Secret Silver Buying by Russian Billionaire, Chinese Traders, and People's Bank of China to Lead to Comex Silver Default?

Published in Market Updates  Precious Metals Update  on 29 April 2011

By Michael O’Brien


 Gold rose to new record nominal highs at $1,540.85/oz in early Asian trading last night. Silver and gold remain very close to nominal highs today as the beleaguered US dollar remains under pressure due to ultra loose US monetary policies, deepening inflationary price pressures and concerns about the feeble economic recovery.

Cross Currency Table GoldCore
Cross Currency Table

Gold has risen 8% this month and silver 28% due to the very poor US monetary and fiscal position, the Eurozone debt crisis and in the background the Japanese nuclear crisis, and geopolitical instability in the Africa and the Middle East. This is continuing to lead to diversification into the precious metals.

COMEX Silver Default?
A number of readers contacted us yesterday to comment critically on our advice to “as ever” ... “ignore the daily noise and focus on the long term and the fundamentals driving these markets.”

Comex Silver Inventory Data  GoldCore
Comex Silver Inventory Data

They felt that it was linked to the paragraph above regarding a possible COMEX default and was suggesting that rumours of a run on COMEX depositories was “noise”.

We were not suggesting that and with hindsight the juxtaposition of this sentence in the immediate aftermath of the paragraph regarding the COMEX was unfortunate and ripe for misinterpretation.

Let us reiterate a COMEX default on delivery of precious metals and specifically of silver bullion bars is far from “noise”. It is of significant importance and that is why we have covered its possibility for some months. A COMEX default would have massive ramifications for precious metals markets, for the wider commodity markets, for the dollar, fiat currencies and our modern financial system.

Silver surged 3.4% yesterday to settle at a 31-year nominal high, and rose by $1.55 on the day. Silver is up some 28% in April alone. The last time this happened was when Warren Buffett took a large stake in silver in 1987 and there were rumours of Buffett “cornering the market”.

Silver remains in backwardation and the possibility of a COMEX default cannot be ruled out – especially as silver bullion inventories are very small vis-a-vis possible capital allocations to silver in the coming weeks and months.

The possibility of an attempted cornering of the silver market through buying and taking delivery of physical bullion remains real and would likely lead to a massive short squeeze which could see silver surge to well over its inflation adjusted high of $140/oz.

Indeed, a recent article in the Financial Times suggested that private or state interests with very deep pockets are attempting to corner the silver market. Bizarrely, this massive story which mooted the possibility of Russian billionaires, Chinese traders and even the People’s Bank of China and other central banks secretly buying silver, has subsequently been barely reported or commented on.

There are now two “conspiracy theories”. One is the long side conspiracy theory which claims, a la the FT, that there are foreign private and state actors attempting to corner the silver market through secret buying.

The other is the more long-standing short side conspiracy theory which has gained credence in recent months due to the CFTC’s investigation into silver manipulation by Wall Street banks, such as JP Morgan, who have massive concentrated positions. This theory has been backed up by some circumstantial evidence by GATA and has recently gone “viral” through the campaign of financial journalist Max Keiser.

The theories are not mutually exclusive and may be true. Indeed, Chinese, Russian and other private interests may be cornering the physical market in an effort to end manipulation of the silver market by Wall Street banks in order to ensure the silver price rises very sharply and creates significant profits on their silver bullion holdings.

Indeed, if the People’s Bank of China is involved – profit may not be the end game, rather the positioning of the Chinese yuan as the new reserve currency through use of gold and silver bullion reserves.

Bloomberg Link Precious Metals Conference
The Bloomberg Link Precious Metals Conference heard a wide range of opinions from precious metal experts and mining executives. The vast majority believed that gold and silver’s strong fundamentals (especially due to anaemic supply and strong demand) should result in prices continuing to rise in the coming years.

The knowledge amongst the participants regarding the fundamentals is in stark contrast to many so-called financial or market experts in the press who continue to be misinformed regarding the gold and silver markets (see news).

