Thursday, April 18, 2013

'A Little Off the Top, Please': Stocks Get Trimmed Again; Gold, Silver Shortages Occurring Worldwide

The weirdness engendered by the recent gold and silver smash-down will not relent. While the paper price represented by the gold and silver ETFs (GLD and SLV) is unrelenting. As soon as the central banks sent the paper prices of precious metals reeling, regular people (and reportedly some not-so-regular people) worldwide have headed to their coin shops and online outlets to purchase as much physical in coins and bars as possible, at prices 20-40% over the paper price.

For those not familiar with this kind of activity, it's known as decoupling, disintermediation or dislocation. The paper price, represented by the traded funds, has decoupled from the reality of the physical price, and, that's a very important, if not disruptive, development.

What it means is that buyers are now not satisfied with the published prices and the market will determine for what one buys or sells gold and silver. That's the premium, and stories are running rampant on the internet of buyers lined up in droves outside coin shops. On ebay, the current price for an ounce of silver is now closer to $30, rather than the smacked-down price of around $23. Gold, though dearer, is seeing similar premiums for physical delivery and shortages are developing worldwide.

What's at the bottom of all this - and the reason for the price smash-down in the first place - is liquidity, or, if you will, supply, and, money velocity.

Simply put, the COMEX and JP Morgan, were facing imminent supply issues, i.e., they could not stand for delivery on contracts which wished to be paid in physical metal. Rumor has it that the long-standing practice of these two titans of trade was to settle in cash, with a premium. Beyond their shortages, this is a central banking issue of liquidity and trust. In particular, the US central bank - the Federal Reserve - cannot allow the price of gold, in particular, and its cousin, silver to erode confidence in the dollar, thus the smack-down, using naked shorts, to the tune of 400 million tonnes.

A few things the Fed, the COMEX and JP Morgan did not anticipate - the unintended consequences - were a run on physical demand rather than panic selling, which actually was the first thing that happened in the paper markets, where the heavily-hedged big players were forced to cover margin calls, thus selling their shares (not their physical metals, of which they owned exactly zero) and forcing the price down further.

The rush to physical was completely unforeseen, obviously, since now, the price for paper assets are far less than that of the physical (the premium effect). So, anybody looking to settle contracts on the COMEX in physical assets will get far less, but the COMEX will have to pay more to purchase the physical asset to settle up, which, if the math is correct (and it always is), means that the COMEX will eventually default on obligations to settle in physical assets and instead pay in cash. Buyers will be quite unhappy to receive cash rather than metal, and, ka-boom, down goes the COMEX, maybe JP Morgan, and maybe even the Fed. We are witnessing the beginning of the end of the craven, evil, debt-is-money fiat system backed by nothing and the rise of real money, gold and silver.

Expect the paper price - the price quoted by the ETFs or the COMEX to become increasingly irrelevant and also expect the CFTC to do what they always do: nothing. Prices of the precious metals have been manipulated by the large players with the help of central banks for decades, and the jig is finally up. This drama will play out over the next three to nine months, but the fallout will be devastating to the global financial system, whose proponents only know how to print, print and print more to solve liquidity and solvency problems.

It can't work, won't work and has never worked, especially now that people have awakened to the rapacious ways of the money-lenders and bankers and are demanding honest currency with no counter-party risk: gold and silver and other hard assets. The global financial system is close to implosion.

This impending implosion is being reflected in stocks, which have taken it on the chin three of four days this week, and the direction of trade is beginning to seriously head in the other direction. Illiquid and insolvent banks backing companies with fudged balance sheets and earnings reports via cost-cutting, wage-shorting and stock repurchasing are beginning to appear unattractive in terms of risk. The reality is that equity investors hold nothing but paper and promises to be paid, nothing more, and those "assets" are looking shakier and shakier as the global economy grinds inexorably to a halt.

Dow 14,537.14, -81.45 (0.56%)
NASDAQ 3,166.36, -38.31 (1.20%)
S&P 500 1,541.61, -10.40 (0.67%)
NYSE Composite 8,921.18, -27.18 (0.30%)
NASDAQ Volume 1,771,593,625.00
NYSE Volume 4,382,134,000
Combined NYSE & NASDAQ Advance - Decline: 2662-3651
Combined NYSE & NASDAQ New highs - New lows: 103-128
WTI crude oil: 87.73, +1.05
Gold: 1,392.50, +9.80
Silver: 23.24, -0.062

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