Rob Kirby: Wake-Up Call re/commodity prices

Today’s Market WrapUp  08.25.2008  Mon  Tue  Wed  Thu  Fri  Kirby Archive

Wake-Up Call
BY ROB KIRBY

Last week, widely regarded silver analyst Ted Butler, reported on recent developments during the July 1 – August 5, 2008 time period in the precious metals complex [specifically, open-interest data in COMEX futures].  

Butler’s work shows, as of July 1, 2008, two U.S. banks were short 6,199 contracts of COMEX silver (30,995,000 ounces). As of August 5, 2008, two U.S. banks were short 33,805 contracts of COMEX silver (169,025,000 ounces), an increase of more than five-fold. This is the largest such position by U.S. banks I can find in the data, ever. Between July 14 and August 15th, the price of COMEX silver declined from a peak high of $19.55 (basis September) to a low of $12.22 for a decline of 38%.

For gold, 3 U.S. banks held a short position of 7,787 contracts (778,700 ounces) in July, and 3 U.S. banks held a short position of 86,398 contracts (8,639,800 ounces) in August, an eleven-fold increase and coinciding with a gold price decline of more than $150 per ounce. As was the case with silver, this is the largest short position ever by US banks in the data listed on the CFTC’s site. This position was put on and resulted in massive market price collapse as our GLD gold-price proxy shows:

Manipulations in the capital markets are not restricted to precious metals. We regularly see the same “man-handling” of the interest rate complex when institutions such as J.P. Morgan wield amounts of 7 – 8 TRILLION in notional [largely 3 month interest rate futures based products] from one quarter to the next:

Ladies and gentlemen, the OBSCENE amounts of these financial instruments being thrust through the system – allegedly in the name of 1 bank, amounting to MULTI-TRILLIONS per quarter – CAN ONLY BE THE WORK OF A PRIVATE CENTRAL BANK [read, the FED], because no public entity – bank or otherwise – has the balance sheet maneuverability in an impaired credit environment to conduct such business.

Conclusions

That such obscenities are allowed to continue – UNREPORTED by the mainstream financial press – is, in itself, a condemnation of not only how warped, twisted and connived our capital markets are, but how COMPLETELY BROKEN and complicit our system of free speech and irresponsible our media have become.

We should ALL CARE about this because, in the immediate term, market manipulations like the ones outlined above lead to the inefficient allocation of valuable, finite resources.

We see the manifestation of these inefficient choices in shortages – of food, precious metals and energy – and the debasement of fiat currencies and geo-political instabilities.

The current track is NOT SUSTAINABLE. This is evidenced by the recent “decoupling” or widening of spreads between the futures [COMEX] price of precious metals and the prices being paid to acquire physical metal. We see the same type of divergence in the interest rate complex where LIBOR is set [effectively by 3 month Eurodollar Interest Rate Contracts] at contrived rates where banks are UNWILLING to lend money.

Under our current monetary regime the distortions outlined above will continue to intensify.

This is why I believe it is so important that people consider having an appropriate amount of physical precious metal, which is getting harder to purchase despite recent price bashings.

I would suggest to you all that recent price declines in precious metal, although nasty, have been largely “linear” in nature. My concern is that on our current path, we will reach a point where confidence is shattered, resulting in a geometric advance in the nominal prices of all things real.

Are you protected?

Today’s Market

Overseas equity markets began the week on a positive note with Japan’s Nikkei Index gaining 212 points to 12,878. North American markets went the opposite way with the DOW off 241.80 to 11,386.30, the NASDAQ giving up 49.12 to 2,365.59 and the S & P losing 25.35 to 1,266.85. NYMEX crude oil futures gained .62 to close at 115.21 per barrel.

On foreign exchange markets the U.S. Dollar Index gained .05 to 76.81.

Interest rates eased slightly across the curve with the benchmark 5 yr. bond ending the day at 3.03% and the 10 yr. bond finished the day at 3.79%.

Precious metals ended the day mixed with COMEX gold futures off 1.30 to 822.50 per ounce while COMEX silver futures added .10 to 13.49 per ounce. The XAU Index dropped 1.87 to 146.96 and the HUI Index fell 1.75 to 341.05.

On tap for tomorrow, at 10:00 a.m. August Consumer Confidence data is due to be released – expected 53.0 vs. prior 51.9. Also at 10:00 a.m. July New Home Sales data is due – expected 535K vs. prior 530K. Then at 2:00 p.m. the FOMC is due to release the minutes of their Aug. 5 meeting.

Wishing you all a pleasant evening and a happy tomorrow!

Rob Kirby

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