The knowledge amongst the participants is also in stark contrast to much of the western public (particularly in European countries), many of whom continue to believe that “cash is king” and remain unaware that they are very exposed to sovereign debt default risk, currency debasement and inflation.

The one participant who was bearish on silver was William Hamelin, the president of Ames Goldsmith Corp., who forecast a drop to $35.85/oz by year-end. Hamelin’s company processes silver for use in a number of consumer products, such as electronic components, batteries and photography.

Gold in Euros to Play Catch up?
Gold’s recent rise has not been solely US dollar related as gold has risen to new record nominal highs in British pounds and yen. Gold has underperformed in euros recently and yet remains only 3.7% below the record nominal high of €1,072/oz seen four months ago in December 2010.

The euro’s strength is not due to German economic strength or due to positive fundamentals rather it is purely due to the fundamentals of the dollar, the pound, the yen and other fiat currencies being very poor. It also may be due to short covering as those short the euro are forced to buy back positions.

Gold in EUR – January 2010 to April 2011  GoldCore
Gold in EUR – January 2010 to April 2011

Gold’s continuing strength in euros suggests that the recent bout of euro strength versus the dollar and other fiat currencies will be short lived and the euro will come under pressure again in the coming months.

Gold in euros has risen 2% in April. It will be interesting to see if euro gold replicates the performance of April and May last year when Eurozone sovereign debt concerns saw gold rise to €825/oz to over €1,000/oz prior to a correction. Previous resistance at €1,000/oz gold looks to be strong support for gold.

Gold

Gold is trading at $1,535.80/oz, €1,034.28/oz and £922.73/oz.

Silver

Silver is trading at $48.75/oz, €32.83/oz and £29.29/oz.

Platinum Group Metals

Platinum is trading at $1,844.00/oz, palladium at $780/oz and rhodium at $2,250/oz.

News

 

(Bloomberg) -- Silver May Jump to $62 an Ounce by Yearend, McGhee Says
Silver prices may climb to $62 an ounce by yearend, Frank McGhee, the head dealer at Integrated Brokerage Services, said today at the Bloomberg Link Precious Metals Conference in New York.

The current rally is “very different” from the jump in prices in the 1970s, and there is “no manipulation” in the market, he said.

(Bloomberg) -- Silver May Rise to $55 an Ounce by Yearend, Coeur’s Wheeler Says
Silver may rise to $55 an ounce by the end of year, Dennis Wheeler, the chief executive offer of Coeur d’Alene Mines Corp., the largest U.S. silver producer, said today at the Bloomberg Link Precious Metals Conference in New York.

“Silver has clearly become money,” Wheeler said. Industrial demand for the metal “continues to grow,” he said.

(Bloomberg) -- Silver Rally No Bubble as Price Will Top Record, Coeur Says
The rally in silver to a 31-year high in New York shows no sign of ending because tight supply and robust demand will send the metal to a record, according to Coeur d’Alene Mines Corp., the largest U.S. producer.

“We’re in a legitimate market driven by financial interest in silver and strong industrial demand,” Chief Executive Officer Dennis Wheeler said today at the Bloomberg Link Precious Metals Conference in New York. “Supplies are relatively inelastic.”

Silver has surged 162 percent in the past year, outpacing the 31 percent gain in gold. Investment demand for silver jumped 40 percent in 2010 as inflation rose, currencies lost value and Europe’s debt crisis escalated, said researcher GFMS Ltd. Industrial use gained 21 percent last year and may climb to a record this year, London-based GFMS said.

The rally is “very different” from the surge in the late 1970s, when the Hunt brothers tried to corner the market, and in 1980, when prices touched a record $50.35 an ounce, Frank McGhee, the head dealer at Integrated Brokerage Services, said at the conference.

“There is no manipulation going on in this market,” McGhee said. “It does not take a lot to stop the market until this market decides to go. I’d like to categorize silver as a freight train.”

Silver futures for July delivery rose $1.554, or 3.4 percent, to close at $47.541 on the Comex in New York. Silver reached $49.845 on April 25.

