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Doug Hornig
Doug joined the Casey team as a freelance writer on the former publication What We Now Know, a perfe... More
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2.0003/07/2006
The Daily Resource 3/7/05
Good morning. . .Gold began the week yesterday with a steep nosedive, as traders pondered the possibility that the long-predicted correction may be in the offing. It dropped $10.60 from Friday to finish at $555.20/oz. Overnight, gold has been flat to slightly lower and, as we head into the New York day this morning, it is selling for $554.20.
Platinum broke above $1050 in Hong Kong heading into yesterday's trading, but it slid in New York, falling $15, to finish at $1034/oz. Overnight, platinum has been drifting lower, and as we head for the morning opening it is trading at $1031.
Silver dropped below the $10 mark, shedding 20 cents to close at $9.98/oz. Overnight, silver has staged a comeback and, heading into this morning's New York open, is selling for $10.03. (Click here for charts)
The past couple of days, we have been looking at different aspects of how the silver market may be affected by Barclay's silver ETF, should the SEC approve it. Yesterday, we presented some arguments from silver bug Ted Butler against it.
Today, here's a different point of view, from analyst Jason Hommel, writing on silverstockreport.com. Butler believes that the danger of the silver ETF is that it will promote manipulation because it allows unlimited anonymous buying, thereby giving people a route around trading law. Hommel, contrarily, believes that is a good thing.
"I would argue," he writes, "that it is impossible for longs to manipulate markets in free markets because freedom means that anyone is free to buy as much of anything as they wish. That's what freedom means." No price, in other words, can be "too high" so long as someone willingly pays it, and thus, in a free society, "The laws against a ‘long manipulation' in the current system only exist to support of the fraud of the paper dollar."
Hommel is not sold on the ETF, however. He's concerned that J. P. Morgan, a bullion bank thought to have large short positions, will be charged with custodianship of Barclay's metal, and that large concentrations of silver will make it easier to confiscate, if government should ever decide to go that route.
But, considering Hommel's distrust of all paper, his biggest problem is unsurprisingly with its potential relationship to metal within the ETF. Tere are a few unpleasant things that may happen.
For one, "the Silver ETF could buy silver futures contracts to excess, which would be manipulative. Practically speaking, a silver ETF must be allowed to trade in silver futures contracts, due to the size. There is no other way to accumulate as much silver as the ETF would require, without buying it from the COMEX through futures contracts. It's not necessarily manipulative. However, if the silver ETF could hold either physical silver, or paper silver, then the very structure lets the door wide open for abuse."
And then, "The silver ETF managers could take your full money, and buy one silver long to satisfy the requirements of the Silver ETF, and then, take the rest of the money, and go short numerous paper contracts to keep down the price (in theory). Or, the silver ETF could use your money to buy silver bullion from the market. Then, they could lease this silver into the market, and hold a silver futures contract instead. And, with the difference, they could go short silver, so as to move the market down, and not be liable for as many paper dollars as they would owe to the silver long who bought a Silver ETF share!"
"Or, the owners of the Silver ETF could buy two or more long contracts for every contract needed to satisfy the requirements of the ETF, and thus, make over 100% as much money as the people who put their capital into the Silver ETF. But the poor holders of the Silver ETF would be exposed to all the risks of a default on silver futures contracts, without the potential leveraged gains."
In the end, paper is inherently risky or, as Hommel puts it, "owning a silver ETF through your IRA account is owning a paper promise (from your broker) that they hold a paper promise (from Barclays) who may hold yet still another paper promise (from J.P. Morgan bullion custodian). That many paper promises stacked on top of each other is not very comforting when the entire reason for owing bullion in the first place is to prevent the loss of capital from cascading cross defaults!"
His conclusion cannot help but warm the heart of any believer in hard currency. "I plan on moving more and more of my capital into physical bullion as this bull market in precious metals develops. . .You don't control the silver or gold unless it's in a safe that you own-the combination to which only you know. Any other type of ‘control' is really just another man's promise, and the beauty of gold and silver is that it is not a promise, it is true and honest and real payment in full!"
In the currency market, the euro fell slightly against the dollar on Friday. Late in the day, the euro was changing hands at $1.2018, as opposed to $1.2036 at the end of Friday's trading.
Trading was muted, as analysts said investors are looking to the February payrolls data for clues about the strength of the U.S. economy and the interest rate outlook, the final employment report before the FOMC meets later this month to decide whether to raise interest rates further. (Click here for currency prices)
In the energy market, oil fell on Monday. Crude for April delivery lost $1.37 to close at $62.30/barrel on the New York Mercantile Exchange. April unleaded finally eased, falling 11 cents, to $1.633/gallon.
Everyone is looking forward to tomorrow's OPEC meeting, at which the cartel will decide whether or not to cut production.
In one positive development, Mohamed ElBaradei, head of the International Atomic Energy Agency, said Monday that he was optimistic that the crisis over Iran's nuclear-research program could be resolved without intervention from the United Nations Security Council, according to a report from the Guardian.
In remarks made before an IAEA board meeting, ElBaradei said that he hoped an agreement could be made in the next week, according to the report.
UBS analyst Jan Stuart said fundamentals are "not strong yet," as demand has failed to pick up and most of the focus has been on supply uncertainties. "Data are slow to arrive, as is normal at this time on the calendar, but already it is clear that this year is not off to a flying start in terms of demand growth."
"OPEC ministers meeting in Vienna on Wednesday should have an easy time deciding to leave well enough alone, while emphasizing worries and vigilance and setting another meeting date," Stuart concluded.
The base metals all had a rough day on Monday, as the board was red straight across. Copper plunged, falling 6¼ cents from Friday and closing at its intraday low, $2.2185/lb. Nickel dropped 3 cents, closing at $6.7378/lb., a loss of 6½ cents. Zinc sagged nearly 3 cents, to $1.0215/lb. Aluminum fell close to 4 cents to $1.0666/lb., while lead shed 2½ cents, to $0.5318/lb.
That's what's happening . . . Until tomorrow!
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