Costata has been working on a few detailed responses to some of the comments in the last thread. But with the comments going over 600 in four days, and then Blogger swallowing about 140 of them on Thursday, I thought it would be a good idea to start a fresh open forum for Costata's replies and for all of you to continue the discussion.
Sincerely,
FOFOA
807 comments:
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Part 5/6
Remember that tuna “ETF” created by the Japanese trading company. Boy oh boy have the banksters got a deal for them. Perhaps that trading company would be prepared to act like the “swing producer”. Operating in a similar way to my speculation about SLV’s function for a silver market manipulator. They could release or buy up tuna in the physical market to exacerbate cyclical trends in order to increase the insiders’ paper trading profits. What if there was also and OTC derivative market developing in tandem to this paper tuna market? Now there are three sets of price signals in this market. The physical market, the paper tuna public exchange and finally a totally opaque OTC market that only a small number of the market participants have any intel about.
What are these new “signals” from the market telling the South American pilchard fishermen? Perhaps the huge increase in the trading volume would tell them that there was an explosion in demand for tuna. You see neo-classical economics assumes that supply is infinite. Demand creates supply in their lexicon. We might see enormous investment in the pilchard fishing industry. Of course it could all be malinvestment if it was based on price, demand and supply signals that were false (artificial).
What would it do to the resource extractor-producers in Australia? Suddenly planning, entrepreneurial decision making and economic calculation would become much harder, perhaps even impossible. It takes time to rear fish. Would all of the profits be arbitraged away from the extractor-producers in paper trading before they could get their fish to market? Remember that interview with Ekkehard Schulz where he mentioned that 30 times the physical volume of nickel was being traded. Of that range of “ €10,000 and €50,000” per tonne of nickel how much of that high of the higher Euro pricing is ending up in the pockets of the nickel miners and refiners?
What if this scenario had actually occurred and the paper fish market had come into being? Could something occur in the physical market that would blow up the paper trade? As it happens some things did occur that could have spoiled a paper fish market (if it had existed). Firstly Japanese scientists discovered how to breed these fish in captivity.
Secondly it turns out that these fish aren’t merely Formula 1 racers they are also among the long distance rally champs of the ocean as well. You see scientists discovered that the Northern and Southern Blue Fin Tuna weren’t completely separate populations as previously thought. They actually cross the oceans to interbreed. If the paper markets were threatening the physical tuna industry you could be assured that there would have been coordinated intervention by the USA, Australia and Japan to save it. It is simply too important to risk.
So what would happen after this paper tuna market collapsed and all the leveraged paper players are busted? Well people still gotta eat, fish gotta swim, don’t they? The market would return to being a physical only market or people would go hungry and profits would be foregone.
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Part 6/6
A Paper Metal Market Collapse
There have been many scenarios rehearsed at this blog over the years in which the paper gold market collapses. They all basically come down to one catalyst – no physical gold. It might be unavailable because governments of the major gold producing countries simply take all of the local supply. In countries with corrupt governments there might be a variation on this theme with the same effect on the market. A foreign government might mine their gold, retain it in their reserves and just pay off the “Generals” for the privilege.
The gold ETFs could be drained completely and all unallocated pooled accounts could demand to be transferred to allocated holdings. As FOA pointed out here:
FOA (2/28/2000; 10:18:13MT - usagold.com msg#8)
First walk
"The Euro float is still too small (NB. written in 2000) to receive a massive dumping of unneeded dollars. Indeed, the more the US tries to discredit the Euro,,,, the greater the risk of a "Washington Agreement #2" where the BIS / ECB uses unneeded reserve dollars to BYPASS the paper markets and massively buy "real PHYSICAL gold". In fact, all they have to do is enter the market in a minor way and the entire paper gold arena will go up in flames."
This scenario of FOA’s applies equally to the gold ETFs. China alone could buy every single share many times over and seek to redeem all of the baskets. There is no shortage of US dollars around the world to accomplish this feat. Obviously it would blow the market to smithereens if they tried but that is not the point. The means are there, if the will is there, to do it.
So what would it take to collapse the paper silver market? The answer to this question is less clear. You could ask the same question about any of the industrial commodity metal markets. Basically there are three or four possibilities. An undersupply that cannot be resolved by a higher price. An oversupply that overwhelms the capacity of markets to absorb it. Widespread insolvency of the market participants could shut down the exchange, at least until other traders stepped in to take their places. Lastly, governments could intervene in the market to ensure that the industrial and military users of silver were assured of supply. I didn’t mention a genuine shortage of silver for a reason – I don’t think that is likely. An artificial shortage? Sure that could happen. In my opinion it is probably inevitable.
Price Discovery
So what is the likely outcome of a collapse in the paper gold and/or the paper silver market? In my opinion it’s very simple. The outcome would be price discovery based on physical metal transactions. If there is an official international market that price would be discovered on a global basis. If not it would be a local physical market.
