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JANUARY
25 2007 4:00PM PDT - Silver
and gold retreated from an early rally but closed
up for the day as the dollar recovered
somewhat from a beating overseas. Metals
in general were stronger today and silver
in particular has been leading the charge.
And even though the dollar sits just below
the important 85 level on the dollar index,
both gold and silver are significantly higher
today than the last time the dollar vacillated
around these levels in November. Clearly,
silver and gold have detached somewhat from
their dollar link, a development some believe
is due to a flight to safety as geopolitical
tensions are once again on the rise while
others seem to think this is a result of
renewed hedge fund speculation. Whatever
the reason, none of my indicators have yet
confirmed a fundamental basis for the move
and therefore I am participating with suspicion.
Resource
Stocks Popular?
Another
report
on the Vancouver show by Sean Brodrick of
the Martin Weiss publishing empire confirms
that attendance by both exhibitors and delegates
was phenomenal and therefore interest in
the resource markets continues to be high.
This is important because investors are
obviously looking for the next resource
play and they appear to have additional
funds to deploy into the markets. Meanwhile,
the popularity of gold continues to grow
as indicated by this commentary
which has Google and Goldcorp sharing top
spots among the recommendations of the best
100 amateur stock pickers over at www.marketocracy.com,
a site similar to the Motley Fool Caps site
where amateur investors recommend stocks
as I discussed on December 7 of last year
(see Archives).
My
point was and is that popularity is a relative
thing and there will be no easy way to determine
the top of the bull market in silver and
gold by simply looking at magazine covers
or by listening to conversations at a cocktail
party. By the way, I never did start tracking
on a weekly basis the top gold and
silver stock recommendations of the Fools
but if anybody wants to know, it looks something
like this today as compared to last December:
Number
of Rated Silver Stocks: 6 today, 6 then
Total
Rated Stocks: 3,588 today, 2,889 then
Most
Rated Silver Stock: Silver Wheat (279) today,
Silver Wheaton (293) then
Number
of Ratings for Top Silver Stock: 242 today,
164 then
Most
Rated Gold Stock: Goldcorp (135) today,
Goldcorp (145) then
Number
of Ratings for Top Gold Stock: 456 today,
300 then
Most
Rated Stock: Apple (4,394 ratings) today,
Microsoft (3,337)
And
here are the key measures of popularity:
Rated Silver Stocks to Total Rated Stocks:
0.17% today, 0.21% then
Most Rated Silver
Stock to Most Rated Stock: 5.5% today, 4.9%
then
Rank of Most Rated Silver Stock:
279 today, 293 then
As
a result of this somewhat tongue-in-cheek
"analysis", it is clear to me
that silver stocks have only marginally
gained in popularity with the average investor
since last December 7. Silver Wheaton continues
to be the most popular silver stock out
of the 6 stocks that are on amateur
investor Fools' radar but there are
still 278 non-silver stocks (among
them only two gold stocks: Goldcorp
and Northgate Minerals) which are more popular.
Therefore, there should be little concern
at this point that investors have an unhealthy
obsession bordering on mania when it comes
to resource stocks in general and silver
stocks in particular.
Greenspan
Admits to Gold Conspiracy?
I
am going to go off on a tangent here to
debunk a major fallacy among gold conspiracists
which continues to rear its confused head.
The latest telling appears in a KitcoCasey interview
with Chris Powell of GATA in which a "famous"
speech made by Greenspan in 1998 purports
to be evidence of central bank manipulation
of the gold price. Here is what Mr. Powell
said:
GATA
believes that the cover under which central
banks have been acting has now been blown
so totally that only the willfully ignorant
can fail to see it. And they point to the
public record to bolster their claim.
For
instance, there were a few key words uttered
by former Fed Chairman Alan Greenspan when
he appeared before Congress in July of 1998.
Greenspan was testifying as to why the Commodity
Futures Trading Commission (CFTC) should
not concern itself with regulation of derivatives
traded in the over-the-counter market.
Greenspan
argued that, “There is no reason to believe
either equity swaps or credit derivatives
can influence the price of the underlying
assets any more than conventional securities
trading does.”
