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Gold and Silver Obvious Price Maniupulation

Commodities / Gold & Silver Nov 20, 2008 - 02:20 AM GMT

By: Richard_J_Greene

Commodities Best Financial Markets Analysis ArticleAmazingly, while gold and other commodity related stocks continued to be sold off to levels that are at deep discounts to their intrinsic value in October, gold continued to break to new all time highs in most major currencies. On October 9th and 10th gold recorded new all time highs in many currencies including the Euro, the Australian Dollar, British Sterling, the Indian Rupee, the Russian Ruble, the South African Rand and many others. The Dow Jones Industrial Average Stock also recorded a multi decade low in terms of gold. Investors are getting a very much skewed view of gold's performance if they are viewing it in terms of the US Dollar or Yen. These are the two main currencies that have been used as cheap funding sources allowing speculators to take on incredible degrees of leverage to invest in higher yielding assets with much better fundamentals.

The excessive debt is being unwound causing a very unnatural rise in the dollar as overleveraged investors raise dollars to pay down their excessive debt. This has caused an unlikely gift from heaven for foreigners holding dollars to sell their dollars which are being printed like at no other time in history while at the same time they are rising in value due to the even bigger buying by debtors selling other assets to pay down debt. The same is happening to the yen which is why in these two currencies gold has not yet recorded another new high like it has in the majority of other currencies.

The manipulative attacks on gold and silver are getting more and more desperate and obvious to the masses. You could say the action on October 10th went just a little too far to the point where even the mainstream press and media are commenting on the price discrepancies between paper silver and gold trading on the Comex and physical silver and gold which is ever more difficult to find available at any price. While the stock market was melting down on that day, gold went from up $40 to down $75 in a matter of hours. Silver went from a high of $12.32 to a low of $9.42 as well. Meanwhile in the physical markets for silver the best price I could find for silver was $16.50 per ounce, a whopping $7+ over the “market” price on the Comex. That is an incredible 75% premium! One ounce silver coins go for more than double the spot price on eBay.

The manipulation has become so obvious we are seeing a steady decline in the weekly Commitment of Trader's Report open interest figures for gold and silver. Could it be that investors are finally realizing that market is a total scam? The manipulators have been so outrageous, they are precipitating their own downfall as Comex longs are increasingly demanding delivery rather than rolling forward. After all, you can take delivery and now sell it for as much as a 75% premium in the physical markets on eBay, for instance. At this rate they are in huge danger of having their scam market revealed since there isn't more than a fraction of the silver available for all of the demand which has been growing rapidly in recent times.

This should soon result in a reemergence of demand for gold and silver equities as the convenience of the futures market and very probably the gold and silver ETFs are called into question. When the fraud is removed, be prepared for the biggest gold and silver stock rally of all-time. Right now the stocks are being sold with no attention to the underlying attributes of individual shares. While many gold and silver stock investors have had enough and want out at any price, those buying in this selloff are picking up stocks of companies trading at less than ONE! times earnings or cash flow and as little as 30% of the cash companies have in the bank. I don't know if there has ever been a time in history where a group of stocks has traded so cheaply while their operations have performed so strongly and that is despite tremendous manipulation and suppression in their underlying products which are priced way below what they will be in a free market.

How could this have happened? This is what we have heard from insiders that witnessed some of the actions which engineered the selloff in the commodities sector.

Back in July, days before Fannie Mae and Freddie Mac were to be rescued, Bernanke and Paulsen were faced with a horrendous Consumer Price Index release of +5.4% which had already been deceptively massaged lower through various methods such as substitution, hedonic pricing, and geometric averaging, generating a number so low it bears no relationship to reality. Even with all the massaging lower of the CPI it was felt it had reached a level that would be most worrisome to the masses, particularly since gold and silver were working their way toward new highs recorded in March right around the time Bear Stearns blew up. Incidentally, it has recently been discovered that Bear was likely attacked by other financial firms since it was long $12 billion in gold derivatives and was not doing its part in the gold suppression scheme. Bear was no more bankrupt than all the other major banks and brokers, however, with the incredible leverage these organizations have taken, (most all are leveraged over 30 to one), a rumor about such a firm's liquidity will soon become a self-fulfilling prophecy since there is constant refinancing going on.

Paulsen knew that top performing hedge funds had been making a killing riding up the long term wave of higher commodities and shorting financials. He was already validated in 2006 by his successful efforts to drop energy prices by getting his ex-employees at Goldman to change the weighting in the widely followed Goldman Commodity index over night. This caused a cascade of selling by indexers when the surprise change hit the press. The scrambling resulted in the failure of Amaranth, a large hedge fund specializing in energy which caused more selling.

