Wednesday, December 3, 2008

What If?

The rumors are swirling about a COMEX gold and silver default coming this month. With the US mint ceasing production of gold and silver eagles and physical silver selling at 150% over the spot market on ebay this is a bit better that just idle conspiracy theory.
The COMEX gold & silver markets are each hurtling down a dangerous path toward default. The artificial paper price has created enormous physical demand, and hampered supply production, if not delivery. The gap between the JPMorgan-led corrupted phony paper price and the legitimate physical price in actual trading markets has grown sharply, enough to force a breakdown like in any distorted market. When December contracts in gold & silver are demanded to be satisfied via delivery of the metal, it will be clear that the COMEX is running a scam. A default is highly likely.
Now I keep asking what happens if that happens, to the price of silver that is. Well there are two silver prices, namely the spot or paper prices and the market or real price for physical silver. So, what happens to your silver contracts when word gets out of a shortage of physical silver by the COMEX? Well there is a naive answer to that, a run on the metal and accompanying skyrocketing to the contracts. Yea, that's what we thought about the bank stocks until the SEC played their games and performed the ultimate short squeeze of all time. See just because your delivery at the strike price is guaranteed by law means nothing. This is what novice investors don't understand, they don't understand that Wall Street is a mafia, no less than a criminal enterprise.
A default is highly likely. Of course, they can continue to deny contract holders the right to benefit from delivery, as they have been doing for months to ‘Non-Economic Customers’ but soon the ‘Commercial Customers’ will be defrauded. Arrests are warranted. We will see how this corruption unfolds.
We will see alright, we will see the criminals on the COMEX, get the same treatment as the bankers and brokers CEOs and your contracts will never get filled. How do I know? Ok since you asked lets see what happened when the London markets defaulted on nickle.

Two years ago, on August 16, 2006, the London Metals Exchange defaulted on its nickel contracts [link]. Note the date: the 16th of the month, almost exactly halfway between the First Notice Day and the Last Trading Day. I have no idea if gold/silver would play out the same way.

The bad news: if you’re buying gold or silver futures with the expectation of taking delivery here’s what happened when LME defaulted on its nickel contracts: they retroactively changed all contracts so that the shorts did NOT have to provide physical nickel to the longs. The contracts were settled for cash with a penalty that averaged a mere 10% of the spot price.

I can imagine the corrupt Comex stiffing the gold/silver longs the same way, citing concerns about “maintaining orderly trading.” Ouch!

In fact I can't imagine anything other than getting screwed on delivery. Now what happens to the silver ETF, SLV? First off you can forget about taking delivery of physical silver, that ain't happenin anymore there than it is on the COMEX. Next the prices of SLV are set by Buillion Desk which follows the London or New York markets whichever is open.

Shares of the iShares Silver Trust are bought and sold at market price (not NAV). Brokerage commissions will reduce returns.

Silver Spot Prices provided by The Bullion Desk. No warranty is given for the accuracy of these prices and no liability is accepted for reliance thereon. Prices are provided on a reasonable efforts basis and delays may occur both because of the delay in third parties communicating the information to the site and because of delays inherent in posting information over the internet. Prices shown are indicative only and do not represent actionable quotations on prices of actual trades.
Now what would you do if you were holding millions of dollars worth of silver contracts, but the COMEX wasn't delivering; no brainer you sell, sell sell, until it hurts. That takes down the spot price ans the SLV right along with it. Maybe!

No one knows what will happen, but I know it's not going to happen the way it is supposed to by law, bank on it. You can do a similar analysis for gold and the gold ETFs GLD and IAU. I will keep my gold SLV and GLD and it would be a good idea to pick up some if you dont already have some, but don't bet the farm. Remember the the banks still have a long way to die and the SKF will give a good and surer ride-until Obama does a bank holiday Roosevelt style that is.

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