Bullion Bulls Canada

Occasionally, a television commercial does an exquisite job of seizing upon some time-tested cliché and then uses an image which perfectly illustrates the principle in question. An example of such a commercial is the ad for Fram oil-filters, which (if memory serves me correctly) dates back to the 1970's, and ran for many years.

For the benefit of younger readers, and older readers who do not recall that commercial, I will briefly summarize it. A mechanic is standing in a garage, in front of a car which is up on a hoist. In his hand, he holds a Fram oil-filter. He holds the oil-filter up, and says, “You can pay me now...or pay me later” (as he gestures to the car on the hoist).

There are several ways we can characterize the principle being cited. One way is to say that we can behave prudently today (by buying a new oil filter for our car), or face catastrophe tomorrow (be forced to pay for an engine overhaul). An economic characterization of the principle would be to say that we can incur a small expense today in order to avoid a major expense tomorrow.

However we choose to frame the principle, one fact is clear: many members of our species never follow this advice, while almost all of us stray from this wisdom at least on occasion. Indeed, this particular human failing is so common that we have a word for it: procrastination. As a consummate procrastinator in my younger days, I fully understand this form of human weakness.

We start with a task we must perform or a problem which we know we must solve – but which we would rather avoid, due to some level of unpleasantness which we associate with the matter in question. In a moment of weakness, we make the mistake of asking ourselves a question: if I wait to deal with the matter until 'tomorrow', will it make much of a difference?

This creates a dynamic which quickly turns into a vicious circle. The reason why procrastination is such a debilitating flaw is that most problems are not so urgent that they absolutely must be attended to today. Thus, when we procrastinators ask ourselves that rhetorical question, we already know the answer: “no, waiting one more day will not make a difference.”

The big problem with that process is that many situations deteriorate at a very gradual rate. This means that if each day we ask ourselves “can I wait one more day?”, we will be able to answer that question affirmatively for a very long time. Meanwhile, the cumulative deterioration of our situation(s), caused by many days (or years) of delay can be much more serious. Few forms of cancer can make us noticeably more ill over the span of only a day, yet we are all well aware of the cumulative destructiveness of that disease.

Most economic problems evolve in a similar manner. If we deal with the problem promptly, we may escape any adverse impact at all, while if we wait too long, the problem can easily become 'fatal'. As individuals, the maturity gained by the passage of years (and often many years) eventually teaches us to avoid the vicious circle of procrastination.

Today, President Obama signed into law the historic Financial Regulatory Reform legislation package. I reviewed this in “A Done Deal” a few days ago, so I won’t restate my position here. I’m putting this short missive out to bring your attention to a new video put out by Commissioner Bart Chilton on the same issue. www.cftc.gov/files/oirm/video/cftc_023455.wmv

I sent the link earlier to a subscriber to test if he could retrieve it, and he responded that he thought that I had produced the video. I didn’t, but it was a fair observation, since the centerpiece of Commissioner Chilton’s statement affirms that the new law mandates that the CFTC establish position limits in order to prevent market concentration. Position limits in silver to break the stranglehold of concentration on the short side of COMEX silver has been my mission for 25 years. Chilton confirms that will be the law. Please watch the video and then decide if my take is correct.

According to Commissioner Chilton, it seems clear that the new law abruptly alters the former debate of whether the Commission should adopt strict position limits in COMEX silver into what the position limits in COMEX silver should be. This is a remarkable transformation. Suddenly, it’s a question of what the position limits in silver should be and when they should be enacted, not if we should have them. Some may wonder how this remarkable transformation came into being, but there is little doubt in my mind that the architect was Gary Gensler.

What should the position limits be in COMEX silver? As I have maintained for two decades, and with which almost 3000 public comments concurred, 1500 contracts is close to the proper number. I based this on real world production and consumption, world and exchange inventories, and an objective comparison of silver with all other commodities of finite supply. The case is easy to make and has been made repeatedly. Now it is up to those opposed to the 1500 contract position limit to state what the limit should be instead and why. There has been conspicuous silence on this matter to date. It is time to break the silence and initiate an honest debate. Of course, it is not just about the level of limits, but in enforcing those limits on the big shorts, like JPMorgan. I assume Commissioner Chilton wasn’t excluding JPMorgan from the new law, but he can speak for himself.

One persistent gripe I have with media analysis of economic issues is the extremely stunted perspective on news items. What I mean by this is that a news item will come out which suggests a particular trend (to greater or lesser degrees). What we will then see is a legion of media pundits jumping on this one inference – and then framing it as if it represents the only rational conclusion for this piece of news.

In fact, as anyone with a reasonable amount of imagination and/or analytical expertise can tell you, most news items are suggestive of at least two possible scenarios – and often more. This analytical ineptitude has resulted in a number of disparaging clichés. Sadly, most take aim at the numbers, themselves, instead of the people using/abusing these numbers.

“Statistics can be used to say anything.” “There are lies, damn lies, and statistics.” “Numbers don’t lie, people do.” The first two expressions are common (but mistaken) adages in our society. The last one has perhaps not yet achieved the status of a “cliché”, but it is certainly an expression which can be found in the writing of an increasing number of authors. And unlike the first two clichés, the third expression is logically valid.

In fact, a “statistic” is a precise numerical representation of a particular item or event. By definition, it can only represent a single fact. Where statistics get their “bad name” is through utterly incompetent analysis. A writer takes a statistic, adds his/her own interpretation of that statistic, and then pretends that the statistic, itself represents the author’s conclusion – because the author refuses/fails to include the chain of logical deductions which leads from the original number to the author’s stated conclusion. For those more interested in this subject from an abstract perspective, I wrote a previous commentary on this very subject.

