Sunday, June 29, 2014

James Turk Responds to the LBMA

Over the past two weeks the LBMA has been conducting a survey of market participants that trade physical silver. They are taking this step in response to the decision to end the daily silver fix.

The LBMA said: “In view of the recent announcement by the London Silver Market Fixing Ltd., it is important to gather the views of the global market to find a solution that meets the needs of market users around the world. The launch of the survey is an integral part of this process.

The LBMA reported that more than 250 people responded to its survey, which ended Friday. Here is my response to the key questions the LBMA posed....

“1. Is the current silver price discovery method sufficient?

The market for silver derivatives dominates price discovery for physical silver, which explains why gold and silver have been in backwardation more often than not since July 2013. This backwardation is proof positive of the abnormal influence of silver derivatives on the pricing structure, as is the fact that commitments to deliver silver in the aggregate far exceed the annual new supply; they even exceed available above-ground supplies. In this regard, an analysis of U.S. Commodity Futures Trading Commission data shows that futures derivatives of commodities such as corn or soybeans do not exceed annual supply. Backwardation in gold in theory is impossible because it would mean participants are passing up the free arbitrage. Given that silver is a gold substitute in that at present 66 ounces of silver provide the same safe-haven characteristics as one ounce of gold (that is, money outside the banking system), backwardation in silver is impossible too, yet backwardation has prevailed on and off for months. That the LBMA 18 months ago stopped reporting SIFO shows how artificial the price curve is for silver. Back then the LBMA stated in effect that customers were unable to transact at the SIFO rate being quoted, which meant that paper pricing was unrealistic because sellers of paper were unable to commit to physical delivery at the prices being posted (that is, posted but not true dealing quotes). If silver derivatives did not dominate the pricing structure, the price of physical silver would be much higher. A similar situation prevails in gold, but is not as extreme (that is, prices in gold are not as unrealistically low as they are in silver).

2. What new improvements would you like to see/recommend?

There are two very different silver markets. One is for physical silver, which is a tangible asset of limited availability. The other one is for paper silver, which includes derivatives of all sorts that can be issued in essentially unlimited supply, meaning that it is impossible for ALL sellers of these derivatives to meet their commitments to deliver physical silver if called on to do so. The paper silver market is in effect a fractional reserve system, which obviously could result in adverse systemic consequences for banks and other participants should a silver squeeze occur (as it did in September 1979 to January 1980). These two silver markets need to be clearly delineated for the benefit of market participants, and the short side of the paper silver market needs to be controlled with rigid governors to impose discipline on the quantity of paper issued. If the prices of silver along the curve (that is, spot or forward) in these two different markets are to intersect as they do now, the shorts in the paper market need to prove that they can deliver physical metal. Doing so would improve the accuracy of any price discovery in the silver market by making spot and forward prices more realistic because they would become an authentic reflection of true supply conditions. Namely, there would be an acknowledgement that the supply of physical silver is limited. Thus, silver price discovery would be improved by imposing discipline that would prevent the paper shorts from dominating the price of physical silver.

3. What are the essential features that you would wish to see in any replacement?

Derivative contracts can settle in either cash or metal. Both the buyer and the seller need to put up margin as evidence of their ability to fulfill the terms of the contact they enter into. These margin requirements are now met generally by providing cash. Though margins can also be met with physical metal in some cases, it is rare. My proposal would be for cash settlement contracts to be margined with cash, regardless whether the participant is long or short the contract, and can be essentially unlimited in terms of the number of contracts issued. In contrast, derivatives that commit to deliver physical metal should be margined differently, in effect controlling the shorts which in turn also would result in disciplined control of the longs of these contracts. Those who have bought a contract that could result in the delivery of physical silver should meet their margin requirement with cash. But those who have sold short a contract that could result in the delivery of physical silver should meet their margin requirement by having physical metal stored in an LBMA-approved vault. As is now the case, the size of the margin requirement can be periodically set by an exchange for exchange-traded derivatives or a regulatory body such as the Bank of England for over-the-counter trade derivatives. Note that even though the short sellers of contracts that could result in the physical delivery of metal are meeting their margin requirement with physical metal, the fractional-reserve nature of the physical market will not disappear. For example, if a 50-percent margin requirement was imposed, the commitments to deliver physical metal in the aggregate could grow to twice the available stock, unless of course the short sellers have additional physical metal available that is not being put into LBMA vaults for margin. But the objective of requiring these short sellers to meet margin requirements with physical metal is not to try eliminating the fractional-reserve aspect of the market, which is probably an impossible task given the human tendency to expand credit. Rather it is simply a method of imposing prudent discipline on the silver market by controlling short sellers of silver derivatives.

