Bill Fleckenstein, gold and silver bull, says no manipulation conspiracy

Here’s the interview with Eric King.

Fleckenstein makes excellent points about the “jihad” against the bullion banks, explaining the ridiculousness of the GATA-type theories. He points out that they are often net short futures simply to hedge their long positions in physical, and that lots of people who work on those desks are PM bulls. He knows a few market makers at the big banks, and says they have been bullish all the way up.

Despite the supposed manipulation, gold is up 4-5X since these theories took hold in force. Why haven’t the supposed shorts “blown up”? As for the central banks, they thought gold was worthless and sold tons near the lows, but now they supposedly think “it’s so magical” that they have to keep the price down?

The futures manipulation theories are just a “loser’s lament,” as Jim Grant says. Get this: he says that big-time short seller Jim Chanos is on the PPT! I can’t confirm that, but would be very interesting and put to bed a lot of nonsense if true.

The discussion of manipulation starts about 3/4 of the way through (to jump to it, place the marker over the “t” in Fleckenstein).

Fleckenstein seems to be a huge silver bull, expecting physical demand to soar. He entertains the possibility of silver reaching some “silly” price level. The wealthy have not taken big physical positions in silver, but if they did, the market could go “wacko.”

Also discussed: the US health care bill, inflation, bailouts, Greece, and home foreclosures.

Good Faber interview on Bloomberg: manipulation, GS, Fed, Greece, etc

He basically expresses my opinion when it comes to manipulation: the Fed manipulates interest rates and bails out banks by accepting crappy collateral and buying bonds, and of course things like FX swaps manipulate that market. GS and others may front-run, but he doesn’t seem to believe in the futures/PPT theory of manipulation. He and I agree that poor traders use that as a mental crutch when they get frustrated.

Lots of other topics are covered, including Greece (he calls it a write-off, and says that the bailout of course was of the European banks, not Greece, which can never pay back its debt).

Watch the video here.

All-in, all over again

Ok, the 5-day trailing average put:call ratio is giving another screaming sell signal (the one in early March was the first in ages to not result in any decline, just a 2-week consolidation). History shows that ignoring these signals is extremely perilous.

Indexindicators.com

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The 20-day average must be at an all-time low, though I don’t have the long-term data available:

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There is no longer any question that today’s market conditions resemble those seen at major bull market tops. Traders, analysts and the general public are extremely optimistic about the prospects for the stock market, but with a yield of under 2% and a macro environment that is still working off the hangover from a debt binge, the likelihood of a sustained advance is very low.

I continue to hear that the market is being propped up artificially by the Plunge Protection Team or Goldman or JPM or some such combination, and while I think it is likely that parties like these do try to manipulate its direction, I doubt very much that they can have any meaningful impact. The markets are global and an expression of social forces too large and wild to control.

Central banks publicly try time and again to manipulate floating currencies, and their efforts are always futile beyond little blips (just ask the BOJ, which once threw away $30 billion trying to supress the Yen, to no effect). Besides, history shows that markets have always been irrational, since long before the PPT. The very fact that so many people blame the PPT for the market’s rise goes to show that there have been lots of bears out there, and markets don’t peak until almost all of the bears have faded away.

The bears capitulate

I usually am not so sure about things, but the markets are looking very stretched at the moment. Sentiment among bears is of capitulation. Everywhere I go on the blogosphere, I see posts and comments about how the market is rigged by Goldman or repo desks or the PPT, and that trading against robots is a no-win situation. I hear that fundamentals don’t matter, that the bulls are in control, that the transports have confirmed the industrials, that China will drive copper the moon and still buy it all, yada, yada, yada. The upshot is that traders seem to think that the bears will be totally crushed no matter what.

Well, what exactly have the bears experienced during the 50% rally from March 6 to today? I’d say that is about as severe a drubbing as you can take in the market, the polar opposite of what the bulls got last autumn and winter. It is time for a reversal, and not a small one. This is Spring 1930 all over again:

Above chart of the Dow Industrials from Yahoo!

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Everybody has seen these before, but here are a few quotes from that post-crash reprieve:

December 28, 1929
“Maintenance of a general high level of business in the United States during December was reviewed today by Robert P. Lamont, Secretary of Commerce, as an indication that American industry had reached a point where a break in New York stock prices does not necessarily mean a national depression.” — Associated Press dispatch.

January 1, 1930

RESERVE BANK AREAS FORECAST NEW YEAR
Despite the obvious slackening of the pace of business at the close of the year, leaders in banking and industry throughout the country maintain an optimistic attitude toward the prospects for 1930.
January 13, 1930
“Reports to the Department of Commerce indicate that business is in a satisfactory condition, Secretary Lamont said today.” – News item.

