Influencing Gold and Silver Markets, Backwardations Imply Higher Gold and Silver Prices

In Stock Market Investing: Will Reading Political Tea Leaves Be A Better Gauge?, we argued that today’s financial market can’t be used as reliable signals for interpreting future trends simply because financial markets especially in the US seem to be operating under the profound “influence” by the government.

And it seems that such “influences” have likewise been extended to the precious metal markets. Some agents of the banking sector, which has been under the lifeline of the US Federal Reserve, seems to have built heavy short positions in both the silver and gold markets.

Here is the excerpt (which includes charts) from Resource Investor’s Gene Arensberg,

``As of December 2, as gold closed at $783.39, the CFTC reported that 3 U.S. banks had a net short positioning for gold on the COMEX, division of NYMEX, of 63,818 contracts. The CFTC also reported that as of the same date all traders classed by the CFTC as commercial held a collective net short positioning of 95,288 contracts.

``That means that just three U.S. banks accounted for 66.97% of all the commercial net short positioning on the COMEX for gold futures.

Courtesy of Resource Investor (Source CFTC for Bank Participation, Cash Market for gold)

``For silver, it’s even more startling. On December 2, as silver closed at $9.57, exactly 2 U.S. banks held a net short positioning of 24,555 contracts. The CFTC reports that as of the same date all traders classed as commercial held a net short positioning of 24,894 contracts. So, the 2 U.S. banks, with one particular Fed member bank probably holding almost all of it, held a sickening 98.64% of all the collective commercial net short positioning on the COMEX, division of NYMEX in New York.

Courtesy of Resource Investor’s Gene Arensberg

``Exactly two U.S. banks have practically all the COMEX commercial net short positioning on silver. For a little context, 24,555 net short contracts means that the two banks held net short positions on December 2 for 122,775,000 ounces of silver with silver at $9.57. The COMEX said on December 4, that there were 80,239,857 ounces total in the “Registered” category, so these 2 malefactor banks held net short positioning equal to about 153% of the amount of deliverable silver in ALL the COMEX members’ accounts.

``And people wonder why both silver and gold moved into backwardation over the past two or three weeks? People are apparently worried that they won’t be able to take delivery of gold or silver metal from the COMEX in the future. They'll pay a premium now to get it now.”

In other words, the historical backwardation seen in the gold-silver markets accounts for as the brewing disparities between the precious metals’ physical markets relative to the financial markets or prices in the financial markets don't seem to be in synch with what has been going on in the physical markets.

To quote Professor Antal E. Fekete, ``Gold going to permanent backwardation means that gold is no longer for sale at any price, whether it is quoted in dollars, yens, euros, or Swiss francs. The situation is exactly the same as it has been for years: gold is not for sale at any price quoted in Zimbabwe currency, however high the quote is. To put it differently, all offers to sell gold are being withdrawn, whether it concerns newly mined gold, scrap gold, bullion gold or coined gold…(emphasis mine)

For us, the most probable explanation for such attempts to influence the precious metal markets is to create the impression that “inflation” remains subdued or contained. The US government wants to stoke “inflation” in the asset markets (stocks and real estate), but not in the commodity markets.

To add, by keeping the impression of contained "inflation", this allows authorities to liberally expand its theater of operations as it continues to wage war against debt deflation.

Moreover, such backwardation can also be read as the unintended effects from the distortions brought about by the attempt to influence the gold and silver market prices and as growing indications of the weakening foundations of the US dollar.

Again quoting Professor Feteke, ``Backwardation will pull in stocks from the moon as it were, if need be. The cure for the backwardation of any commodity is more backwardation. For gold, there is no cure. Backwardation in gold is always and everywhere a monetary phenomenon: it is a reminder of the incurable pathology of paper money. It dramatizes the decay of the regime of irredeemable currency. It can only get worse. As confidence in the value of fiat money is a fragile thing, it will not get better. It depicts the paper dollar as Humpty Dumpty who sat on a wall and had a great fall and, now, “all the king’s horses and all the king’s men could not put Humpty Dumpty together again.” To paraphrase a proverb, give paper currency a bad name, you might as well scrap it.

``Once entrenched, backwardation in gold means that the cancer of the dollar has reached its terminal stages. The progressively evaporating trust in the value of the irredeemable dollar can no longer be stopped.” (emphasis mine)

A prolonged backwardation suggests that price suppression schemes will only build unsustainable pressures underneath which will eventually find a release valve and consequently be vented in prices. Thus, gold and silver prices are likely to zoom to the moon!