This time it has been reported that in July, Paulsen went to big institutional investors such as CALPERS which had big exposure to the well positioned commodity sector and after relaying the seriousness of the condition of the financial system, persuaded them to sell their commodity related investments “for the good of the nation”. He wanted to turn the inflation scare suddenly to a deflation scare. With a few big institutional investors leading the way combined with rampant naked short selling of gold and silver equities by the likes of Goldman reported by Canadian brokers, a wave of selling in this area was put in motion that snowballed. The illogical selling resulted in broken technical patterns of stocks resulting in more selling. This has resulted in a high level of redemptions in gold funds that forces managers to sell even when the stocks trade lower than the cash the company has in the bank. A way to check if this is what happened is to analyze individual companies and see how they have performed. For the most part there is nothing that should result in a selloff, as these businesses are among the strongest in the world today despite suppressed prices for gold and silver that would be much higher at this time.

It is truly a disgrace that the modus operandi of our financial leaders is to send false signals to the marketplace and cause cascading selling and buying after having those in the know positioned to take advantage of the effect. That could have another name – robbery. The bifurcation between the price of the physical gold and silver market and the “market price” as represented by the Comex is an indication that a vast number of participants in these markets have come to the realization, finally, that the market price on the Comex is a total sham. It is most unfortunate that those that have invested in gold and silver to protect precisely against the financial dislocations that have accelerated since Bear Stearns was driven to insolvency, are putting in for redemptions or selling personally because “something is wrong”. Physical gold and silver in your own possession can not be ruined although its perception can be tainted by those that believe the fraudulent pricing from the Comex actually means something. Gold and silver are the mortal enemies of fiat money since fiat is always eventually abused to the point of worthlessness.

Since the very banks which have an interest in seeing gold and silver discredited have access to unlimited borrowings from the Fed and have no restrictions whatsoever from driving the price of the metals and the stocks down, you can not rely on any message that lower prices of these invaluable assets is bringing. There are huge numbers of investors that are currently paying 70-100% over Comex prices for silver and 15-20% over for gold. These people are clearly not paying attention to what the Comex “market” reflects. Gold and silver serve a very special function in the protection of one's assets and in a fiat money system gone totally out of control that is even more true. Investors need an appropriate weighting in precious metals that should not be sold because a line has been broken on a technical analysis chart. Even though it does not seem to be working while it is apparent that it should, it is the type of asset that will probably work all at once, when the constant manipulation is suddenly overcome by natural forces.

Central bankers and the money powers are masters of all things paper. They very cleverly found a vulnerable area to exploit when they noticed hedge funds were very long in this area and that they were using excessive leverage. With a little cooperation from a handful of very large institutional investors they were able to initiate a domino effect of selling making this traditional safe haven look totally ineffective while in reality the selling is a result of holders using leverage and self defeating stop losses that takes them out of the sector when it is most needed. Those that were overexposed or leveraged in this area should bring their weightings down to an appropriate level but to abandon the sector completely at this time is very foolish. Gold and silver should protect assets from either inflation or deflation; however, a very rocky period before that protection becomes apparent should not be totally unexpected and reflects no understanding of what the recent manic money creation will bring about. The huge losses being experienced now are more due to not understanding this than anything else. Stocks can protect somewhat in a period of inflation but bonds would be lethal and unrecoverable.

Deflation would make highest quality bonds acceptable but stocks would suffer. Cash would only protect in the case of deflation or in the initial stage of inflation coinciding with the period before that inflation rolls into the real economy. That is probably what is occurring now and you should be protected in t-bills until it is apparent that inflation is going to be so high that your purchasing power will be wiped out rapidly. In an era when most all major banks are recklessly leveraged at 30-40 times their equity it is clearly not safe to have much cash vulnerable to likely bank failures. To do a check on these statements look at the evidence from the Bank of International Settlements. Despite the belief that banks and financial companies are deleveraging there is almost triple the amount of derivatives as there was over a year ago at $1.4 quadrillion! The money powers are less in control every day and that is why the attack on gold and silver has been so vicious. They have been unsuccessful from stopping other countries and investors from pulling all the available gold and silver off the market and these are the holders that will have the economic power down the road. You can bet when all the leverage unwinding ends, the financial companies that were successful in engineering the selloff will be the new big owners of the stocks and metals that are being thrown away for less money than the companies have in the bank. Firms such as Goldman have vital information since they are among the largest prime brokers. They know how leveraged specific investors are and can use that info against them.

One major prime broker raised their in-house margin requirements on mining stocks from 50% to 100% “because they are so volatile”. Obviously this resulted in more forced selling. They always pull out every trick in their bag to make sellers for what they want to buy. With the information they have in hand is it any wonder that the market can go up 900 points one day and then down 800 the next? They are gaming positions that should be privileged information. Ex-Goldman employees entrenched in key Government positions in many countries help the money powers influence policies such as continually attacking the gold and silver markets. In July, two US banks sold paper silver in a very short period of time equal to 1/4th of an entire year's production driving the silver price from over $19 to around $12 in a few weeks time.

