market.

    The problem is not with the increased margin requirement. It is completely in an exchange's right and duty to set proper margin requirements and adjust it periodically to ensure orderly market trading activities. The problem is with the manner in which the CME raises margin requirement.

    Instead of a gradual and smooth adjustment of the margin requirement over a long period of time, CME choose to leave the margin unchanged while the silver price was raising rapidly early in the year. And then, right before the "sell in may, go away" season, they suddenly begin to hack up silver future's margin aggressively on a daily basis. The consequence is predictable. Instead of stabolizing the market, they disrupted the market. Why they do not adjust the margin down accordingly, now that silver has lost 1/3 of its recent price high? Why are the margin adjustment asymmetic? One has to wonder whether the decision to successively jack up margin ratio was purposeful, with the goal of suppressing silver price in aim.

    The margin requirement in its current forms are asymmetric, because the long side is being punished while the short side is rewarded. It is unfair because it requires CASH deposits on both the long and the short. This torelates and encourages illegal naked shorting of futures contracts.

    Let me explain. A silver future's contract is a binding legal contract between the contract writer (the seller, or the short side), and the contract holder (the buyer, or the long side), that at a future time, the seller shall deliver an agreed amount of physical silver, for consideration of an agreed amount of cash tendered by the buyer. Alternatively, the buyer may choose to settle the contract in cash instead of take physical delivery. But that should be up to the buyer to choose, NOT up to the seller to decide whether the contract can be settled in cash or delivery be made. Failure to do either cash settlement or delivery by contract expiration date is a breach of the binding contract, and the side which causes the failure is the side at fault. Please note, if the contract buyer demands a physical delivery but the seller could not honor the request, it is a contract default even if the two sides could settle in cash.

    Margin requirement is a requirement of maintaining minimum asset, imposed by the exchange to ensure that futures contracts will be fulfilled, and no default shall occur. It is reasonable to impose a cash margin requirement, so in the case the contract holder is unable or unwilling to tender the full cash amount for delivery, he/she is able to choose instead settle in cash and be able to pay the difference in cash.

    But what about margin requirement on the contract seller side. The existing margin requirement on sellers is in CASH, just like the requirement on buyers. This ensures that the seller can pay the cash difference in the case the contracts are settled in cash. But what about the cases that the contract holder request physical delivery but the seller is unable to honor the request? Remember, it is up to the buyer, not the seller, to choose physical delivery.

    What assurance does the exchange has that when the contract buyer demands physical delivery, that it will be honored, and there will be no failure of delivery? Nothing. There is simply no such guarantee. I think that is a big problem. Maybe the exchange reason in imposing a cash margin requirement on the short is that as long as the short has the cash, he she can always go to the spot market to acquire physical silver, and make good on the delivery request.

    Such reasoning is frauded. The physical spot market is limited, while the volume of contracts that can be written and sold has no limit. It is impossible to deliver more silver that what's actually exist out of there. As a matter of fact, if all existing silver future's contracts are settled in physical delivery, the delivery requirement will be many times more than silver that is available.

    I believe silver future contract writers must be required to pose a certain amount of physical silver, or demonstrate ability to delivery physical silver (like for mining companies), instead of pose cash, to meet the margin requirement.

    Allowing silver future contract writers, most of them have no business in silver mining and have no possession of an ounce of silver, to meet their margin requirement in cash instead of silver bullions, not only is unfair and frauded, but probably is ILLEGAL, too.

    Knowingly enter into a business contract with knowledge that he/she can not and will not fulfill, is not just a SCAM, but a CRIME punisheable under contract laws and criminal laws.

    If one trader naked short 2 million shares of a company's stock, knowing there's only one million shares outstanding and that he/she could not possibly borrow two million shares, is ILLEGAL under SEC regulations. You can go to jail for doing that.

    If you write up a contract to sell a bridge in Brooklyn, New York, and actually collected an idiot's money from it, knowing full well that you do not own that bridge, is a crime. You go to jail for it. I am not sure though, about some one who sells real estate property on the moon, as some obviously is doing. But at least the guy claims he owns the moon, and the buyers do not insist on delivery.

    Shouldn't there be some legal repercussions for the nake shorters of silver, especially the biggest naked shorters of silver who happen to be big banks? They write and sell a huge volume of silver future contracts to knock price down within a very short period of time, rip profits doing so, knowing full well those futures contracts are invalid, because they could NOT be honored if physical delivery is requested. There were far more silver future's contracts sold and outstanding, than physical silver that is available.

