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Amateur Precious Metals Investors Panic on Derivatives Deleveraging

Commodities / Gold & Silver Aug 21, 2008 - 04:38 PM GMT

By: Richard_J_Greene


Best Financial Markets Analysis ArticleIt's no wonder precious metals investors are unloading despite swearing they would not be fooled into panicking when the financial system began to come apart at the seams.  Make no mistake; what we are seeing in the gold and silver markets is an all out attack by the financial powers that increased in intensity on July 15th when it became apparent that Fannie Mae and Freddie Mac are, for all intents and purposes, insolvent. 

Gold investors have been let down in a big way by supposed experts that comment on the gold and silver markets but can not see the most obvious of price suppressions in the history of the financial markets. 

Just this morning I read another comment on how the creation of the gold and silver ETFs has been a huge boon to gold and silver.  While it increased demand due to the ease of acquisition; it has done nothing for the price of gold and silver since supply can now be said to be unlimited by the paper promises as well as centrally located physical stockpiles that can be further leased out.  Just try redeeming your promise of silver and gold for actual silver and gold.  Not only that, but most commentators completely miss relaying the point to gold and silver investors that at times like now, where systemic risk levels are higher than ever, you want real physical gold and silver in your possession and not the undeliverable promises of a counterparty such as Bear Stearns, for example. 

Money is now growing on the order of 20% and that is not only in the US but also worldwide.  The recent bounce in the dollar has been explained to be a big reason for the decline in gold.  You are being sold a story by a dishonest used car salesman.  Where the dollar trades versus other paper currencies no longer has any lasting affect whatsoever on any hard assets.  They are all declining at an increasing pace toward worthlessness.  About the only difference of substance is that they have different colors of ink.  Without the option of the ETFs gold would long ago have climbed past $2000 per ounce. 

I would wager that if only 10% of gold ETF holders sold their position and turned around and bought physical gold that gold would be back over $1000 an ounce in a heartbeat.  The spreads that have opened up between the spot and futures market and the physical markets should be setting off alarm bells but you hear very few commentators mentioning it.  Two notable exceptions are bullion dealer Franklin Sanders and bullion accumulator and commentator Jason Hommel .  Take the time to read the commentaries of two that deal in the real world of gold and silver.

You do not get a $200 move down in gold and $7 move down in silver in a month's time, (because they were supposedly in a bubble), and then after everyone and his mother is selling you find it almost impossible to find any actual gold or silver to buy at major dealers across the country.  100 oz. bars on eBay are changing hands at $17 per ounce, over $4 above the spot price.  That is a heck of a lot closer to the market price than $12.68 spot which is what the screen says right now but where you can not buy a single ounce of physical silver.  After this display anyone that uses the paper markets to invest in gold and silver is just an out and out dummy, plain and simple, and they deserve what they will eventually get… nothing. 

How speculators can continually line up leveraged positions against bullion banks with unlimited cash backing who in turn repeatedly smack down the markets is a mystery.  Unfortunately, the cumulative action of these players is making it tough for the rest of us but at the end of the day it will not matter because we will have our gold and silver or our stocks of the companies that are producing gold and silver and making a lot of money.  Even the US mint has suspended production of gold coins.  Silver coins are being severely rationed because they can not divert any more silver from the industrial users that must have the physical silver to consume, taking it off the market forever.  If you can not see by now, with all this data in hand, that the crash in gold and silver has nothing to do with market-related prices you would have to be a complete imbecile.

Minimize the Number of Counterparties You Have To Rely On

If anyone out there is discouraged by the brutal slamming that gold and silver have taken there is something you can do about it; stop taking paper promises and go out and buy real, physical gold and silver and not someone's promise of silver and gold in the future.  Stop making a fool of yourself if you are taking paper for payment of silver and gold and if you simply can not hold physical, buy high quality gold and silver shares and stick with them. 

