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Thursday, June 16, 2011

Is there slight of hand in the silver futures market? Should you own physical silver?

Silver oreImage via WikipediaGold/Silver Futures Manipulation

by J.S. Kim, newsletter

Earlier this month, I discussed gold/silver futures manipulation on the Max Keiser Report in the interview below:
In this interview, I discussed the explosion of gold and silver futures transactions in EFP (Exchange of Futures for Physical) and EFS (Exchange of Futures for Swaps) transactions. These two transactions comprised 98% of 99% of all daily transactions in the gold and silver futures market in New York during the month of May. Certain changes in commodities law in February and March of 2005 allowed for paper ETFs and even financial derivative or paper products that tracked the returns of gold and silver to be substituted for the "physical" part of this transaction. This means of course that the commodity regulators in the US, in an effort to keep the US dollar stable, had started to allow fraudulent paper contracts to be substituted for real physical gold and real physical silver in these transactions.
When GATA first uncovered this potential and likely fraud occuring in the futures markets, banker shills responded in online forums by saying that since EFP and EFS transactions were irrelevant because they constituted a very small percent of the total daily transactions in the futures markets. Thus, they concluded, it wouldn't even matter if gold and silver futures contracts were being exchanged for paper airplanes because in essence the volume of EFP and EFS transactions were much too small to impact liquidity and price discovery in the gold/silver futures markets in any kind of meaningful manner.
On Max Keiser's show, when I pointed out the fact that EFP and EFS transactions now comprised nearly 100% of all daily gold/silver futures transactions, I was attacked for making these statements from anonymous (i.e. cowardly) posters  that stated that again, these transactions were irrelevant because they were not true settlements as only true settlements in the futures markets occurred in cash or physical. 
However, this twisting of the facts I had presented was 100% wrong and disingenuous. Here's why. If the economic equivalent of the silver ETF, SLV, shares were exchanged in an EFP transaction for 50 long silver futures contracts, the owner of the SLV shares opens up 50 new long silver futures contracts, but the holder of the 50 long silver futures contracts, in ADDITION to receiving the SLV shares, also opens up 50 short silver futures contracts to offset his long position and effectively close out his long futures position. So the NET effect is that 50 NEW short silver futures contracts are opened with possibly nary a single ounce of REAL PHYSICAL SILVER exchanging hands. Ultimately, this exerts downward pressure on the silver futures prices, AND the silver futures market is robbed of a REAL transaction in REAL PHYSICAL SILVER that would have contributed to price discovery of a silver futures contract. 
To think about this another way, imagine that you could trade two shares of Netflix stock for every one share of Google stock instead of selling Netflix stock and receiving a cash payment. And imagine if 99% of all sales of Netflix stock consisted of Netflix for Google stock swaps. Now imagine that Google stock starts sinking and Netlflix launches a new product in the REAL WORLD that leads to a 50% boost in sales, but 99% of all transactions in Netflix still involve Netflix for Google swaps. Ultimately, the value of Netflix stock is going to be suppressed because these paper for paper swaps lead to no true price discovery of the value of Netflix stock and disregard information that is happening the real world regarding Netflix sales.  
While not a perfect analogy, it is a relevant analogy in that EFP and EFS transactions rob the silver and gold futures markets of real price discovery of how much one troy ounce of PHYSICAL gold should trade for and how much one troy ounce of PHYSICAL silver should also trade for. Furthermore, these EFP and EFS swaps allow the banksters to set prices for gold and silver in the futures markets that ABSOLUTELY DISREGARD the real time supply and demand for PHYSICAL GOLD and PHYSICAL SILVER that happens in the REAL WORLD. When you realize this, would you then consider the futures market to be a real market or a fraudulent market?  And that is precisely why nearly 100% of daily gold/silver futures transactions now consist of these privately negotiated transactions that contribute nothing to true price discovery. If bankers wanted to wield these paper for paper transactions as a weapon to prevent true price discovery of gold and silver, it certainly could be used for this purpose,  and this is precisely my point.   
According to the latest June COMEX physical inventory report, JP Morgan, though it owns eligible physical silver (NOT available to settle silver futures contracts), owns NOT ONE TROY OUNCE OF registered physical silver in the COMEX vaults that can be used to settle its short futures silver contracts. As far as I understand the purpose of the futures market, the regulators tell us that the purpose of the futures market is not to allow speculators to create gross distortions in the commodities market for their own personal windfall at the expense of the public, but to allow producers to hedge against rising and falling commodity prices in the free market. Since JP Morgan isn't a silver miner the last time I checked and they hold zero ounces of registered physical silver in the COMEX vaults, why are they even allowed to participate in the silver futures markets? Also realize that total COMEX silver dipped below 100M oz for the first time ever this week.  The fact that the inventory of physical silver that can be used to deliver against silver futures contracts in COMEX vaults is plummeting like a stone in the ocean should serve as a warning to anyone that owns paper gold and paper silver to IMMEDIATELY convert these paper contracts into REAL PHYSICAL GOLD AND SILVER before it is too late.
Lastly, I discuss the similarities of the bankster games when they took down silver from $50 a troy ounce to $33 a troy ounce to the bankster games that they inflicted upon the silver futures markets in 1980 when the Hunt Brothers tried to corner the silver market. Trust me, the price of silver in the REAL physical market, specifically in silver coins, never approached the $33 an ounce that banksters were setting in the futures markets. If you listen to my above interview, you will discover that the banksters used virtually the same blueprint they used to destroy the Hunt Brothers to inflict the same damage to PAPER silver prices this year as well. 

By understanding these bankster games, we at SmartKnowledgeU have been able to consistently outperform the gold/silver sector every year by a very significant margin.  That's not to see that are immune to volatility because if you invest in the gold & silver sector,  you WILL be subject to considerable volatility at times. However, knowing when to sell versus knowing when to be patient will be the difference between large gains at the end of the year or possibly large losses even if you are invested in the right assets. Since the launch of our Crisis Investment Opportunities newsletter in June, 2007, thus far, we have yielded positive returns every single year, and significant returns every year except in 2008, a year in which we ended up just very slightly positive. Still, from January 2008 to May 2011, our CIO newsletter has returned a cumulative yield of +136.84%, nearly doubling the +69.53% performance of #1 globally ranked John Paulson's Advantage Fund during the same investment period.  Right now, we are entering a period will gold and silver mining stocks will be bottoming and when great gains will be made in future years. Buying mining stocks at the right time WILL be the key to earning large profits in future years. 
Good investing, 

JS Kim
Managing Director
SmartKnowledgeU Pte. Limited

PS: You can follow Mr. Kim on Facebook and Twitter.
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