    I hereby request that CME and other commodity exchanges consider imposing margin requirements in physical commodity, rather than in cash, on future contract writers. And I want to see if the authority is up to its task to investigate whether there has been illegal naked shorting in the precious metal and commodity future's market, activities that certain parties write future contracts that they know full well can not be honored. But I do not hold out hope on that happening any time soon.

    To precious metal investors, I say you either take physical delivery, or do not even participate in the market. What is the point of buying a contract but do not take delivery? Future's trading is a zero sum paper game. As I explained in the past, if you want to profit from the commodity bull market, take possession of physical goods is the only way. If you don't hold it, you don't have it.

    Disclosure: I am long SWC, PAL.

    Additional disclosure: Full Disclosure: The author is heavily invested in physical palladium metal, and have very large positions in palladium mining stocks SWC and PAL. The author also owns a number of silver mining stocks but does not own any share of GLD, the gold ETF, or of SLV, the silver ETF.
    Stocks: GLD, SLV, SWC, PAL
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Comments (15)
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  • minorman
    , contributor
    Comments (245) | Send Message


    Clearly, taking physical delivery is the way to go. Many are lured into the futures market because it offers leverage (not as much as it used to).
    It is actually not even a real zero-sum game - like all other casinos the house keeps some percentage of the turnover - AND - as you point out - may change the rules of the game after you place your bet (i.e. hike margin reqs. etc.). Not to mention contango/backwardation.


    Stay out of the flashy bankster casino and just buy the real deal. (My personal favorite is beautiful the Australian 1 kg Kookaburra coin!)


    Btw. if you are interested in the banksters' general (but traditionally illegal) practice of letting lenders “give better title than one has” when they put up loan collateral I recommend “Money as Debt” by Paul Grignon.


    (Fractional reserve/modern) “Banking doesn't involve fraud - banking is fraud.”


    Those of us who put our surplus money into *real* things on a running basis (for me mostly Tellurium, Indium, Palladium and Silver) have been and continue to be generously rewarded.
    14 May 2011, 02:59 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Minorman:


    You are absolutely right. Those of us who gradually buy some minor metals over the years are doing just wonderfully. Interesting you buy indium. This is a metal that is supposed to rally big time, but because China dominate the indium market and the short-sighted over-production by China, indium price has been struggling a bit. But it can turn in a heart beat once China tightens up control on indium.


    People who continue to trade futures contracts will continue to lose, until they realize why it doesn't work. Hoarding real physical silver and other precious metals is the only thing that works.
    14 May 2011, 08:35 PM Reply Like
  • minorman
    , contributor
    Comments (245) | Send Message
    If you analyze indium, the story is exactly equivalent to tellurium:


    -Global annual production unknown, but certainly less than 600 ton.


    - China might produce a large fraction of the World's indium (as they do tellurium), but there is a hard limit to how much they can conjure up.


    -Zero primary production. 100% byproduct (in this case from zinc). Ie. supply has essentially no price elasticity.


    -Main users are *totally* indifferent to price (estimates for indium in a flat screen TV or an iPad is on the order of 5-25 cents). Even the CIGS solar guys (Check out Frontier Solar starting up a 900 MWp/yr plant as I write this.) can afford to pay on the order of $3000/kg, before it starts to hurt.


    Price action? I grabbed indium at $400/kg and $600/kg not too long ago. Now its trading at well over $800/kg according to


    I'm not selling a gram until well over 3000/kg (2010 - shadowstats adjusted dollars).


    Btw. Mark. I want to thank you for being the one who originally brought tellurium to my attention a few years ago. What a gem of an investment idea that was!
    15 May 2011, 02:55 AM Reply Like
  • secretbonus
    , contributor
    Comments (27) | Send Message
    I am trying to figure out more about how to determine "price elasticity" and actually quantify it for the various metals. I am looking at "years left of supply based on consumption rate" and then comparing the prices, but I recognize that certain metals can be replaced putting a ceiling on some of the prices


