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May 8, 2011
Issue 146  -  The Art of Manipulation
 
 
We currently have a completely controlled marketplace.  All actions and price movements are carefully scripted, correlated and controlled by complex computer algorithms.  We are merely cogs in the great machine.  We must adapt to the machine and use it to our advantage.  This can be challenging especially when manipulation is beyond blatant, I present exhibit A, the silver chart from last Sunday night:
 
 
What you see here is the price of paper silver, not the real thing, falling $6 in a few minutes!  How can that be?  Remember, those who make the rules are in a very advantageous position.  What happened to cause this?  The press reported it was the killing of Osama Bin Laden plus a possible slow down in China.  WHAT!!!?!  These are completely unrelated to the price of silver.  If these were true reasons all commodities would have been slammed this hard.  They weren't.  Gold sold off pretty mildly.  This was the shot across the bow indicating that it was on.  Proceed several days later and the price is in the mid 30s. 
 
This has NOTHING to do with the fundamentals of silver, the economy, blah, blah, blah...    It's all about control.  The big banks are short silver (they lose money as it rises) and they needed it lower to reduce their losses.  Pretty simple stuff.  To do this they need to have something "help" them.  This time it was the commodities exchange which just so happened to raise margin levels.
 
What is a margin level?  This is not like margin debt.  Margin debt is money you borrow from your broker, using your stocks as collateral, to buy more securities.   A futures account has margin requirements.  This is based on the contract you purchase.  A contract for silver controls 5000 ounces.  The margin requirement is a percentage of the value for the entire contract.  If silver is $50 an ounce, then a contract is worth 5000 x $50 or $250,000.   Before last week, the margin was 6%, so for this example you would need 6% of $250,000, or $15,000 PER contract.  Every day on the commodities exchange the account is settled up.  If your underlying commodity went up, you are credited, if it went down, you are debited.  This is a zero sum game, for every credit, there is someone else with a debit.
 
To maintain integrity, the exchange must ensure that everyone has enough money (margin) in their account to pay for possible losses.  They don't want someone to be unable to "pay up" at the end of the day.  As the value of the commodity increases, the margin is usually raised.  Typically at a very slow rate.  Maybe 6 to 7%.  since it is a percent, the commodity would have to fall by the entire 6 or 7% for the account holder to have trouble.  If the amount on account falls below the rate, he/she will get a margin call.  They must either deposit more funds or sell positions with the exchange to make up the difference. 
 
As you could imagine, this is a very volatile situation.  The exchanges are very leery of having a customer default.  Therefore they raise the margin levels.  So what happened in silver that caused this huge sell-off?
 

Silver margins rise 84 pct in 8 days, provoking sharp selloff

* CME sets successive COMEX silver futures margin hikes
* Five rises since early last week, spec margin up 84 pct
* Silver prices slump 20 pct from record high April 28
* iShares Silver Trust holdings fall 4.78 pct

NEW YORK/SINGAPORE, May 5 (Reuters) - The CME Group sharply raised silver futures margins for a fourth and fifth time in under two weeks, an 84 percent rise in trading costs that has helped provoke a nearly unprecedented sell-off.

The exchange has announced five margin hikes for silver futures in fewer than two weeks, an 84 percent rise in trading costs that has sparked a 20 percent slide in the market in the past five sessions, its sharpest such loss since the collapse of Lehman Brothers in late 2008.

CME hiked margins on Wednesday to $14,000 per contract from $12,000 effective Thursday, May 5, and again to $16,000 effective Monday, May 9. Prior to April 25 the margin stood at $8,700 per contract.

One contract holds 5,000 ounces, worth about $200,000 at current prices. Margins are deposits paid by investors in futures markets, where full payment is made when contracts mature, to an exchange or clearing house to cover the risk of default by that investor and typically are based on the largest most-likely daily market move.

However, margins can also be used as a tool to curb speculative trading activity, particularly "hot money," by reducing the number of positions a party can hold by leveraging a particular amount of money.

Silver prices have tumbled more than $10 since they touched an all-time high of $49.51 an ounce on April 28.

"The catalyst for the silver move could be the margin requirement hikes, squeezing out the pure short-term speculators that were playing a hot segment," said Joe Cusick, senior market analyst at Chicago-based online brokerage optionsXpress.

Some in the market have questioned the delay in raising the margin and whether the impetus for the remarkable series of hikes came from the exchange, or from U.S. regulators worried about the 170 percent rally in the metal in the past 12 months, and its acceleration in 2011.

"The CME must have been worried about the volatility in the market, but the margin hikes have come very quickly and some time after the sharpest part of the rally," said a trading source at an international bank in Singapore on condition of anonymity.

"So yes, you might wonder if the regulator is talking quietly behind the scenes." said the source, who was not authorised to speak to the press on the matter.

But others said it was a simple matter of prudence on the part of the exchange.