One
might think the chairman guilty of a surprising
naïveté, or perhaps something a bit more
sinister, but that’s a topic for another
day. The relevance here is that gold, in
addition to being a fundamental currency,
is also a commodity, and as such the CFTC
is responsible for oversight of its market.
Greenspan
waved off the necessity for the CFTC to
regulate gold derivatives, telling Congress
to fear not, that the “central banks stand
ready to lease gold in increasing quantities
should the price rise.”
Oops.
Bet he wishes he hadn’t let that slip. As
Chris points out, “Greenspan was telling
Congress that the purpose of gold leasing
was not what the central banks had been
telling the world—to earn a little money
on a dead asset. The real purpose of gold
leasing was to suppress the gold price.
His remarks are still posted on the Federal
Reserve’s Internet site.” [they are—we checked]
Now
here is my reply.
The manner
in which former Fed Chairman Greenspan's
speech
in 1998 -- the one in which he supposedly
admits to central bank manipulation of gold
-- became the "smoking gun" for
the gold conspiracy camp is typical flawed
logic. In the speech, Greenspan stated in
part that "...central banks stand ready to lease gold in increasing quantities should the
price rise".
Gold
conspiracy advocates now simply quote
this as "central banks stand ready to lease gold in increasing quantities should the
price rise". But in the seemingly innocent act of truncating
a sentence to its last few words, the theory-mongers have
very effectively taken a concept out
of context and corrupted its meaning
for their own narrow purposes (to prove
that central bank gold manipulation
exists).
Taking
the statements of an alleged participant
or apologist of a conspiracy out of context
and then turning the words around to make
them seem like a slip of the tongue is a
favorite tactic among conspiracy theorists.
This same tactic results in selective focus
on ambiguous bits of physical evidence in
attempts to cast doubt on the validity of
official explanations of complex events even
though the vast majority of the evidence
is conclusive. Thus we find that a few scattered
incongruities and inconsistencies which
can readily be explained by chance, circumstance
or contrary evidence are instead held up
as proof that sinister government plots
were behind the Kennedy assassination,
the terrorist attacks on 9/11 and the long
suffering gold price.
In
the latter instance, we are to believe
that a supposed slip of the tongue by Mr.
Greenspan has betrayed a tightly guarded
secret of the entire financial establishment.
And even though this secret is allegedly
rotten, pervasive and long-standing, the
conspirators have managed to hide all but
a couple of similarly shaky bits of "evidence",
each of which is also a purportedly damning
slip of the tongue.
In
the case of Mr. Powell, he correctly states
that the whole point of Greenspan's
speech was his assessment of risk in
the unregulated over-the-counted derivatives
market. But Mr. Powell fails to properly
explain that Greenspan's assessment
hinged on his belief that manipulators in
the over-the-counter market are
unable to effectively restrict supply and
that is why they cannot influence asset
prices. Instead of mentioning this very
important tenet of Greenspan's speech, Mr.
Powell instead finds it both surprising
and relevant in his personal opinion
that Greenspan may be naive about what influences
asset prices and that all derivative
gold transactions should be subject to regulation
because gold is a commodity. Yet these points
are completely irrelevant to the central
message of Greenspan's speech; why
Mr. Powell brings them up is beyond me.
What
is relevant is that Greenspan was only talking
about manipulation of the markets through
attempts to restrict supply and corner an
asset. This has nothing to do with
"what the central banks had been
telling the world—to earn a little money
on a dead asset." This is
simple misdirection on Mr. Powell's part
and represents nothing more than an
attempt to substitute his own agenda (arguing
that central banks have lied about why they
lease gold) for Greenspan's agenda
(arguing against derivative regulation).
But this is Greenspan's own speech after
all, so shouldn't at least his agenda be
mentioned before being substituted?
Read
Mr. Powell's words again and notice how he
carefully and adroitly avoids the subject
matter of Greenspan's speech altogether!