This is life and death for your financial survival.  Don't be tricked out of your financial survival assets by manipulations and forced technical analysis chart violations that are engineered by the Plunge Protection Team.  Even precious metal investors I believed to be sophisticated are running from shares like scared children.  The gold ETF (GLD) and the silver ETF (SLV) were brought into existence and have as custodians JP Morgan and Barclay's, sworn enemies of gold and silver. 

What more do you need to know?  Again, the only thing that will end the suppression of gold and silver is the physical markets and they will end it quick.  Were you buying gold and gold shares because you thought jewelry demand was going up or were you buying gold and silver shares because you fear the whole system is shaking to the core and about to blow up?  Did you really think the money powers and the banking fiat money system was going to just roll over and go down without a fight? 

It is very likely that a huge bank failure is just around the corner because the ferocity of the attack on the paper gold and silver markets smells of desperation.  If there is a major financial dislocation just around the corner, this latest smash down has provided an opportunity for the banks and bullion banks to cover their massive short positions before gold and silver soar upwards out of control.  The proper response to protect against these raids is to take advantage, go out and buy some physical silver or gold and pay up to get it now rather than later.  Later will be too late at some point and let's just hope it's not this time for those that settle for delayed delivery.  For those that wish to delve into the matter of precious metals manipulation and intervention we highly recommend .  They have accumulated evidence from publicly available records and have done a superb job of organizing it including the following link.

Bailouts for Them, Bigger Bills and Debased Money for You!

Gold and silver were so viciously attacked the day that Fannie and Freddie were on the ropes, yet this will not be the last time.  The bailout of Freddie and Fannie is the best thing that could ever happen to gold and the worst thing that could happen to the average citizen.  It guarantees that trillions more in paper dollars will be created.  The passing of this bill is a criminal act.  The people of this country are, in effect, handing over a blank check to the money powers that have been robbing from us and swindling our money for years and years.  Passing this bill is like handing over all the income taxes Americans pay to those that have overleveraged the system and will continue to do so.  

The derivatives pile has grown to $1.2 quadrillion from $550 trillion a year ago.  Doesn't it seem they are still just leveraging up the system further.  It will be very good for the money powers as they will take your donations and distribute them to fat cats and zombie banks again and again until the system finally implodes after the maximum amount of cash can be extracted from the citizenry and funneled up to the good old boy club.  How naïve Americans have become!  There is certainly an abundance of evidence that something is very rotten in Denmark as far as the integrity and dealings of large financial institutions. 

See the links to Rob Kirby  and Catherine Austin Fitts for clues to some of the methods to take your money and put it in their pockets.  Their research has found trillions of dollars have disappeared from the housing debacle and it looks like the hand of a fat cat got caught in the cookie jar.  Americans…wake up!  You are being robbed; stop trusting counterparties and most of all stop trusting your Government's financial decisions to bail out the system.  It is those decisions that have bankrupted the system. 

They have fiat-sized our money into increasing worthlessness and now they are trying to do that to gold and silver which is the main thing that can protect you from the bogus paper currency we have allowed.  Meanwhile, as our Government officials cap the gold price as suggested by Paul Volcker, foreign Governments and investors can sit back and accumulate at their leisure all the physical gold and silver they can find at prices that are at a severe discount to what the true market price would be.  Don't fall for it; buy physical when you buy gold and silver just as all the foreigners are doing. 

The Crisis Will Not Change Because What Caused It Has Not Changed

The venerable James Dines, who wrote “The Invisible Crash” which documented the ups and downs and progression of the 1970's gold bull, is right when he says, “Those who are first very often look wrong”.  This book showed the mind numbing declines that occurred during that fantastic precious metal market and how very few grasped what was happening until the very end where, of course, everyone piled in catching at best the last gasp run of the bull despite gold multiplying in price by 26 times.  Despite that turmoil there were gold stocks that went up 500 times for those that bought early and held on through thick and thin.  This occurred with high interest rates, high inflation, a poor economy, high oil prices, and foreign altercations.  Sound familiar?  The current bull will make that one look like a blip. 