    Substitutes: Indium has substitutes in many, perhaps most, of its uses; however, the substitutes usually lead to losses in production efficiency or product characteristics. Silicon has largely replaced germanium and indium in transistors. Although more expensive, gallium can be used in some applications as a substitute for indium in several alloys. In glass-coating applications, silver-zinc oxides or tin oxides can be used. Although technically inferior, zinctin oxides can be used in LCDs. Another possible substitute for indium glass coating is transparent carbon nanotubes, which are untested in mass production of LCDs. Indium phosphide can be substituted by gallium arsenide in solar cells and in many semiconductor applications. Hafnium can replace indium alloys in nuclear reactor control rods.
    I would not say indium's price is completely inelastic, but the cost of the metal in relationship to the price of the finished product is such that there is very low price elasticity, and the same thing is true with silver. However with Indium having only a 10 year supply remaining, I imagine that there will be some changes as price appreciation occurs.
    25 May 2011, 11:35 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Indium's supply side price elasticity is zero, as it is purely a by-product of zinc mining. They can't produce more zinc just for indium.


    USGS does not have an estimate of indium mineral reserves:


    As Indium is a zinc mining by-product, it probably lasts as long as the zinc mines.
    25 May 2011, 03:12 PM Reply Like
  • secretbonus
    , contributor
    Comments (27) | Send Message
    I am starting a series talking about trying to value basic materials and metals on my site
    Let me know if you have any insight on this as I work to develop parts 3 and 4. There are a number of shortfalls with this method as I look into it and I am recognizing that simply looking at "current supply and demand" and using the "years left" and price to determine value neglects the ability for more common metals, materials and even chemicals to replace the functions of such material. Also, in my opinion the need for things like transportation, electricity and batteries seems to be something that would persist even with higher prices, where as the demand for jewelry are probably more likely to decline.
    25 May 2011, 11:55 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » By-products are more preferable than main line products. Because as a by-product, there is lack of incentive to increase production even if the price goes up a lot.


    A famous example is rhodium. a mere 4% global shortage was enough to push rhodium from $300-ish to $11000. There is zero price elasticity on either the supply side (it's a pure and minor by-product) or on the demand side. By luck South Africa started producing some UG2 ores, which contain a bit more rhodium, thus bringing the price down. The shift had absolutely nothing to do with consideration of rhodium price, though.


    Tellurium is another example. Copper mines may shift to using chemical leach to produce copper, instead of electrolysis. They could care less they will produce no more tellurium, if it cuts their copper production cost. That act could send tellurium price flying.
    25 May 2011, 03:17 PM Reply Like
  • minorman
    , contributor
    Comments (245) | Send Message
    See the following excellent papers by Martin Green (the UNSW professor who lead the group which developed the 25% efficient silicon solar cell):


    Green, M. A.
    Improved estimates for Te and Se availability from Cu anode slimes and recent price trends
    Progress in Photovoltaics: Research and Applications, 2006, 14, 743-751


    Green, M. A.
    Estimates of Te and In prices from direct mining of known ores Progress in Photovoltaics: Research and Applications, 2009, 17, 347-359
    Secretbonus - assigning a number of "years left" of anything depends very heavily on your assumptions. Without a clear statement of these and proper references to sources it becomes to arbitrary for my liking.
    26 May 2011, 12:58 PM Reply Like
  • secretbonus
    , contributor
    Comments (27) | Send Message
    Much of the data is from this
    and also from
    and some other sporadic links that I used as a crude estimation.
    I agree it's an arbitrary number, but the market is just as irrational and clueless as anyone else, and it's going to be arbitrary for them. The demand changes constantly, especially when prices are volatile. Maybe a given "metal A" is between 10 and 15 years, or even 5 and 25, but that's still enough to tell you that it's more scarce than metal B for example which who knows could be between 50 and 5000 and that data would still tell you that investing in the metal A is conclusively better. The information above would tell you that if they were priced the same that there is almost no reason at all to invest in metal B over metal A if they both are equally important. With more arbitrary numbers we may not have that luxury. Maybe there's a large margin of error for some, while others are more predictable, but that's no different than earnings estimates where there can be very stable estimates and predictable companies with predictable earnings as well as some companies with very unpredictable earnings, You still do the best you can with the information out there to make a decision to find which commodities seem to be grossly mispriced. This is just another way to look at it. So even an estimate that isn't very accurate, still has application,especially if no one else uses it because they consider it too arbitrary. It's more about trying to compare one metal to another and understand the scarcity that exists. The idea is to invest in all metals that are scarce which will reflect the overall scarcity of all precious resources and just use the information to the best of your ability to determine which metals to "value weight" by investing more in the metals that are scarce and cheap, and considering their uses. You will rebalance the portfolio and maintain your ratios so as to profit from volatility and make sure to buy (add on) low and sell (reduce position) high while giving them some room to run so over a long period of time the metals performing well naturally accumulate a larger position before you sell. They're all likely to beat inflation over the next 50 years, some more than others, and some may have more steady increases, while others will present several chances to sell. Many people have no clue how scarce oil is but they still invest in it because they know in fact it is scarce. How scarce it is doesn't matter, it's still scarce enough to be a good investment. It's only when you consider investing in other commodities that also may be scarce and good investment, that you might consider looking at other factors.