January 21, 1930
“Definite signs that business and industry have turned the corner from the temporary period of emergency that followed deflation of the speculative market were seen today by President Hoover. The President said the reports to the Cabinet showed the tide of employment had changed in the right direction.” – News dispatch from Washington.

January 24, 1930
“Trade recovery now complete President told. Business survey conference reports industry has progressed by own power. No Stimulants Needed! Progress in all lines by the early spring forecast.” – New York Herald Tribune.

March 8, 1930
“President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days.” – Washington Dispatch.

May 1, 1930
“While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States – that is, prosperity.” – President Hoover

June 29, 1930
“The worst is over without a doubt.” – James J. Davis, Secretary of Labor.

July 6, 1930

‘BUSINESS CYCLE’ SEEN AT NEW PHASE; Bankers Hold Downward Trend in Markets Indicates Recovery Is Near. DENY ANALOGY TO 1920-21 Economists Point to Superior Credit Conditions Now, Holding Easy Money Points to Revival.

August 29, 1930
“American labor may now look to the future with confidence.” – James J. Davis, Secretary of Labor.

September 12, 1930
“We have hit bottom and are on the upswing.” – James J. Davis, Secretary of Labor.

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The bears were down but not out in June, and quite a few armchair traders jumped in to have another go at the fast money they found when they jumped on board the sell train in October and February. Well, 100 points in about 12 trading days left them flabbergasted, and toasted more than a couple of levered accounts. When traders are flabbergasted, they tend blame manipulation, and concluding the game is rigged, all but the gamblers bow out.

Well, this trader is not flummoxed. I’ll freely admit traded this rally poorly by thinking I should only buy at 620 and then not jumping aboard when we took off on huge breadth and volume from 666, and then by shorting high-flying junk and starting to buy my long term puts too soon, but I can chalk those up as trading school tuition fees. Nothing that has happened this year should surprise anyone these days, when it is so easy to look at 80 years of daily Dow closes on Yahoo. If this is 1988 and not 1930 I will eat the Tom McKans my wife hates so much and take up a respectable profession like welding.

Speaking of 1987 and expectations for a depression, Trader, the cult documentary on Paul Tudor Jones, is finally up on Youtube. People were recently paying $1000 bucks for this thing on VHS. I can’t say that it is worth that kind of dough, but it is definitely worth an hour of your time to watch one of the contemporary greats in his element as he trades what he thinks is the analogue of 1928-29.

UPDATE: Trader is gone. The producer had it taken down. But, it is still out there if you know where to look… a certain renegade financial site has posted a link. I’ll leave it up to readers to figure out which.

ProShares announcement: it was the ban.

ProShares Announcement
Friday September 19, 11:25 am ET

BETHESDA, Md.–(BUSINESS WIRE)–Due to the emergency action announced by the Securities and Exchange Commission on September 18, 2008, temporarily prohibiting short sales of shares of certain financial companies, Short Financials ProShares (SEF) and UltraShort Financials ProShares (SKF) are not expected to accept orders from Authorized Participants to create shares until further notice. Unless notified otherwise, shares will be available for redemption by Authorized Participants as normal. The shares of these ProShares are expected to trade in the financial markets today, but may trade at prices that are not in line with their intraday indicative values.

No more SKF for me, ever. I’m on an accelerated schedule to get out of the rest of my short ETFs. Too many wild cards, not enough disclosure.

Long-term puts only from now on. I had hoped to hold onto the ETFs until we started to really plunge, because I had figured market functions would hold up that long, but we are apparently on an express train to Animal Farm.

I wonder how many others feel the same? I bet this week’s shenanigans are going to put a lot of people off the markets entirely. All they have done is burn a few shorts and set the markets up for a rapid retracement of the last 900 Dow points, plus give or take a couple thousand to the downside.

Markets don’t drop because of shorts (though shorts can drive them up fast). Markets drop with the scales off of longs’ eyes.

Just an Ordinary Crash: No Conspiracy to Manipulate the Silver or Gold Markets

Source: kitco.com

It amazes me how many of the same people who clearly saw the manifestation of the credit bubble in stocks and real estate are incapable of conceiving that the same cocktail of easy money and bull-market sentiment found its way into their own favorite markets. Many hold it as a matter of faith that the precious metals bull market will end in a manic top of 1980 proportions ($2500 gold, $150 silver in today’s dollars), and are therefore blinded to the possibility that we have had our top for now. Maybe we should be grateful for a pretty darn good run, with gains of 425% for silver and 300% for gold, topping out with a spike and 98% bullishness.

With deflation setting in, the foundations of this market are being shaken, and it is a different game now – – it’s not over, but the rules have changed. Those small-timers doubling down on physical right now could be in for a world of hurt in a few months or years and decide to bail at exactly the wrong time (according to the principal of maximum pain for the maximum number).