He asks the why (as in "why the
Commodity Futures Trading Commission (CFTC)
should not concern itself with regulation
of derivatives traded in the over-the-counter
market") but instead of providing
Greenspan's own answer, Mr. Powell substitutes
his own while claiming that it is actually
a slip of Greenspan's tongue ("Greenspan
waved off the necessity for the CFTC to
regulate gold derivatives, telling Congress
to fear not, that the 'central banks stand
ready to lease gold in increasing quantities
should the price rise.'") Brilliantly,
Mr. Powell implies that the CFTC does not
need to regulate gold derivatives because
central banks are already in control of
the gold price through leasing! And were
we to leave it at that, I would understand
why many people might be duped.
But
this time we are not going to leave
it at that.
To
start out, I'm going to wonder why Mr. Powell
and others of his persuasion never mention
that within this very same speech Greenspan invokes
the example of the Hunt brothers' unsuccessful
attempt to corner the silver market:
"Even trading on exchanges does not in itself eliminate all endeavors at
manipulation, as the Hunt brothers' 1979-80 fiasco in silver demonstrated. The
primary source of regulatory effectiveness has always been private traders being
knowledgeable of their counterparties. Government regulation can only act as a
backup. It should be careful to create net benefits to markets."
Greenspan
clearly contends that regulation alone is
not enough to discourage manipulation and
often it is not even desirable. He makes
a strong case for the free markets to be
left to their own devices ("private traders being
knowledgeable of their counterparties" ) with regulation acting
as a backup, and then only when regulators
"create net benefits to markets".
In
this sense, it is completely nonsensical
for Greenspan to have slipped on his
tongue earlier in the speech by admitting that
central banks actively regulate the
over-the-counter gold price. After all, he
is providing numerous examples of why institutionalized regulation
of over-the-counter markets is largely unnecessary.
To wit, Greenspan is arguing against government
interference and for free markets! So why
in the heck would he make a shocking admission
that regulation of the gold price is necessary?
The answer is that he isn't. Instead, he
is actually saying that regulation of the
gold price is unnecessary!
To
claim otherwise that "central banks stand ready to lease gold in increasing quantities should the
price rise" is really just a slip of the tongue would mean that Greenspan
was intentionally repudiating the central,
pro free market, argument of his speech!
The equivalent would be a murder suspect
trying to carefully construct an alibi during
interrogation in the midst of which he suddenly
pens a confession admitting he is the killer.
That is exactly the type of insanity we
must accept as realistic if we are to believe
that Greenspan's tongue slipped (despite
this being a prepared speech).
I
will repeat this because it needs repeating,
Greenspan made his comments about gold
only in the context of manipulation
of the most common and dangerous kind:
the attempt to drive prices substantially
higher by restricting supply and cornering
the market. He did this for good reason
since the history of commodity trading is
replete with cornering attempts to the exclusion
of virtually every other manipulative practice.
This is the important part GATA won't
explain to you in the hopes that you will
feel stupid for believing otherwise ("only
the willfully ignorant can fail to see it")
and therefore you will likely avoid
trying to figure it out for yourself.
I
will repeat this again just so that I can't
be accused of glossing over this point,
it was only in the context of
Greenspan denying the ability of derivative
counterparties to corner the markets that
Greenspan discussed gold. And
he specifically singled out the yellow metal
because it is an asset which has a finite
available supply and whose market can
conceivably be cornered by furious attempts
to secure available bullion. The clear,
and only logical, implication of Greenspan's
statement about gold is that central banks
would be a supplier of gold as a last
resort if an otherwise successful restriction
of supply were to drive the price to
a level at which gold derivative defaults
threatened the financial markets.
That
is the only thing Greenspan said about gold.
He made no general statement about
central bank gold activity as might be implied
by the fragment "central banks stand ready to lease gold in increasing quantities should the
price rise". Don't believe me? Well, Greenspan's meaning becomes entirely,
obviously, irrefutably, logically, sensibly,
abundantly, truthfully and unambiguously
clear as soon as his statement is put back
into the context from which it has been ripped:
"Nor can private counterparties restrict supplies of gold, another commodity
whose derivatives are often traded over-the-counter, where central banks stand
ready to lease gold in increasing quantities should the price rise."