Older Mines
Discovering new deposits has become more difficult, while “older mines cease production at a time when demand continues to grow,” said Wheeler, whose company is based in Coeur d’Alene, Idaho. High prices are not “a short-term phenomenon,” and the metal may jump to $55 by the end of 2011, he said. Integrated Brokerage’s McGhee predicted $62.

Not everyone is bullish on silver. William Hamelin, the president of Ames Goldsmith Corp., forecast a drop to $35.85 by year-end. Some manufacturers are “leaning” toward using more substitutes, including copper and nickel, after prices surged, he said.

Coeur d’Alene, which is based in the Idaho city of the same name, fell 51 cents, or 1.6 percent, to settle at $31.70 in New York Stock Exchange composite trading. The shares have jumped 84 percent in the past year, compared with a 19 percent gain for the Russell 2000 Index.

(Bloomberg) -- Emerging Market Nations to Buy Gold, World Gold Council Says
Emerging market nations will be major purchasers of gold in the coming years, George Milling- Stanley, managing director for government affairs at the World Gold Council, said today at the Bloomberg Link Precious Metals conference in New York.

“China and the BRICs in general” are “the kind of countries we expect to see as gold buyers going forward,” Milling-Stanley said. China’s imports have risen “dramatically” in the last 12 months, he said.

(Bloomberg) -- Central Banks, IMF Gold Sales at 53.1 Tons in Current Accord
European central banks and the International Monetary Fund sold 53.1 metric tons of gold so far in the current central bank gold agreement which began September, the World Gold Council said.

Euro zone banks sold 0.9 ton of the metal in the period, the council said today in an e-mailed report.

(Bloomberg) -- Money Creation Will Boost Gold Prices, Cuggino Says
Money creation, increasing liquidity and the global macroeconomic environment will continue to boost gold prices, Michael Cuggino, the president and portfolio manager of Permanent Portfolio Family of Funds, said today at the Bloomberg Link Precious Metals Conference in New York.

(Bloomberg) -- Gold Will Climb to $1,650 an Ounce by Yearend, Rhind Says
Gold prices will climb to $1,650 an ounce by yearend, William Rhind, the head of sales and marketing at ETFS Marketing LLC, said today at the Bloomberg Link Precious Metals Conference in New York.

Most retail investors are still “not participating” in the gold market, and more buying would be “bullish” for the market, Rhind said.

(Bloomberg) -- Gold Will Climb to $1,575 an Ounce by Yearend, Anderson Says
Gold prices will climb to $1,575 an ounce by yearend, Thomas Anderson, the vice president and global head of ETF strategy and research at State Street Global Advisors, said today at the Bloomberg Link Precious Metals Conference in New York.

Investors are purchasing the metal for “wealth preservation” and to take “risk out of” their overall portfolios, Anderson said.

(Bloomberg) -- Lots of ‘Bullish’ Fundamentals for Gold, Arrowhawk’s Fan Says
There are lots of “bullish” fundamentals that will continue to support gold prices, and negative real interest rates make the metal “attractive,” Jennifer Fan, a partner and senior portfolio manager at Arrowhawk Capital Partners, said today at the Bloomberg Link Precious Metals Conference in New York.

(Bloomberg) -- Casimir Capital’s Sands ‘Very Bullish’ on ‘Going Higher’ Gold
Richard Sands, president and chief executive officer at Casimir Capital LP, said he is “very bullish” on gold. “We think it’s going higher,” Sands said during the Bloomberg Link Precious Metals conference in New York.

Earlier, George Gero, vice president-global futures at RBC Capital Markets, said the precious metal’s recent purchasers were “weak buyers” who bought the commodity for “momentum reasons.” The metal functions as an “additional, alternate currency,” Gero said.

(Bloomberg) -- Platinum May Climb to $3,000/Oz, Stillwater’s Mcallister Says
The price of platinum may climb to $3,000 an ounce and palladium prices to between $1,500 and $2,000 an ounce over the next five years, Francis McAllister, chairman and chief executive officer at the Stillwater Mining Company, said today at the Bloomberg Link Precious Metals conference in New York.

