Thursday, December 2, 2010

Wikileaks Founder on the Run, Is the US prepping for Austerity? Backwardation returns to Copper and what is Silver really worth anyway?

12/2/2010 Portland, Oregon – Pop in your mints…
A quick view of the news finds the Wikileaks fiasco taking on a life of its own.  It is interesting to see that politicians really are as fickle and childish as we imagine them to be.  While we haven't read any of the leaked documents, we imagine it would be like reading a log of text messages amongst teenagers.  We are not sure if anyone on the planet thought that modern day politicians were trustworthy but the little we have heard about the leaked documents appears to leave no doubt that they are not.  So why do we give them so much power of the economy or the money supply?  This troubles us here at The Mint.
In other news we see that the debt reduction commission in the US is being taken seriously, at least by the mainstream media and the FED is urging it on.  Could it be that the FED sees that its balance sheet is no match for the coming onslaught in the Bond markets?  It is so severe that Obama has announced pay freezes for government workers and the government needs to unload its surplus property.  Leave it to government managers to sell property at the bottom of the market.  It must really need the money!  Does the US government see Armageddon on the horizon in the Bond Markets?  Is the Treasury beginning to wonder why the Federal Reserve is out-bidding everyone by a country mile at recent bond auctions?   
Who knows, but with yields edging up today it appears that the Bond Market for the moment is in an orderly retreat.  We have our doubts but are cautiously hoping that its retreat will continue to be smooth and lack the drama that we have been predicting as of late.  In short, we often hope we are wrong here at The Mint. We are inclined to prepare for the worst and hope for the best.
Today our attention turns to commodities.  Specifically Copper and Silver.  While Bond markets may be the biggest and most important markets in the world's present financial system, commodities are real and everywhere on mainstreet.  Stocks, bonds, and currencies all trade in what should be more or less of a closed system.  As we saw yesterday with our Mega Maid illustration, when the Bond Markets suck, stocks blow, and vice / versa.  In a stable currency environment, one could not grow significantly unless the other shrinks.  What determines the overall size of the system is monetary policy or how much money and credit exists at the time.
This is an oversimplified explanation but the point is that stocks, bonds, and currencies for the most part are "controlled" within the present financial system.  Commodities, on the other hand, are real and in large part cannot be controlled.
To put it bluntly, stocks, bonds, and currencies are a false, easily manipulated, fantasy world.  Commodities are the real world.  We are currently bombarded by information about the fantasy world when we really need to pay attention to the real world.  What we have witnessed for the past 3 to 5 years is the beginning of the collapse of the fantasy and a resurgence of reality.  Presently, production in the real world has been manipulated by events in the fantasy world.  This manipulation can only last for a short while.  The consequences of this manipulation are devastating to those on the margins and are often blamed on "global warming" as we see today.  These are just distractions.  The real cause is the use of fantasy world money in real world transactions.  If we used commodity money or commodity backed currency, the world would be in balance.
But back to Copper.  Today we see that the copper market is in a state of "Backwardation."  This occurs when spot prices (what something costs today) exceed future prices (what something will cost today to be delivered in the future).  Think of backwardation as Michael Jackson doing his famous moonwalk.  The normal market state, in case you are interested, is called "Contango", which is, as its name does not suggest, the opposite state of the market.
What is interesting is that backwardation occurs theoretically when people are anxious to get their hands on something real now.  They are losing faith in promises of future delivery.  Either that or they are the ones responsible for future delivery who do not actually have or produce the commodity that they have promised to deliver.  The state of backwardation may be created by naked short selling of commodities.  In short (pun intended), it is selling what you don't have.  Part of this short selling is normal market operation.  But if it gets to be too big a portion of the market and backwardation occurs, those who are short the commodity stand to take significant losses.  This is where we are at in Copper.  Those who have and produce copper are in a great position.  Those who do not but somehow have to deliver it anyway (banks come to mind) are not.
Keep this in mind as you consider the short position in Silver, much of which is naked or scantly clad.  At roughly 76,168 contracts representing 380.8 Million ounces, is proportionally the largest net short position of any commodity.  What will happen to the price when all of that Silver sold in the fantasy world has to be delivered in the real world?  This is where the real and the fantasy world collide, and the real world always wins.
Speed up that Moonwalk Silver!
Stay Fresh!
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Key Indicators for Thursday, December 2, 2010
*See FED Perceived Economic Effect Rate Chart at bottom of blog.  This rate is the FED Target rate with a 39 month lag, representing the time it takes for the FED Target rate changes to affect the real economy.  This is a 39 months head start that the FED member banks have on the rest of us on using the new money that is created