At present, I want to point out how such superficial (and erroneous) analysis can affect the precious metals sector – and the people whom report on it. In particular, I want to examine data from India and China’s bullion markets, and then explain how this data is more complex than it is currently being portrayed by most commentators in this sector.

Starting with China, recently released data from the World Gold Council shows that “retail investment demand” for gold continues to rapidly increase in China. Several reasons are put forth to explain this increased demand by precious metals commentators: rising wealth/income levels in China’s population, an increasing distrust of debauched paper currencies (or a concern about “inflation” – which is the same thing), and even the explicit endorsement of gold (and silver) as “desirable investments” by China’s government.

These are all valid reasons, and all “drivers” of current demand for gold in China. However, an even more important dynamic is either ignored, or simply unknown to most of these writers: the extreme “liberalization” of China’s bullion market. Ironically, precious metals writers have reported (in great detail) on the recent announcement by this government of significant moves to “open up” China’s precious metals market. Yet, the much more significant move by the Chinese government which preceded this has been almost completely ignored.

Starting with Mao, China’s citizens were prohibited from purchasing bullion. It wasn’t until 2002, that this total ban was partially lifted. However, small purchases of bullion were still not allowed. When you combine the (previously) small incomes of China’s population with an official ban on small transactions, the effect of this decree was that gold was still totally out of reach for well over 90% of China’s 1+ billion inhabitants.

It was only at the beginning of 2009 that all restrictions on bullion-buying by individuals in China were ended. From that time, it only took about one year for China’s gold-buying to surge to a level where (depending on whose numbers you look at), China is either tied with India as the world’s largest gold-consumer – or has already vaulted into top-spot.

Clearly, the single most-important driver for this demand was the lifting of prohibitions on bullion-buying, and yet that dominant factor has been almost completely overlooked by the precious metals community. Why do I continue to harp on this point?

Unlike the other drivers of demand mentioned (which are based upon current factors), the roughly 50-year ban on bullion-buying in China obviously created vast amounts of pent-up demand. Arguably, this pent-up demand must be satisfied first (since it predates those other drivers), before the Chinese market even begins to be driven by the other factors listed. However, even if you reject this “chronological” interpretation of Chinese demand, it clearly represents a major incremental addition to all the other demand-drivers.

Given the decades of rampant manipulation of the precious metals markets on the “short” side of trading, it is more than ironic that as the U.S. CFTC (“Commodity Futures Trading Commission”) ponders restrictions on commodities markets, it has expressed the most public concern about “speculators” on the “long” side of investing.

This comes with HSBC sitting with the largest concentrated-position in the gold market in history (“short”), while JP Morgan sits with the largest concentrated-position in the history of the silver market (also “short”). Furthermore, these concentrations (in proportionate terms) are far larger than anything seen in the history of all commodities markets.

Nonetheless, we continue to hear endless rhetoric about “speculators” disrupting markets (especially the crude oil market) – through “competing” with the buyers who actually consume these commodities through their own operations. Such “disruptive speculation” is often referred to (disparagingly) as “hoarding”.

Before I get into a direct analysis of this economic phenomenon, it would be helpful to review some basic economic fundamentals, and then first apply those fundamentals to the “short” side of commodities trading. Regular readers will be familiar with one of my economic mantras on commodities markets: anything which is under-priced will be over-consumed.

In fact, this isn’t really “economics”, but merely an expression of common sense. If chocolate bars were suddenly re-priced at a dime apiece, store shelves would be cleaned-out in days. Manufacturers’ inventories would then quickly be drained. This would soon be followed by acute shortages in the global cocoa market, and very possibly the sugar market as well.

At some point, not too far down the road, such warped pricing (totally against economic fundamentals) would create utter havoc in these markets – as acute shortages occurred – leading (inevitably) to a massive price-shock, not only to the chocolate bar market, but also with the cocoa market, and likely the sugar market, too. These price-shocks, in turn, would cause serious disruptions in other markets which rely upon these commodities.

In short, excessively low prices are at least as damaging and disruptive to markets as excessively high prices – and arguably much more so, since they lead to two massive distortions to markets: first over-consumption (which depletes inventories and stockpiles), followed by a massive price-shock (the only way to curb demand to a sustainable level).

If we replace the words “chocolate bar” (in our example) with the word “silver”, we see what utter havoc has been created in this market, through JP Morgan being allowed to accumulate and hold the largest, concentrated (short) position in the history of commodities market.

Noted silver authority Ted Butler has estimated that 90% of global stockpiles of silver have been used-up, thanks to decades of this market-manipulation by JP Morgan – along with smaller, but equally nefarious allies in this market. With decades of manipulation behind us, and global inventories and stockpiles already decimated, we have gone through the period of “over-consumption” and are rapidly approaching the massive price-shock – which became inevitable the day that JP Morgan (and fellow banksters) embarked upon this permanent-manipulation scheme. It is the years of ceaseless manipulation, combined with JP Morgan misrepresenting their activities in this market which makes this more than merely "illegitimate", but also illegal.

Not surprisingly, growing numbers of investors are gravitating toward this market. They are investing in a commodity which has become genuinely “scarce”, due to the nefarious (and illegal) manipulation of this market by JP Morgan and allies. How is the brain-dead media reacting to these market events?

Far from condemning the indefensible conduct of the bankers (on the short side), it is silver investors who are depicted as “speculators” – which as I explained earlier, is a “four-letter word” in the eyes of the U.S. regulator.  And rather than describing the activity of these “speculators” as the very sensible decision to stock-up on a commodity in short supply, the media depicts this activity as “hoarding” – yet another term with negative connotations.