"While the volatility persists, the main job of the exchange is to maintain the integrity of the market and to protect market participants," said Jonathan Barratt, managing director of Commodity Broking Services in Sydney. ;…

-END-

 
This is unprecedented.  Raising the margin 5 times!  Where are the authorities!  Talk about changing the rules in the middle of the game.  People had to come up with a LOT more money to keep their silver contracts.  Raising (and lowering) of margin is a common practice but this is unprecedented.  What is so suspicious about this is that the last couple raises occurred AFTER silver had fallen.  In fact there is ANOTHER raise coming Monday at the close.  Here's an old timer, Bob Chapman describing what happened:
 
 
So what does it mean and where are we going?  Right now it's very hard to judge as this is uncharted territory.  I have a feeling that we aren't through falling but we will rally some here before the true final fall and bottom. I could be wrong, but it's hard to predict what criminals will do.   Where are the possible bottoms?  The $33 dollar bottom that was just hit is a possibility.  It represents a 50% drop from the peak to the previous plateau.  The 200 day moving average is right at $28.38.  If the price falls through $33, that would be an enormous value and would have me loading the boat.  
 
There are tons of reasons to be buying gold and silver at this point.  Sure they could go lower, but in the long run, they are going much, much higher.  What does one of the richest men in the world think:
 

Top speculator Paulson is not selling gold... Calls for $4,000 an ounce

Wednesday, May 04, 2011

May 04, 2011

Gold could hit $4,000 an ounce over the next 3-5 years, says hedge-fund manager John Paulson. Gold is currently trading around $1,500 an ounce.

The United States and the United Kingdom have flooded their respective economies with money in order to fuel a more-robust economic recovery.

That rush of money will apply inflationary pressures on those economies, making gold poised to the hit the $4,000 mark in a few years, Paulson says...

 
This is not the action of a man who thinks gold has topped.  How about this:
 
 

Huge gold purchase by Mexico's central bank: 100 tonnes

By Jack Farchy
Financial Times, London
Wednesday, May 4, 2011

The central bank of Mexico bought nearly 100 tonnes of gold in February and March, the latest emerging market country to turn to bullion as a means of diversifying away from the faltering dollar.

The purchase is one of the largest by a central bank in recent history. The gold, worth $4.6 billion at current prices, is equivalent to about 3.5 per cent of annual mined output.

 
The central banks of the world are accumulating gold.  Why do you think this is?  Gold is money.  It's that simple.  We will eventually have a partially gold backed currency because it's the only thing with any stability.  Paper is just that, paper.  No limits, not constraints, and not worth ANYTHING.  If everyone woke up tomorrow and decided they didn't want to take paper, what would happen?  Inflation that you wouldn't believe, that's what.  People would start demanding more and more of the worthless stuff for transactions.  This would feed on itself and self replicate, causing more inflation.  Under this circumstance, gold is virtually invaluable.  Paper values would mean nothing in regards to it. 
 
If you have followed the metals for any length of time, you see that gold and silver are NEVER allowed to rise as much as they fell this past week.  This doesn't happen in other commodities.  They can skyrocket up and down.  That's a normal market.  Metals are not normal markets.  They are rigged and controlled. 
 
The metals may go down in the short run after a probable bounce which is normal after such a big fall, but in the long run, there is no place for the metals to go but up.  If you haven't bought any gold or silver yet, now is a very good time.  Use this fall to your benefit.  After all, the dollar is still in a death spiral.  In fact, the word is getting out:
 
 
US Debt Rating Should Be 'C': Independent Agency

Published: Tuesday, 3 May 2011 | 3:09 AM ET

By: CNBC.com

There have been increasing concerns about the fate of United States' prized triple-A sovereign debt rating. While

Standard and Poor's recently downgraded its U.S. debt outlook to negative from stable, implying that a ratings cut could happen in two years, one independent ratings agency has given the U.S. sovereign rating a "C".

"A 'C' is equivalent to approximately a triple-B on the S&P, Moody's and Fitch scales. It's two notches above junk and one notch above the equivalent of a single A," Martin Weiss, President of Weiss Ratings, told CNBC Tuesday.

Weiss was quick to add that while the rating seems weak, the debt situation is not in a danger zone that would trigger panic, noting that there was still broad market acceptance for Treasurys.

The grade reflects the U.S. massive debt burden, low international reserves and the volatility in the American economy, he said.

The U.S. government debt is fast approaching the $14.3 trillion ceiling, with the debt-to-GDP ratio close to 100 percent. And a downgrade of U.S. Treasurys - one of the most widely held assets - could theoretically raise borrowing costs and in a worst case scenario, trigger a default on the government's debt obligations.

America's rating was ranked 33rd out of 47 nations, according to Weiss, which began tracking sovereign debt last year. France and Japan also got a "C" rating, while Only China and Thailand received an "A" rating.

Weiss Ratings based its score purely on statistics, and does not take into account qualitative factors such as political stability.

-END-

 
Yes, this is the cold hard truth.  The United States debt is barely worth anything.  Certainly not AAA as they would have you believe on CNBC.  Notice who Weiss rated as As, China and Thailand.  That's what you call a changing of the guard.  Everyone around the world knows this except us.  It's plain to see if you just open your eyes and look:
 

National Home Prices Double Dip

Published: Thursday, 5 May 2011 | 12:02 AM ET

By:

Diana Olick
CNBC Real Estate Reporter

It's official.