4. Which market participants would be the ideal contributors to the pricing mechanism? (for example, bullion banks, manufacturers, refiners, others?).

All market participants should be the contributors to the pricing mechanism. When a trade takes place on an exchange or over the counter, the data of that trade should be immediately provided to neutral third parties to collect and report (for example, Bloomberg, Reuters, et al.). Aggregate data should also be reported. For example, this would include measurements of the total outstanding commitments for physical metal by size and forward date.

5. Other comments on the pricing mechanism?

While I have focused almost exclusively on silver, my analysis and recommendations also apply to gold."

- Source, James Turk via King World News

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Thursday, June 26, 2014

Government is the Real Manipulator of Gold

A select group of bullion banks are simply the front-men, acting as agents of the gold price suppression scheme devised and engineered by governments, and Barclays Bank may not even be among this chosen group. After all, it was accused of manipulating the gold price by a dollar around the London fix, but the FCA did not investigate the big $18 drop in the gold price that had already occurred from the previous day. The FCA only went so far to note the impact on the gold price from extreme selling in the US market by reporting that there was “a drop in the price of August COMEX Gold Futures (which was caused by significant selling in the August COMEX Gold Futures market, independent of Barclays and Mr Plunkett).”

So who was the real manipulator of the gold price that day? Why isn’t the CFTC doing its job by investigating this manipulation? And what about investigating the flash-crashes where imponderable weights of gold are sold on the COMEX in mere seconds?

You will get old waiting for an investigation. We all know that the CFTC turns a blind eye to the manipulations by the US government. But at least something is being done in London. The FCA made a small step in the right direction, and so has the LBMA.

- Source, James Turk via King World News

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Monday, June 23, 2014

Gold Manipulation Starting to be Covered by Mainstream Media

We’ve seen manipulations like this time and again over the years, but there has been a major new development. The mainstream media is starting to write about these manipulations in the wake of the fine imposed on Barclays Bank by the Financial Conduct Authority, which is the UK’s regulator.

This £26 million fine is of course a drop in the ocean when compared to fortunes made over the years by the price manipulators. But the fine is big enough to start drawing mainstream media attention to the skulduggery going on in gold.

An article by Bloomberg is particularly revealing, relying as it does on the FCA’s document that reports its investigation of this one particular gold price manipulation by Barclays Bank. It makes clear how the paper market is being used to manipulate the price of physical gold, which ignores the reality that the supply of physical gold is limited, while the supply of paper commitments to deliver gold is essentially unlimited.

This means that gold - and silver too - operates on a fractional reserve basis. In other words, there are far more commitments to deliver physical metal than there is physical metal available, so when the music stops - which it always does eventually - the result will be a systemic failure as occurred in 2008 when Lehman Brothers was unable to meet all of its derivative commitments.

The important point is that the FCA report illustrates how the Barclays “exotic options” trader, Daniel Plunkett, twice conjured up out of thin air up to 150 LBMA good delivery bars that he did not own (then valued at $93.5 million) in order to force the price of gold lower during the fixing process. He then covered this short position by ‘buying back’ these non-existent bars from the trader at Barclays spot metal desk.

- Source, James Turk via King World News

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Friday, June 20, 2014

Derivatives, Sound Money and the Move to Tangible Assets

Chris Martenson, economic analyst at and author of The Crash Course and James Turk, Director of the GoldMoney Foundation talk about banking, derivatives, sound money and the move to tangible assets. James Turk mentions that today, commercial banks as well as central banks are leveraged at unsustainable levels. While both agree that it makes sense to get back to less risky traditional banking and a sound money system, Martenson raises the question of how it will be possible to bring the leverage down to prudent levels again and how to get rid of the huge amount of complex derivatives. That said, Martenson argues that the gold standard has been proven to be a working monetary system with automatic leveling functions. As a result of the coming structural changes to our monetary system, both men recommend owning tangible assets. They point out, that those who act first have a great advantage.

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Tuesday, June 17, 2014

The Importance of Gold to Human Liberty

Gregor Hochreiter, Author of "Krankes Geld, Kranke Welt", and James Turk, Director of the GoldMoney Foundation, talk about his book and how it explains that the lack of hard money not only impacts economics but also morality and values. Gregor explains that institutions impact individual behaviour and that fiat money encouraged debt and provokes short term mentality and speculation throughout society. Gregor uses the term "inflation" in the strict and original definition: an increase in the money supply. Rising prices are a consequence of inflation, a mere symptom. They discuss how to transition from sick money to sound money, highlighting the importance of ideas in ensuring the sustainability of any reform.