[emphasis mine]
Now,
please don't take the above words to
the opposite extreme to argue that central
banks have only leased gold, if ever, to
thwart an attempted corner of the gold market.
Or that central banks have never leased
gold in response to a price rise which did
not involve cornering the market. Greenspan
said nothing of the sort and so his speech
provides neither evidence for or against
central bank leasing outside corner attempts
when "private counterparties restrict supplies of gold".
Indeed, central banks are not infallible
and it certainly is plausible that bureaucratic
hubris may have contributed to some
gold leasing in vain attempts to regulate
exchange rates via currency dominated gold
prices. But there is absolutely no logical
connection between this possibility and
a claim that central banks have engaged
in a concerted effort to suppress the gold
price in all currencies as evidenced by
an alleged slip of the tongue of the top
central banker when he said "central banks stand ready to lease gold in increasing quantities should the
price rise".
Perhaps
the absolute simplest way to explain my
point is that Greenspan did not in any way
imply that central banks are concerned with
a price rise in gold. Rather, the central
banking concern revealed by Greenspan involves
the risk to financial markets should a
corner attempt on gold cause a derivative counterparty
to be destabilized. In such an event, Mr.
Greenspan is simply pointing out that central
banks will use whatever means they have
available to them. In the case of the LTCM
crisis in 1998, it was to provide liquidity.
In the case of an ongoing attempt to corner
the gold market, providing liquidity would
not make a difference and therefore "central banks stand ready to lease gold in increasing quantities should the
price rise".
Let
me illustrate the very real concern over
cornering the market with a hypothetical example.
Suppose that I approach various firms (counterparties)
around the world that are known to
deal in over-the-counter derivatives involving
metals and with whom I enter into contracts
pursuant to which I am promised the
delivery of 20% annual mine supply
of iridium metal within the next 12 months.
I agree to pay twice the going rate for
this iridium in exchange for haste
and discretion. Suppose further that iridium
is a tight market with virtually no
inventory stocks or sources of supply other
than mine output. Next, suppose that I go
around to most of the world's platinum
group mines and purchase 90% of their
forward iridium production for the
next 12 months. Again, I pay a hefty premium
compared to the current market price but
I don't mind because I plan to make the
money back and then some.
How?
Why, a good old fashioned short squeeze,
that's how! By acquiring 90% of supply while
at the same time contracting for others
to sell me 20% of supply, I have cornered
the market. Try as they may, my counterparties will
be unable to acquire all of the iridium
they are required by contract to sell to
me in 12 months. In effect, they will
have to buy it first from me -- being
the only source of iridium -- just
so they can turn around and sell it right
back to me at the much lower, predetermined
contract price. In such a scenario, my profits
(and counterparty losses) would technically
be infinite since I get to name my
own iridium price even if the counterparties
are short just one measly ounce of
iridium. The effective contract-clearing
price of iridium, however, is limited to
my counterparties' combined net worth.
Otherwise, I will end up as one creditor
of many in bankruptcy if I'm not careful.
Now, suppose my counterparties
include many of the world's largest banks...
Well,
a perfectly executed corner serves
to transfer the cornered counterparty's
net worth to the cornering counterparty.
In turn, the perfect cornering asset is
one with a small but active market
and finite supply. In this sense, iridium
is probably not a realistic example. In
fact, Greenspan states in his speech that
there are no realistic examples in the modern
marketplace. That is, with the possible
exception of gold, a risk which he trivializes
by making his allegedly infamous statement.
In
conclusion, Greenspan is explaining why
the free market provides both a better
pricing and policing mechanism than
a market in which central banks and regulators
constantly intervene. This is so axiomatic
a concept that an admission of central bank
control of the gold price is fatal to the
argument. Therefore to consider Greenspan's
quip about gold as a slip of the tongue must
necessarily fall into the same category
of insane logic which would have you believe
it is realistic that a recalcitrant murderer
intent on foiling a successful interrogation
would accidentally pen a written confession.
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