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Thursday, August 28, 2008 12:01 AM

Jon Nadler, Senior Analyst Kitco, Chimes In On The Precious Metals Conspiracy

Mish Moved to MishTalk.Com Click to Visit.

The amount of hate email I have been receiving in response to The Great Gold, Silver Conspiracy Explained is large but not unsurprising. People simply want to blame others for their own trading mistakes. I will have more on that in a separate post.

Most of the emails I received are unprintable because of the profanity. However I will print one of them anyway with slight edits. I will voluntarily withhold the name of the person writing although no such request was asked.

Name Withheld Writes:

Man, he skims right over the below, as if it is a quirk or coincidental.

Well @$$hole, why else would "someone" want to pay you to borrow their gold/silver????

Conclusion: *&%@You!!!
The above rant was in response to lease rates where I wrote:

"It does not make sense to me for lease rates to be negative, assuming they are indeed negative, as stated. However, just because something does not seemingly make any sense, is not proof of manipulation in and of itself."

Rest assured I received many more similar emails, about many other points. Every such email was a ridiculous ill-informed rant about something.

The Mystery Of Lease Rates Explained

I can now explain lease rates, gladly, in fact. Amidst all the hate email, there was one jewel. It was from Jon Nadler, Senior Analyst, Kitco Bullion Dealers Montreal.

Jon Nadler, Senior Analyst, Kitco Writes
Dear Mike,

I read with great interest your rebuttal of the "smoking gun" article by Butler. You are 100% correct in your comments.

One mystery I can lay to rest for you and your readers is the anomaly of 'negative' interest rates. Simple. It never happened.

Kitco received a BAD DATA FEED from Reuters. The error was corrected. End of story. We now have a system in place to 'ring' an alarm any time lease rates pop more than 1/4 percent. Solution will prevent such errors from reoccurring. Imagine how the conspiracy theorists will look when shown one of the pillars of their argument was based on a bad data feed.

Finally, just so you are aware, there is another rebuttal coming their way - soon. It will be on Kitco and it will be at the Silver Summit. In the interim, here is a quick 'mini-rebuttal'.

A major industry research firm was recently commissioned by a silver producer to find the alleged “smoking gun” of price suppression in the silver market, and all they have found is that the people promulgating the conspiracy/suppression/manipulation fairy tales were the only ones likely to be smoking (something). The results of the research may soon see the light of day, but it has already become rather clear that Ted Butler and his supporters are chasing silvery ghosts.

The accusation that manipulation is visible in the silver market is not only an unwarranted claim, it is in fact, a totally ill-informed and ignorant one. There are many levels on which such a claim is not only wrong, but demonstrates an almost total lack of knowledge about how the commodities markets, including the futures markets, work.

Consider, for starters, just the simplest and most straightforward facts.

1. Banks are market-makers. They stand to buy or sell the commodities in which they make markets, taking the other side of a trade from other people or institutions entering a market. When prices fell sharply a few weeks ago, it was because investors, particularly short-term, technically oriented funds, were selling. These funds often use over-the-counter forwards and options to execute their buy or sell transactions.

2. The funds came to market to sell their silver. Commodities were on the decline, the dollar was looking attractive, they had profits to lock in, etc. The reasons were varied but logical. They had to find someone (a counterparty) who was willing to buy what they were selling. Guess who bought? It was the market-makers.

3. So, the market-makers (the banks) were heavy BUYERS, not SELLERS, during the time when prices declined. Now, because market-makers do not take naked, one-sided positions, as they were BUYING the metal in a sharply declining price environment, they were immediately seeking to HEDGE their large and growing LONG positions. How do you think they did that? Yes, they SOLD in the futures market, hedging their LONG positions.

Now, if one knows anything about markets, one understands that. The question is why the people who write the drivel you frequently read do not understand even such an elementary concept as the basic flow of trades. Anyone learns this fact in their first year economics course in college. One would think that people who purport to know about these markets would know what freshmen in college know, yes? Apparently, they do not.

There are many other issues that came in to play during the period in question. For one thing, market liquidity dried up as rapidly as silver prices fell. All of those cavalier traders that had started trading gold disappeared. There was only selling. Those few banks that stood up and did their market-making jobs naturally represented a larger percentage of the trades, because the others fled as soon as someone yelled “Fire!” That does not make for, nor does it sound like a conspiracy.