This gold bull is barely out of the starting gate. 

This latest gold and silver intervention has admittedly been the worst because the very things that we bought gold to protect ourselves from have happened yet we have been steam-rolled.  We have seen these smash downs before, almost always at key bullish moments.  Ask yourself if anything has changed to the fundamentals of gold and silver and you will see they have only gotten stronger.  The crux of the problem is the majority continue to play on the money powers field.  They are experts at controlling all things paper.  Stop playing on their field!  Fight your battle and mount your defense in the real world, the physical markets, not the paper fantasy world of the money powers.  You can not win there!  A good indicator to see where we are in the gold bull is to look at how big jewelry demand is out of total demand. 

When we are toward the end of this gold bull jewelry should be largely priced out of the market, probably only accounting for about 15% of overall demand rather than the vast majority of demand as it is today.  For those that are afraid that the stock market will be so bad that gold stocks can not buck the tide, realize that precious metal stocks are the only group in the stock market with a negative beta meaning on average they are going in the opposite direction from what the market does.  Even during the depression gold stocks bucked the trend rising 900%.  Some money absolutely has to stay committed to the stock market due to the huge amount of institutional funds.  That money will gravitate eventually to the areas that provide a haven and despite the efforts of the money powers to discredit the safe haven status of precious metals and precious metals stocks they will find this sector of the market.  Gold and silver stocks will provide many times the purchasing power returns than cash; that is for certain. 

Those that choose to get those benefits from the gold and silver ETFs should read the following story and keep in mind that they will be the ones stuck with the sardines at the end of the day. 

While gold was first discovered in Alaska during the 1870s, the 1890s have come to be known as the Yukon-Klondike Gold Rush days, as thousands of rugged individuals swarmed to the northern climes to find fortune and glory. Unsurprisingly, during the winter of 1896-97 the Alaskan ports were frozen solid and therefore closed to all shipping traffic. Food became very scarce and very expensive since new supplies had to be brought in over land at great hardship. Reportedly, a can of sardines that had cost $0.10 in New York could be priced at 10 times that amount by the time it reached the gold miners in Alaska. Still, there was great demand even at such inflated prices. For instance, in one remote mining town the price of a can of sardines was sold at rapidly escalating prices from $10.00, to $30.00, then $50.00.

Finally, one desperately hungry miner paid $100.00 for a can of the highly sought after sardines. He took it back to his room to eat. He opened it. To his amazement he discovered the sardines were rotten. Angered, he found the person who sold him the tin and confronted him with the rotten evidence. The seller was amazed and shouted, ‘You mean you actually opened that can of sardines? You fool; those were trading sardines, NOT eating sardines.

The Reality

The action in the precious metals markets is being hard-sold as the end of a bubble when in fact it is nothing more than another skillful manipulation and smash down.  A confluence of factors have come together to sell this story including a shutdown of factories in China to help clean up the air for the Olympic games that has temporarily upset commodity demand from the most important user. 

A lot of fuss has been made of the decline in India for jewelry demand yet a huge factor in that market was the sudden unwillingness by the Western bullion banks to extend the usual bank lines of credit that has disrupted the usual workings in that market so that backlog will soon manifest itself.  Another unprecedented event has been the incredible fact that you no longer have to pay to “lease” gold and silver, the bullion banks now actually pay derivatives dealers to take it and sell it.

When investors saw gold get bashed after the Fannie Mae debacle it was the last straw.  They came to the conclusion that there is nothing that can happen that will make gold work.  While this is understandable it is also very regrettable because the very forces that caused this to occur are probably the same that are sitting back with bids under the market price to accumulate at giveaway prices.  The commercial shorts on the COMEX can now have a field day covering their massive short positions.  It is time for investors to hold tight and add to their positions and to speak out against the interventions.  As Ed Steer of the GATA clan has said, ‘there are no markets now, only interventions”.  If you are willing to give up your only protection in the face of this you are announcing your willingness to be a slave and you will eventually be a slave. 