While platinum will remain the more expensive of the two metals, the gap between their prices will narrow, he said. Demand for the metals from the auto industry, particularly in China, will drive prices, he said.

(Bloomberg) -- PGM Supply Can’t Keep Up With Demand, CPM Group’s Rannestad Says
Platinum group metals supply can’t keep up with demand, Erica Rannestad, commodities analyst at CPM

Group, said today at the Bloomberg Link Precious Metals conference in New York. “The fundamentals are really tight,” she told the audience.

(Bloomberg) -- PGM Demand to Outstrip Supply on Auto Demand, TMR’s Lifton Says
Demand for platinum group metals will continue to outstrip supplies as long as the auto industry uses catalytic converters, Jack Lifton, founding principal of Technology Metals Research LLC, said today at the Bloomberg Link Precious Metals conference in New York.

(Bloomberg) -- Gold Luring Central-Bank Buyers May Extend Record Rally in Price
Central banks that were net sellers of gold a decade ago are buying the precious metal to reduce their reliance on the dollar as a reserve currency, signaling demand that may extend a record rally in prices.

As developing countries accelerate purchases, gold may reach $2,000 an ounce this year, compared with a record of $1,538.80 yesterday in New York, said Robert McEwen, the chief executive officer of producer U.S. Gold Corp. Euro Pacific Capital’s Michael Pento, who correctly predicted gold’s highs for the past two years, forecast a 2011 high of $1,600.

Prices reached a record 14 times this month on demand from investors seeking an alternative to the dollar after the currency slumped to the lowest since 2009, U.S. debt widened, and the Federal Reserve signaled April 27 that borrowing costs will remain near zero percent for an extended period. The economy in China, the biggest foreign holder of U.S. Treasuries, grew 9.7 percent in the first quarter.

“China is out to have more gold than America, and Russia is aspiring to the same,” McEwen said yesterday in an interview in New York. “When you have debt, you don’t have a lot of flexibility. China wants to show its currency has more backing than the U.S.”

In 2010, central banks became net buyers for the first time in two decades, adding 87 metric tons in official-sector purchases by countries including Bolivia, Sri Lanka and Mauritius, according to World Gold Council data. China, with more than $3 trillion in foreign-currency reserves, plans to set up new funds to invest in precious metals, Century Weekly reported this week. Russia purchased 8 tons of gold in the first quarter.

China’s Gold Reserves
China, which has just 1.6 percent of its reserves in gold, may invest more than $1 trillion in bullion, Pento said. “China wants to be an international player, and they need to own more gold than they currently have.”

The U.S. Treasury Department projects the government could reach its debt ceiling of $14.3 trillion as soon as mid-May and run out of options for avoiding default by early July. The Fed has kept its benchmark rate between zero percent and 0.25 percent since December 2008 to help stimulate the economy, driving the dollar down 11 percent against a basket of six major currencies during the past year.

“Until monetary policy changes, you’re going to continue to see gold go up,” said Michael Cuggino, who helps manage $12 billion at Permanent Portfolio Funds in San Francisco.

“Ultimately the best thing we can do to create strong fundamentals for the dollar in the medium term is first, keep inflation low, which maintains the buying power of the dollar, and second, create a stronger economy,” Fed Chairman Ben S. Bernanke said on April 27.

U.S. Reserves
As of April, China was the sixth-largest official holder of gold, with 1,054.1 tons, according to World Gold Council estimates. The U.S. has the most, with 8,133.5 tons, or 74.8 percent of the nation’s currency reserves, council data show.

Central-bank buying may have the same impact on gold as the introduction of exchange-traded funds, Cuggino said. Prices have more than tripled since the SPDR Gold Trust, the biggest ETF backed by bullion, was introduced in November 2004.

Central banks in emerging markets may aim to hold 2 percent to 8 percent of their foreign-currency reserves in gold, Francisco Blanch, the head of commodities research at Bank of America Merrill Lynch in New York, said in an interview.

Gold is “close to” its cyclical high, said Blanch, who expects the metal to average $1,500 this year.