    If you know a better way to value metals, I'd be happy to hear it.
    31 May 2011, 12:52 PM Reply Like
  • minorman
    , contributor
    Comments (245) | Send Message
    I'd agree with most of your assessments.


    When I value something I always try to be as conservative as possible. If there is a window where the "true" value falls within I always base my investment thesis of the worst case value.


    For example, before my first investment in physical tellurium (on the basis of inelastic and small supply combined with fast rising usage in CdTe photovoltaics) I dug out values for the main metrics of the investment from as many sources as possible:


    Global annual output: anywhere from 200-800 ton/yr.
    By how much could this possibly be raised: 35->50% extraction - I.E. 300-1100 ton/yr.


    CdTe demand (ignore all other uses of Te): anywhere from 50 kg/MW to 110 kg/MW.


    Annual CdTe output before it hits the ceiling - range: 2.7 GW/yr to 10 GW/yr.


    What price would a CdTe producer be able to pay before it really hurts:
    Say 10% of ASP which in a few years will be perhaps $0.8/W for solar panels. This means that 8 cents/W for the Te which at 50-110 kg/MW comes to $730-1600/kg.


    Should ASP go down further so will the price target of Te. Should the necessary loading to produce 1 MW go down (better technology) the price target of Te will go up.


    This is why I say that $1000/kg is a minimum target for Te.


    For indium the same analysis gives a way higher figure.




    The second link you provided is quite obviously crazy. Of course the World won't "run out" of terbium by 2012! In fact there are many mines which will *start* to produce terbium and other lanthanides in 2015 or so (Avalon, Great Westerm, Ucore, Quest, Stans Energy, Alkane - just to name a few junior miners in this field). Yes - they *surely* won't be able to meet demand for terbium which is why the enormous increase in the price of terbium will continue and why I own stock in Dacha Strategic Minerals (and Great Western Minerals), but stating that we will "run out" is just plain silly.


    Most minerals are characterized by the "easy first" principle. Just as in the case for fossil fuels, this means that we will never find ourselves in a situation where there is nothing available at any price, but as the easy sources are depleted price can/will surge unless substitutes can be found.


    Off the top of my head, the only truly depletable resource I can think of is helium. Once the last natural gas with helium (US natural gas) has been extracted it is essentially gone forever (He is light enough to slowly, but surely, escape earths gravity and thus leave our planet for good once it has been released to the atmosphere).
    8 Jun 2011, 01:35 AM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » Minorman:


    Your calculation of CdTe consumption is incorrect. The typical CdTe layer in the solar panel is 3 microns. A panel is 2 feet by 4 feet, so about 3/4 of a square meter, and generates about 70 watts. The density of CdTe is 5.86 grams per cubic centimeter. So 0.75 M^2 would consume 0.75 * 3 * 5.86 = 13.20 grams of CdTe and generates 70 watts. Since 53% of mass of CdTe is tellurium, it amounts to 7 grams of tellurium for 70 watts of solar panel.


    That translates to 100 grams tellurium for 1KW of solar panel, or 100 kilograms for 1 MW, or 100 metric tons for 1 GW of solar panel.
    8 Jun 2011, 08:43 PM Reply Like
  • minorman
    , contributor
    Comments (245) | Send Message


    You should re-read the second paragraph of my post. Most conservative (not most "realistic").


    The point is that I can point you to credible sources which each give different numbers - some of which agree with your numbers and some of which agree with mine.