This physical price discovery process would then reveal if the paper price had valued the metal accurately. It would reveal for all to see if the paper price had undervalued or overvalued the physical metal. So, would the prices of these metals move in the same direction? We will revisit this question in the next installment of this series Two Theories About Gold and Silver
costata,
1. Shelby Moore III writing here recently about silver. A few snippets:
"You see there is no way silver can be money, because there simply isn't enough of it in bullion form to handle the $trillions in economic activity."
You often hear this as an argument against gold. All of the existing gold in bullion form is worth less than 5000bn US$. This is insufficient as a basis of the financial system. Well, all of you know an answer to this puzzle.
2. I also have an objection to the idea that silver has industrial uses and therefore (1) it should not be used as money; and (2) it will not be used as money.
How about the following thought experiment. Assume that for a period of 20 years from 1980 to 2000, gold costs 20 US$/oz whereas silver costs 500 US$/oz. What would have happened? There would be hundreds of industrial applications of gold, but only very few of silver. The reason ist quite obvious. Gold is the second best conductor, and it is cheap and readily available. So it is used in virtually all processes. Silver is simply too precious and too rare.
This is what I meant by destoying the silver market. You make it artificially cheap so that hundreds of new industrial applications come up, and therby you try to turn the silver market into that of an industrial commodity. In some sense, they also tried this with gold. Take a look at how GFMS always stresses the use of gold in jewelry. With gold, it was a bit half-hearted though. Still, the MSM always talk about mine supply and jewelry demand for gold, but never about money stock, at least not outside the ETFs.
3. On short-selling. If you want to make sure that your broker does not lend your shares, you can keep them in a cash account as opposed to a margin account. Then your shares are 'segregated' funds. Your broker would commit a fraud if they lent them to a hedge fund. If you suspect that this type of fraud is common, your only way out would be to take possession of the printed share certificates and to lock them up in a safe place yourself. I don't think this sort of fraud is too common. I have tried to borrow shares in specific companies, and often it is very difficult to find someone who lends them and even if it works, the shares may be suddenly recalled. From this expecience, I guess that this type of fraud is not too common because why woulnd't they do it given that I am willing to pay for this service.
Naked shorting of shares is possible only within the settlement period (which is 3 business days in the US), and only between brokers. The shares that are sold short naked are not actual shares (for which you are sent annual reports and for which you receive dividends and have a voting right), but rather they are a sort of derivative that promises delievery of actual shares. It makes sense only for other brokers to purchase them. So whenever you as an individual purchase shares in a cash account and the trade settles after 3 days, you can be sure that you have honest shares. If you purchase shares and they fail to settle after 3 days, you would have a legal issue with your broker. At least up to now, I am not aware of any systematic problems. By the way, in Europe ex UK, share transactions settle on the same day, and so all this is a non-issue in Europe.
Finally, the Zero-Hedge article that you link describes the clearing agent for share transactions. In Europe, for example, all stock trades have long been cleared by a small number of central clearing agents. No share certificates are moved. Are you saying you suspect that stock clearing is fraudulent? This sounds like canned food in the basement to me.
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4. So what would it take to collapse the paper silver market?
You gave the answer in the paragraph above:
China alone could buy every single share many times over and seek to redeem all of the baskets. There is no shortage of US dollars around the world to accomplish this feat. Obviously it would blow the market to smithereens if they tried but that is not the point. The means are there, if the will is there, to do it.
Victor
VTC,
Re: Shelby
Obviously I don't subscribe to the view that there is a physical limitation. I agree with the Maloney "atoms" video. I copied and linked those comments from Shelby because they show how far he has come from his strident claims for silver over gold even a year or two ago.
Re: DTCC
I see your points. I find it significant that it is not clear who has title to the shares. The brokerage account says that the account holder does but that is an account sitting on the broker-dealer's computer. If the shares are registered in the broker-dealer's name with the DTCC nominee then it creates opportunity for shenanigans. I'm not claiming this is common practice.
The signal feature of many of the "financial innovations" I have been highlighting is that the potential exists for abuse in these systems when they were at one time, or could now be, structured in a way that prevents the opportunity for abuse. It looks intentional to me.
You also wrote:
"If you want to make sure that your broker does not lend your shares, you can keep them in a cash account as opposed to a margin account. Then your shares are 'segregated' funds. Your broker would commit a fraud if they lent them to a hedge fund." (My emphasis)
Fraud doesn't seem to bother these folks in London and on Wall Street. It appears that none of these people needs to have any fear of law enforcement agencies. They walk away from every infraction with a wrist slap and a small fine relative to their profits.
Costata,
This series highlight the best description of paper markets and modern banking practice I have seen.
The scary thing is that it affects all aspects of our everyday life!
Side note: Lately, renewed questions about growing your own potatoes emerge. Our fruits and vegetables consistently undervalued, through government subsidies. The lesson is that there are several ways to distort a market.
How can governments keep the metal markets in check, under conditions of failing paper markets?
Gabriel,
Thank you.
"How can governments keep the metal markets in check, under conditions of failing paper markets?"
IMO it's difficult to see how they can prevent it.
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