I received quite few e-mails yesterday after Zero Hedge put this article out entitled “Is Obama about to crash the Gold market again?” If you recall, President Obama held a similar meeting with bank CEO’s and agency heads back in April just before the drive by shootings of gold and silver on the 12th and 15th. The fear now is that we may be in store for a repeat.
I don’t think so. I wrote back to those fearful yesterday with a simple “Can you imagine the premiums and shortages this would create?” Since April we have seen premiums shoot higher for physical metal, we have seen shortages all over the globe and now we are seeing a backward basis in London’s GOFO rates (for the last 32 days and counting) as well as COMEX futures. Simply put, the plan backfired. It backfired so badly that the Bank of England apparently had to ship some 1,300 tons and another 800 or so tons was shipped from LME to Switzerland for “re” melting into bars that suit the Asian demand.
To put this in perspective, the 2,100 tons that left Britain in the first 6 months is almost equal to the entire global gold production (minus China) for an entire year! AND the result was what you ask? A backwardated market with premiums to purchase and shortages of supply. In other words, even with this “extra” 2,200 tons of supply there are still acute shortages. There is no hiding it anymore. Were another “April operation” like the last be attempted, the paper markets would probably just cease to exist.
No, I don’t think that Mr. Obama’s meeting was about crashing gold. I believe the meeting had something to do with the currently crashing bond market(s). It may also have had something to do with the upcoming G-20 meeting. We may have been tipped off that something wicked comes our way. “Something wicked” as in some sort of currency agreements already having taken place around the world that isolates the U.S. and lessens demand for dollars used to settle international trade.
As for the crashing Treasury market, it now verges on “out of control.” We touched 2.9% yesterday which is almost a 100% increase in interest rates since the beginning of the year. The Fed for their part has lost over $300 billion on the move so far. How much has been lost by market participants? Who are they and more importantly who are their counter parties? I don’t know what THE number is on interest rates that will blow up the derivatives market (it may have already blown and we don’t know it yet) but rates cannot move as fast as they have without someone, somewhere losing huge sums of money and becoming insolvent.
Could the meeting yesterday have been as simple as the MSM/White House explanation that “Dodd-Frank” regulations need to be sped up? Maybe, but I seriously doubt it. I deep down believe that control has been lost in the Treasury market and has set off the nuclear derivatives time bomb that we all knew existed but never wanted face. We will soon see as the Fall season arrives because insolvent counter parties cannot be hidden (for long). The dollar index has weakened but Treasury bonds have crashed like never before. For those of you who remember 1987, it was a declining bond market (rising interest rates) that triggered the whole event.
From that point forward the markets have been “managed” and “saved” time after time after time. Just as the Green Bay Packers used to “sweep right or sweep left” play after play, the Plunge Protection Team has come in with the same play to support the dollar and Treasuries. Part of this “playbook” was the suppression of precious metals as alternative currencies with the occasional drive by shootings of their prices. Just as other NFL teams figured out how to stop “Packer sweeps,” the world has become wise to the PPT playbook. The world is abandoning and exiting the “safety” of the U.S. Treasury market space in favor of precious metals. We have so far seen ferocious exodus of Treasuries, massive demand into the metals but only 15-20% movement in price. Assuming that (maybe not a good idea to assume) the metals do not have an overnight “markup,” the short term price damage that was done should be reversed and then some to compensate and appease the defiance of Mother Nature.
In summary, I think there are far bigger fish to fry currently than mobilizing the remaining gold inventories to suppress price. I think that JP Morgan knew this and is the reason that they are now long gold. Could they actually view their long position as a hedge to their interest rate and derivatives exposure? Ya think?