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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

Silver, Greece and Greenspan

Commodities / Gold and Silver 2011 Nov 02, 2011 - 08:06 AM GMT

By: George_Maniere


Best Financial Markets Analysis ArticleI must get 20 emails a day asking me if I believe that the silver market is rigged. I answer the same way every time. Yes!!!!!!!!!!!!!!

I have asked a few of my hedge fund buddies and a few were kind enough to comment on what many consider this highly contentious subject.

The Silver Institute states that it believes in an open and transparent silver market. The CFTC handed this investigation to its own Enforcement Division three years ago after issuing letters in 2004 and 2008. We are still waiting for their findings.

Jeffrey Christian, Managing Director and founder of CPM Group, who has at times been accused of being a government plant by some ardent supporters of the silver manipulation theory, is not shy when it comes to voicing his position on the topic. He says that people who hold physical silver do so not just an investment; they do so as more as a religion.

For a few decades now, gold and silver analysts and investors have debated the validity of allegations concerning precious metals price manipulation through COMEX futures contracts by a cartel that supposedly includes large bullion banks as well as the US Treasury and Federal Reserve. By maintaining an overly large short position in the silver futures market these banks have been at times able to suppress the price of the white metal in the face of bullish fundamentals.

However, the US Commodities Futures Trading Commission (CFTC) at the urgent request of independent investors has looked into the allegations of price manipulation in the silver market. In 2010, the most recent investigation began when independent bullion trader Andrew Maguire went public with allegations of manipulation of the gold and silver markets by JPMorgan Chase and HSBC, which prompted a class action lawsuit against the two banks. In September of this year, HSBC was dropped from the lawsuit with reports that the plaintiffs and the bank had entered into a tolling agreement, which is often used to allow sides to negotiate a settlement while also leaving plaintiffs the ability to file a new complaint if negotiations prove ineffectual.

Although the current investigation by the CFTC is considered ongoing and Commissioner Bart ChiltonMountan has said he believes violations have take place, the CFTC has yet to finalize its investigation.

And so, the battle rages on between those who ardently believe that large banks like JPMorgan are actively suppressing the price of silver and those who think the likes of Gold Anti-Trust Action (GATA) are merely in the business of selling conspiracy theories and not interested in the truth.

That begs the question, if this conspiracy is so widespread why is the gold mining industry not screaming blue murder over it? The answer is simple. Miners are hesitant to go up against the government, which must approve their mining permits, and the bullion banks, to which they turn to for financing. However, Christian rebutted that bullion banks are not the only financial entities providing non-bank financing. He believes the mining firms are headed by sophisticated, educated executives who can look at the evidence and say there is nothing here to support these allegations. I have to focus on running a business and running it profitably and running it efficiently and this is, again, a giant distraction.

In response to an audience member’s direct question about his position on the allegations against JPMorgan and HSBC, Christian said he doesn’t believe that these banks hold an undue concentrated position in the COMEX silver futures market. Their positions in the market are rather primarily hedge positions of physical or OTC market transactions, forward purchases and metal that is leased out.

Another question concerned CME’s decision to raise margin requirements when prices are rising. A better question would be why haven’t they lowered the margin requirements now that volatility in silver has fallen?

Christian defended CME’s raising margin requirements by saying that there has never been a default of a major exchange or clearinghouse in the US because the exchanges require people to prove they have the financial wherewithal to cover their positions. He said higher margin requirements are not a negative for those holding long positions, but are rather harder on those holding naked short positions, which are not backed by physical collateral. Naked shorts must increase their margin balance to prevent defaults.

Two of the biggest names in the rare earths industry outside of China have endured a stark contrast in fortunes over the past two weeks.

Colorado-based Molycorp Inc. (NYSE:MCP) announced on October 20 that it would be opening a new processing plant in California months ahead of schedule, with the expected start-up date now slated for early 2012.

To coincide with the early start for the new facility, Molycorp also announced they would soon be restarting operations at their Mountain Pass mine in order to build stock for the plant.

The 3,500 tons of rare earth oxides equivalent (REO) expected from the facility should push Molycorp’s total output in 2012 up to 8,000-10,000 tons of REO.

Capacity at Mountain Pass is then anticipated to jump to 19,050 tons of REO in 2013 with the completion of Phase 1 of Project Phoenix, a $781 million expansion and modernization project at Mountain Pass that could eventually see the complex generating 40,000 tons of REO per year.

In a company statement, CEO Mark Smith explained that Molycorp are accelerating our start-up because of robust rare earth oxide markets and very favorable project economics.

By accelerating the start-up, they also further de-risk the overall project by allowing for a more orderly and sequential start-up of the various circuits of this highly complex plant.