Home prices have double dipped nationwide, now lower than their March 2009 trough, according to a

It was inevitable, and it was predicted (by me for sure) that a surge in sales of foreclosed properties and a big push by banks to facilitate short sales would force home prices down dramatically.

Sales of bank-owned (REO) properties hit 34.5 percent of the market, according to the survey, resulting in a national price drop of 4.9 percent quarterly and 5 percent year-over-year. National home prices have fallen 11.5 percent in the past nine months, a rate not seen since 2008. Add short sales, where the bank allows the borrower to sell for less than the value of the mortgage, and prices have nowhere to go but down.

"With more than one-third of national home sales being REO (bank owned), market prices are being weighed down as many markets have not regained enough footing to withstand the strain of the high proportion of REO sales," says Clear Capital's Alex Villacorta.

You don't have to tell Los Angeles Realtor Bill Kerbox any of this. LA prices had been improving, and LA is still one of the nation's best performing metro markets right now. Recently, however, prices took a turn, now down 2.4 percent quarter to quarter thanks to 34 percent REO saturation.

"We have definitely seen a number of both short sales and foreclosed properties along the West Side here, and they have definitely taken a hit," bemoans Kerbox. "It hurts to have a very low comp pop up next to your beautiful new home."

While the usual subprime mortgage suspects, like California, Arizona, Florida and Nevada used to rule the foreclosure roost and still have high volumes of distressed properties, the mid-west is seeing a surge in REOs now, thanks to the plain old recession. 40 percent of the Chicago market is foreclosures, 43 percent in Cleveland and 51 percent in Minneapolis. Home prices fell 8.7 percent in the Mid-West during the past three months compared to the previous quarter.

While the foreclosure crisis is abating on the front end, with fewer loans going newly delinquent, the pipeline of seriously delinquent loans is enormous. Banks are now ramping up the foreclosure process after the "robo-signing" paperwork scandal, but at their current pace it would take about four years to process all the bad loans through foreclosure and even longer to sell those homes out on the open market.

While buyer demand is rising, thanks to a slowly improving jobs picture, mortgage availability is still very difficult for the low to middle-income borrower, and falling prices don't help already weak consumer confidence in the housing market. If prices continue to fall further, which they likely will in the short term, the number of so-called "underwater" borrowers, those with negative equity, will rise even higher, which could in turn result in more loan delinquencies.

Nationwide more than a quarter of all homeowners with a mortgage are in a negative equity position, but in some markets, that number is far higher. 46 percent of Massachusetts borrowers are underwater, according to LendingTree.

The last time home prices fell at this rate, three years ago, they were then boosted by government stimulus in the form of a home buyer tax credit. "A note of caution to those looking for a strong end to 2011: The last time no incentives were in place and distressed inventories were this high, home prices fell sharply," warns Villacorta.

 
Now if you'll recall, about 5 years ago, there were those proclaiming that the U.S. housing market NEVER falls all at once on a nationwide basis.  Yet, here we are with the second occurence of the impossible.  NOTHING can't fall in price.  That's nonsense.  Our housing market is in serious trouble and will be for years.  Buying a house now isn't a particularly good idea because you will be able to buy them cheaper later.  Lots of better places for your money now.   Think about this for a minute.  The housing market was manipulated higher by government intervention.  Now that manipulation has come unraveled.  The government is now manipulating the metals prices and they are STILL rising.  Imagine what will happen when that game ends.  If the housing fall is any indication, it will be massive.  Please buy some while they are on sale.  You won't be sorry. 
 
 
Positions
 
GORO  (closed $27.16, down $2.99, average price paid $6)
 
Unfortunately, the support level of $29 was blasted pretty good this week.  If we can't get back above this quickly, it could lead to further weakness.  The blasting of gold and silver were the main cause.  Once you factor in that GORO will be producing gold/silver at zero cost, it just doesn't make sense for the price to drop as much as it did.  I expect the price to quickly rebound.  This week there will be an earnings release.  There is NOONE expecting this to be anything but a horrible report because of the heavy rains last fall.  If there is any good news whatsoever, GORO could soar.  Very safe to buy Monday with limited downside risk.
 
 
Mexus Gold  (closed $.21, flat, average price paid, $.22) 
 
A couple private emails to the company (thx to Jim And TIm) revealed that news was coming very soon and that the boat was awaiting a special sonar before departing.  This will be used for the finding larger (and more valuable) cable.  Hopefully we can get this on the road before too much longer.  The longer it takes, the more pressure on the share price as investors get impatient.  No sales here though.
 
Stocks    (Current status, out, sold on March 18)
 
Physical Gold  (Closed $1,495,566,  down $71,  average price paid $395)
 
Physical Silver  (Closed $35.62,  down $12.32,  average price paid $5.31)
  
I'll close this week with a pretty funny practical joke a guy plays on an aunt.  Listen to what she says after she realizes it's a joke...  Have a great week!