Gold’s Enemies
“The enemies of gold are rising interest rates and a balanced budget,” said Pento of Euro Pacific Capital in New York. “I look for a summer swoon once Bernanke exits the bond market. You’re going to have a temporary rise in real interest rates.”

The Fed said it would buy $600 billion in U.S. Treasuries through June.

The Federal Funds rate would have to rise to “Volcker” levels before gold enters a bear market, said Gold Corp.’s McEwen, who expects the metal to rise to $5,000 over three to four years.

Prices have advanced 7.7 percent this year, extending a decade of gains in which gold jumped sixfold from a low in 1999. The all-time inflation adjusted record is $2,338.92, based on the value on Jan. 21, 1980, according to a calculator on the Web site of the Federal Reserve Bank of Minneapolis.

Former Fed Chairman Paul Volcker ended gold’s rally to a then-record $873 by raising borrowing costs to 20 percent in March 1980.

Silver Adjusted for Inflation – (U.S. Urban consumers price index) – April 1971 to April 2011
Silver Adjusted for Inflation – (U.S. Urban consumers price index) – April 1971 to April 2011

(Irish Times) -- Stock Take - Proinsias O'Mahony: Silver Linings
A fortnight ago, this column warned that silver, trading at $40, had “seldom looked so expensive”. It almost touched $50 on Monday.

Mea culpa? No. Such parabolic moves are typical of bubbles, which tend to unwind just as rapidly. Having traded more than 26 per cent above its 50-day moving average – no other commodity was remotely as overbought – the metal finally sold off, quickly falling below $45 on Tuesday. Silver has risen by almost 150 per cent over the last year and by 50 per cent since January. The gold:silver ratio, having this month fallen below 40:1 for the first time since 1983, fell to 32:1 on Monday.

Trading volumes, which hit record levels this week, have tripled over the same period. Leveraged exchange-traded funds, which allow traders to bet against silver, are also seeing record trading volumes. The huge volatility has resulted in a rise in margin requirements for speculators. Silver trading, it appears, is best left to those with strong stomachs.

(Editor’s Note: A little knowledge is a dangerous thing. This superficial analysis of silver purports to analyse the silver market and yet completely ignores the fundamental driver of prices in the silver market and other markets – supply and demand. It also completely ignores the fact that silver is near record nominal highs and well below real inflation adjusted highs of $140/oz (see chart above). It talks about “silver trading” being best left to “strong stomachs”. This is true however trading and speculation is in large part why wealth has been decimated in recent years and passive allocation and diversification into safer assets would be more prudent advice then superficial analysis regarding trading silver. The article is indicative of the lack of understanding about gold and silver as safe haven diversifications. As the old expression goes some “know the price of everything but the value of nothing”.)

(Miningweekly.com) -- Old gold fundamentals are 'passe' – Peter Munk
The traditional supply and demand fundamentals that have determined the gold price in previous decades no longer apply, Barrick Gold chairperson and founder Peter Munk asserted on Wednesday.

Gold prices, which reached record highs above $1 520/oz on Wednesday, are being driven by investors looking for security, and looking to protect wealth, he said at the annual shareholders meeting of the world's biggest gold company.

Investment demand exceeded jewellery demand for gold in 2010 for the first time, and some analysts have suggested this puts the market in a precarious position, as prices could fall sharply if investor demand growth slowed or reversed.

But Munk insisted that the old dynamics of physical demand have lost their importance.

“Gold today is no longer related to a normal economic cycle of supply and demand, jewellery and Indian wedding seasons...” he said.

“All those things are passe, forget about them.”

Gold is being driven by “a fundamental, global and growing insecurity, a fundamental, global and growing lack of confidence of the world in everything they were brought up to believe in”.

All this means that “gold's future is assured”, Munk said.

“Because ultimately more and more people every day looking for security and looking to protect wealth are driven to gold.”

Speaking earlier, CEO Aaron Regent said Barrick remains very positive on the outlook for gold, which is proving to be the “currency of choice as the ultimate store of value”.

Barrick reported a 22% increase in first-quarter net profit on Wednesday, thanks mainly to higher bullion prices.

 


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