The Government and their agents have spent the last decade propping up zombie companies such as GM and the banks, and suppressing free market movements in gold and silver. They continue to add to the problem with the massive bailouts and money creation that is the key factor driving gold and silver up which is what they so foolishly are trying to stop. As derivatives positions blow up, the dollar gets a boost as failing counterparties try to raise dollars to pay off their failed bets. A very huge portion of the $1.4 quadrillion in derivatives is positioned directly against what the natural pull of a free market that would cause asset prices to move to. More specifically, interest rates on bonds would be very much higher, gold and silver would be very much higher, debt of most major corporations would be unsalable except at dramatically higher interest rates, etc. etc.

The key problem of the financial system is too much debt and leverage. All solutions so far to the key problem involve more debt and leverage. That is why derivatives have almost tripled since this crisis began over a year ago and we are no closer to a solution. Gold and silver are even better values now than ever. The $700 billion bailout which we were vehemently opposed to went to the banks and to furthering the goals of the financial powers which is not in your interest. Not a nickel of it has gone toward extending more credit to consumers, nor will be, you have been lied to. Guaranteed, some of it has gone to holding back the gold and silver price and from exposing the reality of the situation. Write your Congressman and complain, let them know you see what is going on. We do.

There are many money managers that clearly see what is going on and they have taken the appropriate steps to address the current scene. Managers such as Jim Puplava, Eric Sprott, John Embry, John Hathaway and many others have taken the correct steps. Their performance has not reflected that they are the correct steps but that will come in time unless we let the financial powers take from our very hands the investments that will protect us from their actions. No leverage whatsoever should be used in this environment. The only way you can have these stocks taken from you is if you are using borrowed money. Gold stocks, silver stocks, and uranium stocks have fundamentals so strong that they can not be hidden despite the unprecedented attempts to make them look bad. This is why silver trades as much as 100% above the phony paper markets. You should be increasing your exposure to these assets not withdrawing from them. The upside is absolutely unprecedented. Gold and silver stocks have never been cheaper relative to gold and silver than they are right now. If you are overexposed, cut back, do not withdraw completely.

Do you own physical gold and silver? It is absolutely essential and can still be sold at close to all time highs despite the bogus paper markets. In this investment climate gold and silver should not only be a permanent part of your portfolio no matter how the investments respond in the turmoil, it should be an increasing portion. Physical metal is very difficult to acquire if you have waited to this point so do not give up on your gold and silver stocks. They have direct possession even if it is still safely below the ground. Put the vast majority of your portfolio in cash generating gold and silver companies, there are many which trade below three times cash flow and even one times cash flow. Many, if not most, have more money in the bank than their entire market capitalization. Panic selling initiated by the Paulsen and Bernanke white wash did little to calm the nerves of the market place. It did shut off the escape hatch of gold and silver that will benefit like no other area when the money printing accelerates and escapes into the real economy. At that point, and we believe it is very soon, those that have sheltered themselves in cash and bonds will be annihilated and will be too afraid to move to the safety of gold and silver after what was just perpetrated. This is truly criminal activity, be aware of it and stay sheltered with an appropriate percentage of your assets.

The capital that has been cut off from mining will most definitely create an upward explosion in the price of gold and silver like nothing we have ever witnessed. Demand for gold and silver continues to mount, particularly on the investment side while supply is in the early stages of absolutely plummeting. Gold production was down 6% in the first half of the year and will be much worse in the second half. Some companies we spoke to are moving to slow their production because they feel the Comex prices are just ridiculous. We agree and are glad to hear they hesitate to throw away scarce product for an inadequate price. Silver production will likely skid sharply if the situation continues. The zinc price has dropped all the way back to .48 while industry breakeven is closer to the $1 mark. 32% of silver production comes to market as a byproduct of zinc and another huge portion over 25% comes as a byproduct of copper.

The stage has been set for the most remarkable and likely rapid rebound of all time. The bull market in gold and silver and all commodities was catalyzed by a very long period of underinvestment and lack of capital. That situation is clearly being exacerbated by the events of the past five months which will cause an even more explosive upside than before. The supply side will be affected much quicker and deeper than any falloff in demand due to weak world economies. One can not just decide they all of a sudden would like to go find a new gold or silver mine or uranium field. Physical commodities must be priced above their production cost or the supply will simply dry up which is exactly what we are seeing in the gold and silver markets. Intervention can last for quite awhile but eventually the artificial prices result in ever bigger shortages and upward pressure on prices. People know that gold and silver should really be doing better now with all we have seen transpire this year so some people are using that as a justification not to buy it. As John Embry has said, “that is exactly the mindset the guys driving the price down are trying to create.” You can be sure when they can no longer drive it down they will be the big owners when it all bottoms.