Silver has dropped over 40% from its highs just before Bear Stearns went belly up while the average listed silver stock is down 51%.  There are many silver stocks with just sparkling earnings reports including one that is growing over 40% and trading at less than three times earnings and very few people would be able to name that stock.  Investors in today's markets know only one thing: that a stock that they know by name only has broken some chart level that they consider means this company is automatically tossed on to their junk heap. 

Throw out your charts and step up to buy companies growing 20-60% that are absolute jewels.  There are only two ways to invest in this market to avoid this constant smashing.  Build a big position in physical gold and silver and if you do not want to arrange to store it do not trust the ETFs.  Quality gold and silver stocks are a different investment than physical gold and silver but they provide some security most investors don't appreciate.  The metal investment is secure because it is still in the ground, especially if the drill results are high quality by reputable firms. 

The obvious suppression of gold and silver is not only causing huge dislocations between the paper markets and the physical markets, it is also starving the sector of badly needed capital to develop new mines to meet surging demand.  Decades of infrastructure neglect have been lengthened even further, guaranteeing this will be a very long bull market.  Physical gold prices now exceed spot prices by $50!  Demand will only soar higher as bank after bank continue to fail. The banking industry is so horribly leveraged that banks can not be handed money fast enough to offset further ongoing defaults and write offs.  There are rumors that JP Morgan has been designated the black hole cesspool to dispose of worthless securities that are being replaced 100% with Government securities free of charge, (except to us as they dilute the money in our pockets every month). 

They even passed a law stating certain companies would not have to generate financial statements for national security reasons.  Could the reasons be that our wealth has all been destroyed and siphoned off by these criminals?  We still must borrow $2 billion a day from foreigners to maintain our standard of living and that's without counting all the ongoing massive defaults.  Foreigners are well aware they are only pouring money into a black hole and when they refuse to fund it any more our next step will be to create it from air which would result in hyperinflation.  Expect an attempt at a military solution before that happens but we may find we may not have as many allies as we thought when we pursue that avenue.

Keeping money in cash is no longer an option for two reasons: one, you are guaranteed to see the value of your money lose 15-20% of its purchasing power over the next year and, two, it is impossible to know which banks will go under next due to their tremendous leverage and horrible credit standards.  Already we have only $37 billion of the $53 billion left in the FDIC funds to insure deposits against bank defaults.  Every call of a bottom in the financial sector is based on another slick gimmick that has nothing to do with free markets.  Disallowing short sales in favored banks close to the money powers was successful in generating the desired short squeeze but it did nothing to change the fact that most banks are horribly leveraged with bad credits that are beyond saving. 

The only thing that the proposed bailouts will do is put more of our money in their pockets and that will continue until we have none and these banks will fail any way despite our donations.  Stand up for your rights and refuse to let the public get further raped.  Neither presidential candidate will do anything to stop this from occurring.  You have to let your representatives know you will not stand for this any longer and most of all don't be tricked out of your only defense from this and silver.  In this fantasy world of values, investors should be concerned with one main thing how many ounces of gold and silver they have in their possession and how many shares they have been able to acquire in the best gold and silver companies they can find.

By Richard J. Greene

© 2008 Richard J. Greene
Richard is Managing Partner, Portfolio Manager of Thunder Capital Management. Richard graduated from St. Leo College, received his MBA in Finance, Management and International Business from the University of South Florida and is a Chartered Financial Analyst (CFA).

Thunder Capital Management LLC was founded in July of 1999 with the mission of creating wealth while preserving capital. Founder and Portfolio Manager Richard Greene, who utilizes his unique combination of expertise and experience in a wide range of markets, industries and investment vehicles, oversees all investment activities of the firm.

This article is made available for informational purposes only and is not intended to be an offer to sell or the solicitation of an offer to buy interests in any fund. Such an offer will only be made upon the delivery of a confidential offering memorandum which are available to pre-qualified persons on request.

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