    The best idea of exactly what FSLR is consuming may be found by closely reading second-to-latest 5N+ annual report and comparing the numbers with FSLR's production numbers (the latest 5N+ report gives no useful numbers - I guess someone at 5N+ got an angry call from FSLR's Te-secret department).


    Alternatively, if you want to be conservative. Assume, 2.5 micron instead of 3 (has been demonstrated for years). FSLR now runs at active area 11.4% efficiency i.e. 114 W/m2.
    This gives 114 W / 0.025 cm^3 (CdTe) = 114 W / 0.0776 g Te = 68 kg/MW.
    This will only improve as the engineers at FSLR are told to focus on bringing down absorber thickness (and if necessary, sacrifice efficiency) when FSLR procurement sees an end of Te supply. The "supernova" has most certainly not erupted yet - but it will someday! Your call was right - it was just way premature. (Btw. FSLR just announced yesterday an expansion in Germany which brings them to 4 GW/yr capacity.)


    Why would you base an investment thesis on the available numbers that suit you best (confirm your thesis)? - You should play devil's advocate instead and if it *still* seems like a good idea - it probably is.
    9 Jun 2011, 01:22 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » I don't prefer numbers that suits my thesis best. I prefer numbers that are mostly close to reality.


    The 3 micron CdTe layer thickness is well established. It was found on a NREL web site, it was revealed at FSLR's web site a long time ago before they removed it. And it was given, orally, by the former CFO (the guy with German accent) in an investor presentation.


    Has FSLR been able to reduce the CdTe layer thickness some what? Maybe. But bear in mind there are extreme technology difficulties in reducing the thickness:


    1. If the layer is too thin, it becomes transparent and thus does not catch much photons, hence reduce the power efficiency of the solar panel.


    2. If the layer is too think, there is much more electricity current leakage, reducing the total power output.


    3. If the layer is too thin, it deteriorate over time too fast and may not last the designated lifespan of the solar panel.


    Relying on 5N Plus data is problematic. You get a dollar figure, but without unit price it is hard to calculate exactly how much CdTe they supply to FSLR.


    Curiously, even though FSLR's product grows rapidly, and we know tellurium price has been raising, too, the sales revenue of 5N Plus stalled of any growth for almost two year now. FSLR wanted to have secondary CdTe supplier besides 5N Plus. It is difficult to find one, but FSLR could have succeeded in finding another supplier. They definitely get some raw material from Apollo Solar of China, the world's only known primary tellurium mine in central China.


    I am absolutely amazed to read how FSLR still aggressively open up more solar panel factories. Are they really getting the supply? Are they killing themselves off by over-expanding. And there are other CdTe solar panel startup companies as well.


    In any event investment in physical tellurium could not look better.
    9 Jun 2011, 03:18 PM Reply Like
  • minorman
    , contributor
    Comments (245) | Send Message
    OK Mark


    The problem you point out in the 5N+ data is the very reason I suggest you go one year back. The former report had useful numbers (in tones).


    I agree the Te bull is amazing at this point, but remember also to do the "exit" calculation: How much could FSLR realistically afford to pay for your Te: $1000/kg, $1500/kg or perhaps $2000/kg?


    If your (higher) estimates of kg/MW are better than mine - the limiting price FSLR could pay before they loose profitability goes down!


    I'd like to hear what price you think would be the realistic limit. (My estimate is given in a post above.)
    10 Jun 2011, 12:28 PM Reply Like
  • Mark Anthony
    , contributor
    Comments (3595) | Send Message
    Author’s reply » I would say that at 50 cents per watt spent just on tellurium, FSLR would be struggling. That's 50 cents spent on 0.1 grams of tellurium, or $5000 per kilogram of tellurium is a price barrier FSLR could not overcome. Right now we are at roughly $500 per kilogram. We still have 10 fold to go.


    Beyond FSLR, tellurium also have wide application in this new phase change memory thing. This will revolutionize the micro-electronic industry. PCM can me made not just into regular memory, but also flash memory. It replaces DVDs, hard drives, flash memory drive and all that, leaving no more mechanical part in any electrionic device. The electronic industry can pay way much higher price than 50 cents for 0.1 gram. They probably can pay 100 times higher price, i.e., 50 cents for i miligram. Each PCM based electronic component only needs a tiny bit of tellurium.


    Let's see where the PCM can bring us to on this tellurium thing.
    10 Jun 2011, 02:17 PM Reply Like
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