I get tired of seeing the rants of precious metals newsletter writers about the dark forces behind every downtick in the markets. I am extremely skeptical of the feasibility of any successful long-term market manipulation, whether it is in the stock, currency or futures markets. The dollar volumes of these markets are so large that even governmental bodies find it futile to try to influence price trends by strategic buying or selling.

If such forces were able to move a market in the desired direction, that would create a golden arbitrage opportunity for sharp-eyed speculators, inducing them to step in and buy or sell at the “artificial” price and thereby push the clearing price back to its proper level. To hold a market at an “artificial” level indefinitely would require infinite resources, which not even governmental bodies posess. And according to the natural laws of markets, if one venue (such as the COMEX) became so hopelessly encumbered, participants would figure out another way to contract with one another (such as Dubai).

But this is a moot point, because manipulation just doesn’t work. As Mish points out (click for his graphic), in 2003 and 2004, the Japanese tried overtly to suppress the Yen as it rose from the low 80s to almost 100 per dollar, with a massive series of interventions totaling over $300 billion. Their efforts failed, and the Yen later just fell as the psychology of traders changed according to their own whims, as in every market.

As to why there is a shortage of retail physical gold and silver right now, I have heard from a couple of dealers that it is not an uncommon phenomenon when there is a rapid drop in prices, as it brings out demand. I am in agreement with Mish that this demand by small-timers is likely a contrary indicator. Where were the hordes of new gold bugs when gold was under $300?

I am not usually in agreement with regulatory bodies, but it is good to see that at least one of them employs someone with a grasp of how markets work. The CFTC published an excellent letter to address the conspiracy crowd as far as silver is concerned. Here’s an excerpt.:

During the past 20 to 25 years, the Commodity Futures Trading Commission (CFTC or Commission) has received numerous letters, e-mails and phone calls from silver investors alleging that the price of silver futures on NYMEX has been manipulated downward.

In 2004, Dr. Michael Gorham, Director of the Division of Market Oversight (Division) addressed silver investors’ concerns in an open letter (2004 Silver Letter) that considered the plausibility of a long-term short-side manipulation of the silver futures market and provided an analysis of activity in the silver futures market. That letter concluded that the existence of a long-term manipulation was not plausible and that an analysis of activity in the silver futures market did not support the conclusion that the market was being manipulated.

Recently, silver commentators and a group of investors that rely upon them have reasserted their allegations that the silver futures market is being manipulated downward by a small group of traders on the short side of the market. As a result, DMO staff decided to revisit this issue by taking a fresh look at activity in the silver futures market.

The analysis draws the following conclusions:

• There is no evidence of manipulation in the silver futures market.
• Silver cash and futures prices have risen dramatically between 2005 and 2007, with silver outperforming the gold, platinum and palladium markets, suggesting that silver futures prices are not depressed relative to other metals prices.
• NYMEX silver futures prices tend to track closely the price of physical silver.
• Concentration levels for the top four short futures traders in the silver futures market are comparable to those observed in the gold and copper futures markets, and generally are lower than the levels seen in the platinum and palladium futures markets.
• The composition of the traders comprising the top four short futures traders, in terms of net positions, changes over time. These traders represent a diverse group, and their futures positions are driven by an even more diverse group of customers.
• There is no observable relationship between short-futures-trader concentration levels and silver prices.
• There is a slightly positive relationship between the total net position of the large short futures traders and silver prices; this suggests that larger short futures positions are associated with higher, not lower prices.

Advocates of the short-side manipulation argument contend that silver futures prices have been manipulated downward for close to 25 years. What these advocates fail to indicate, however, is where prices should be, except to argue that prices should be higher than they have been currently or in the recent past.

With respect to the claims of silver commentators that prices are being suppressed, it should be noted that these commentators have never articulated a credible explanation as to why, for more than 25 years, buyers have not entered the market to purchase silver (at the supposedly depressed prices), thereby driving up prices to a level that these commentators believe is reasonable. In this regard, no barrier to entry has been identified that would prevent individuals or firms from buying cash silver or entering into long silver futures positions.

Given the similarities between price movements in these four metals, it appears that general market forces that have contributed to an increase in gold, platinum and palladium prices have also supported an increase in the price of silver. Moreover, the fact that the price of silver outperformed the prices of the other metals during the period, while not definitively answering the question of whether silver prices have been manipulated, calls into question the contention that silver futures prices have been manipulated downward. In short, there is nothing obvious in the silver price series between 2005 and 2007, when compared to other metals’ prices, to suggest that silver prices have been manipulated downward.

Gold and silver bugs believe that central bankers and bureaucrats care as much about precious metals as they do. To government types, the metals are just barbarous relics of ancient monetary history, and I doubt they spend much time worrying about their prices.