Stocks in these sectors are trading at ridiculously low valuations based on earnings, cash flow, reserve values, and even just cash alone in the bank. This is clearly not a time to sell these companies yet investors have continued to do so forcing fund managers to sell stocks trading at a fraction of their real value to raise cash. As overleveraged hedge funds and investors sell investments and buy back dollars to pay off debt, the artificial strength of the dollar will persist until the debt is retired. Yes, believe it or not, there is global demand for the US dollar at a time when the country is fundamentally bankrupt which few yet understand in the US. This has all been set in motion by Paulsen and Bernanke with their scheme in July to twist the arms of big institutional investors to sell their commodity investments.

The companies continue to report good earnings results even with the unnaturally low gold and silver prices. It is impossible to know exactly when the selling will stop since investors want out of the strongest performing industries remaining in the US. If they would only take a hard look at what they are selling the selling will stop but all things must run their course. The sad part is just as investors run to cash we are ever closer to seeing just how unsafe cash is. We have been wary of banks all year to the point of not allowing much cash to sit in them. Our worst fears regarding how unsound banks are has proven out. So far damage to depositors has been minimal as bigger banks that are in even worse shape have rescued bankrupt banks like Washington Mutual and Wachovia.

Gold and silver continue to improve fundamentally with: wars on two fronts; huge, unprecedented and growing budget and trade deficits; ongoing financial crises with many more banks to go under; a recession that will uncover more financial problems; a flawed national energy policy; and improving supply and demand fundamentals. In addition, the monetary base is up over 50% over the past few months while other money printing to fund bailouts has even exceeded that. The Fed has kept its word that it is ready, willing, and able to print money in any quantity necessary to back these bailouts of the financial powers.

The uranium price moved down in October as hedge funds and financial players that were hoarding uranium metal were forced to sell in the deleveraging process. I was never a big fan of hoarding metal that already is experiencing shortages for its basic applications. Good for the electric utilities that got some material at a bargain price that they will find ever harder to acquire in the years ahead. The price has started to move back up over the past few weeks.

When you look at the actions of our Treasury Secretary and the Fed you have to question either their sanity or honesty, it is one or the other. The Government's borrowing needs for next year are already expected to double to over $2 trillion. Contrast the recent bailout plan initiated by China with ours. The China plan is focused on infrastructure with such things as railways and public housing that will require ongoing demand for commodities with a real, lasting product that can be used many years into the future. The US plan is focused on funneling $100's of billions of dollars and eventually trillions to failed financial firms as well as uncompetitive industries the most glaring of which is the US auto industry. These are the companies that caused the problems we have now. The Administrators running the bailout were complicit in this entire mess. AIG was just handed another $40 billion now raising that bailout for one firm to over $150 billion. AIG has been rumored to be the biggest short seller of gold and silver. Does that seem like a worthy bailout to you?

Contact your Congressman! There should be no more bailout money funneled to the bankrupt Wall Street banks and brokers. American Express was just converted to a bank so it could too get on the gravy train. Enough! Let the chips fall where they may so we can start over. The current plan is just taking more from you and me in favor of the financial elites in power. The sooner it stops the better. Make no mistake, the market and the media can be moved at will with all of the financial weapons we have handed over. Congressmen were threatened with Martial Law if they did not cede all the requested powers along with the $700 billion. Protect yourself with t-bills and gold to the greatest extent possible. Be very wary of cash held by banks or any counterparty.

If you were a businessman and you bought a company that was generating cash equal to what you paid for the whole company or even 1/3 of what you paid for the whole company would you be upset and want to sell it? That is, in effect, what you are doing if you sell these companies that are trading at these very low valuations. It makes no sense but it is happening.

By Richard J. Greene

© 2008 Richard J. Greene
Richard is Managing Partner, Portfolio Manager of Thunder Capital Management. Richard graduated from St. Leo College, received his MBA in Finance, Management and International Business from the University of South Florida and is a Chartered Financial Analyst (CFA).

Thunder Capital Management LLC was founded in July of 1999 with the mission of creating wealth while preserving capital. Founder and Portfolio Manager Richard Greene, who utilizes his unique combination of expertise and experience in a wide range of markets, industries and investment vehicles, oversees all investment activities of the firm.

This article is made available for informational purposes only and is not intended to be an offer to sell or the solicitation of an offer to buy interests in any fund. Such an offer will only be made upon the delivery of a confidential offering memorandum which are available to pre-qualified persons on request.

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