If the funds are selling long positions, the banks on the other sides of those transactions are taking long positions, in the OTC markets. They hedge these long positions by shorting the Comex. Thus, they appear in the regulated and reported futures and exchange traded options markets as shorts.

One of the important points that the conspiracy quacks always miss is that the banks are usually the passive agents in markets. They make the markets, and take what is coming at them. “Longs and shorts always match” is something people who do not understand the markets say.

Yes, they match, but the important factor to know for price discovery is which side is initiating the trade. In recent weeks it was the short side: Funds selling. The longs and shorts matched, but the impetus for the trades was selling. Thus, prices fell. At other times, if the impetus is from heavy buying, the market makers will be going long, offsetting forward short commitments they are making.

So, no, you would not expect to see a big increase in the market makers’ long positions on the Comex at a time when they primarily are buying long in the OTC markets. Another point to consider when deciding to ignore stupid comments about how ‘banks’ have 35% of the shorts is to say: “So, who else would be shorting gold at these low levels?” The real question is not why the ‘banks’ position is so high. The question is, why it is so low? Go to ETF Securities’ website, by the way, and see their notice today about the massive increase in fund buying in recent days in commodities ETFs – reversing their selling of recent weeks.

Also, by the way, why not NAME the banks in question? Why not ask them right out as to the motives behind their positions (better yet, who their clients were) and whether or not they acted in a willfully nefarious manner? One can take any database and make it suits their argument.

A quick scan of all commodities in the reports in question reveals that in fact US bank participation was -on average- just 2.2 across the board. Or, one could isolate sugar and say that non-US banks appeared to “gang up” on wheat, corn, and sugar in a 'disturbing' way in August. Give me a break.

What you have here is the footprints of the hedge funds exiting the commodities' markets in a mass stampede. Nothing more than that.

The 'smoking gun report' is completely in error. What we may have here is a bullion analyst grasping at straws, and trying to incite the retail public to buy physical silver in the hopes that it will reverse the growing tide of money exiting the commodities complex. The so-called “shortages of physical silver” are simply localized coin blank inventory problems (the US Mint) or manufacturers not operating on a 'let's stock it, whether we think we can sell it or not' basis.

While everyone is aware that physical demand can and did rise on the massive price break we've had since the highs of March, and those of July, such a reaction by the would-be buying public is quite normal. Surely, many would love to try to bring down a $20 (or higher) initial cost on their metal if they have a chance to buy more at $12 or $13 per ounce. As for silver supplies, there is quite an ample supply of the raw material from which to manufacture any small product. Let fabricators come back from their summer holidays and the situation might change soon.

There are no problems securing Austrian, Australian, or Canadian silver coins and (as of yesterday) and dealers feel confident that their current and pipeline US silver coin supplies will ensure the satisfaction of all of their commitments to their customers. The theory that the market is somehow sinisterly manipulated – (especially as it comes at a time when US regulators are keeping a keen eye on the goings-on in the commodities and financial markets for just such type of evidence), is simply ludicrous and totally out of touch with market reality. Caveat lector."


Jon Nadler
Senior Analyst
Kitco Bullion Dealers Montreal
Jon, thanks much for clearing that up. Your email should put an end to this nonsense, but I am positive it won't. Conspiracy theorists have been ranting for 15 years and most likely will be ranting for another 15. They will continue to pour over COT data, inflows, foreign government sales and other such nonsense, not understanding what the data they are looking at even says.

Conspiracy theorists choose to believe 10 or more banks are all acting together over 15 years or more to suppress the price of gold, and in that time not a single person has stepped up to blow the whistle or expose the conspiracy in some fashion. Amazing!

One of the many baseless rants I received today was about foreign governments acting to suppress the price of gold. The real reason foreign governments are selling gold is because they are stupid. The height of stupidity was the Bank of England's sale marking the exact bottom in the market.

I am a big fan of Occam's Razor which states "All other things being equal, the simplest solution is the best." In other words, when multiple competing theories are equal in other respects, the principle recommends selecting the theory that introduces the fewest assumptions and postulates the fewest entities.

Competing Theories

Theory 1: The US government, foreign governments, central banks, various broker-dealers, and a consortium of 10 large US banks are all acting together in some massive conspiracy to suppress the price of precious metals, for 15 years running, and during that period not a single person has stepped up to expose the fraud even though CIA and other intelligence leaks have been running rampant.

Theory 2: There was massive selling by over-leveraged hedge funds in response to fundamental changes in regards to the US dollar vs. the Euro.

Mike "Mish" Shedlock
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