Analysts speaking to Reuters pointed out that the acceleration was a positive sign for Molycorp in the face of lingering criticism that the company lacks significant reserves of high value heavy rare earth elements (HREE), and added that the news could add some stability to prices that are expected to rise in late November when China is scheduled to release its rare earths production and export quotas for 2012

Lynas Corp. (LYSCF), meanwhile, suffered a setback in their quest for a license from the Malaysian government to import rare earths from their Mount Weld mine in Australia to an advanced materials processing plant the company is building in Kuantan, Malaysia.

A joint statement released on October 19 by the Malaysian Ministry of International Trade and Industry and the Ministry of Science, Technology and Innovation confirmed that “[Lynas] is not authorized to import any rare earth ores into Malaysia without the prior approval of the Atomic Energy Licensing Board (AELB).”

The importation of rare earth ores into Malaysia, a would-be importer has to be issued a two-stage authorization. At this point in time, Lynas was neither issued an AELB Class E (Import/Export) license nor does it qualify yet for a permit to import rare earth ores into Malaysia.

A response from Lynas immediately following the statement from the Malaysian government pointed out that “no decision is expected to be made for some weeks,” and highlighted pressure from activist groups and politicians who oppose the Kuantan facility as the reason behind the announcement from the Malaysian authorities.

A week earlier on October 12, the AELB revealed that it had received a long-term waste management plan from Lynas, which an IAEA panel had recommended the company submit before the import licensing phase for the Kuantan facility went ahead.

It was confirmed that AELB have received the long-term waste management plan from Lynas but we have not analyzed it yet.

The plan will not be made public as I do not consider it submitted until we make sure it is in accordance with international standards.

Analysts believe Lynas will eventually secure an import license, but cautioned that the politics surrounding the deal did pose a legitimate threat.

If it was a regulatory decision, Lynas should be able to jump through any hoops. But if it is a political decision, then the risk of a more negative outcome increases.

A couple of days ago former Fed Chairman Alan Greenspan stated that the Eurozone is doomed to fail because the divide between the northern and southern countries is just too great.

The statement is based upon the fundamental make-up of Eurozone participants and that they will never be able to work together. There was an expectation during its creation in 1999 that the southern members would behave just as those countries in the north. His example, the Italians would behave just like the Germans. The exact opposite has happened.

What came about was a system where the northern countries began subsidizing the excess consumption of those in the south. Throw in a global economic downturn and then all of a sudden you have a sovereign debt crisis.

Greenspan predicts that as the fiscal problems of Portugal, Spain, Italy and Greece grow worse, the influx of goods from Germany and France will dry up. When this happens, the standard of living for the southern Eurozone members will decline.

The effect of the divergent cultures in the Eurozone has been grossly underestimated. The only way to have several currencies from divergent nations lumped together is if they are culturally close, such as Germany, the Netherlands and Austria. If they aren't, it simply can't continue to work.

Greenspan feels that, to a very large extent, what's driving the United States at the moment is Europe due to the fact that there's one single integrated global stock market.

As for our debt problems at home, Greenspan said it will be difficult to get any sense of consensus on Capitol Hill to solve problems. The current political environment is the most polarized he has seen since the beginning of his career.

A necessity in solving the U.S. debt would be to address the revenue aspect of the budget. He said we can accomplish this by eliminating tax breaks, loopholes and other measures that drive down federal revenue.

Furthermore much fiscal policy is implemented, not through spending increases, but through tax credits and other so-called tax expenditures. The markets should respond to them as they do spending cuts, with little contraction in economic activity. We thus could get a very large positive impact on the deficit from such reductions, with minimum negative impact on the economy.

Greenspan gave his support to the President's Simpson-Bowles Commission deficit reduction plan that was presented months ago to help rein in federal spending and boost revenue, but that plan was met with stiff resistance from lawmakers on both sides of the aisle in Congress.

The presumption we can rein in our budget deficits without inflicting some fiscal pain is utterly unrealistic."

The take is that the euro cannot survive because of the differences between Eurozone members. Eurozone dysfunction has shown itself in the negotiating processes to save Greece. There was no actual restructuring of their institutions, which is needed going forward. Expect more problems for the Eurozone and the euro in the very near future when Italy's well-being is on the table - and there are no easy fixes for the EU's third-largest economy.

By George Maniere

In 2004, after retiring from a very successful building career, I became determined to learn all I could about the stock market. In 2009, I knew the market was seriously oversold and committed a serious amount of capital to the market. Needless to say things went quite nicely but I always remebered 2 important things. Hubris equals failure and the market can remain illogical longer than you can remain solvent. Please post all comments and questions. Please feel free to email me at I will respond.

© 2011 Copyright George Maniere - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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