They discuss Austrian economics and how they are not even taught in Vienna. Gregor explains that academic economics at university level are very mathematics focused and debates are very narrow. However there is a growing interest among the general population in alternative schools of economic thought. Gregor sees a role for gold and silver coins in the solution to our monetary system.

They talk about how under the classical gold standard the negative feedback disciplinary mechanism was imposed automatically by gold, without the need for political discretion. They talk about the importance of gold to human liberty.

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Saturday, June 14, 2014

Robert Prechter and James Turk on Inflation vs Deflation

Robert Prechter of Elliott Wave International discusses inflation and deflation with GoldMoney's James Turk in this podcast. They also talk about GoldMoney, and the advantages of owning allocated gold stored at secure vaults.

Both men differ on the question of whether or not inflation (defined as a rising price level) or deflation (when prices fall) will be the dominant economic trend in the years ahead. Prechter argues that governments and central banks will be unable to prevent a big collapse in financial markets, owing to debt defaults and massive contractions in bank lending. In contrast, Turk thinks that America is heading for hyperinflation, owing to the US government's unwillingness to change its spending habits and the Federal Reserve's continuing monetisation of government deficits.

However, they agree that regardless of whether or not deflation or (hyper)inflation prevails, owning gold is still desirable -- provided that it is held in allocated form in secure storage. James and Robert both see gold as insurance against financial chaos, and as a means of protecting yourself from a collapse in the value of stocks, bonds and real estate.

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Wednesday, June 11, 2014

A Lot of Central Bank Gold is Missing

GoldMoney's Andy Duncan speaks to James Turk, Chairman of GoldMoney and co-author of The Collapse of the Dollar (2004), about his claim that central banks are holding less in their physical gold reserves than many assume.

James Turk explains the problem that central banks report gold and gold receivables as one line item on their balance sheets. This allows them to lease out physical gold in return for paper claims -- posing the question of just how much physical gold is left.

They also discuss the Gold Money Index and the gold-based Fear Index. Both show that gold remains undervalued compared with historical norms. They talk about how close we are to a "Golden Cliff", where the western central banks stop lending out their gold, and what the systemic repercussions of this are likely to be.

Finally, they assess the chances of Western governments undertaking gold confiscation and capital control measures; the likely amount of physical gold held at Fort Knox; and the reasons behind their prediction of an upcoming failure of fiat paper currency.

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Sunday, June 8, 2014

The Eurozone's New Bailout Fund

Philipp Vorndran, of Flossbach & von Storch, and James Turk, Director of the GoldMoney Foundation, talk about the unsustainable level of US government debt. They discuss the possible combinations of growth, taxes, austerity and inflation necessary to reduce the debt burden. Philipp explains that as long as it can print its own money, the US government will never default on its debt. The real question is how much the dollars it repays it with will be worth. They also talk about the US sovereign debt bubble, but Philipp does not expect rising interest rates, because of central bank policy, including Operation Twist.

They talk about stocks. Philipp explains that dividends and cash flow has to be analysed together with risk, sustainability of earnings and risk. They also talk about the Eurozone's new bailout fund and whether it will be enough to save the euro. Philipp explains the difference between the EFSF and the ESM and the process for their approval. He explains that the size of the EFSF is enough to rescue small countries like Greece or Ireland, but too small to deal with problems in Italy or Spain.

They talk about whether Greece can leave the euro. Philipp explains that there is no doubt that Greece is bankrupt. He talks of a 75% haircut on Greek debt and also expects strong opposition to austerity from Greek public opinion. He talks of the danger of bank runs in Portugal and other countries. Portugal, Greece and Ireland could still be contained and even leave the euro without destroying it.

- Source, Gold Money

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Thursday, June 5, 2014

Austrian Economic Center and the Friedrich August v. Hayek Institute

Barbara Kolm, of the Hayek Institute, and James Turk, Director of the GoldMoney Foundation, talk about the work of the Austrian Economic Center and the Friedrich August v. Hayek Institute to bring the teachings of the Austrian school of economics back to Austria and the rest of the world. After 10 years of warning about the crisis that we are now living through, Austrians are starting to get more attention, although academia is still dominated by Keynesian and Monetarist ideas.

Barbara explains the importance of innovation and economic growth for the material wellbeing of humanity. Barbara talks about the student competition that they are organising as well as their soon-to-come media lecture program. She talks about their mobile-based Austrian economics dictionary available in many languages on Blackberry, i-Phone and Android platforms. She also talks about the Free Market Roadshow. Barbara explains how the Austrian school teaches individual freedom and individual responsibility, and that these are fundamental for prosperity.

- Source, Gold Money

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Monday, June 2, 2014

The Gold Price & Its Cycle

James Turk and Michael Maloney of describe the gold price cycle in this video.

- Source, Gold