The train wreck

Photo Courtesy of Dennis Mitchell

I’ve recently had to recall the discussions —held when things were looking good in 2005— of the imminent derailing of the US Treasury purchasing by the Chinese. The tenets of those ideas still hold true, the Chinese will have to discontinue —at some point in the future— their mercantile policy of increasing market share at the expense of debasing their own holdings of US Treasurys.

Apparently, China is changing its portfolio policy.

Although the first months of 2010 saw foreign purchases of US Treasurys dwindle, Chinese year to year purchases of Treasuries seem to be holding. The Chinese purchase of metals during March surprised by bringing their trade balance close to zero, making it quite evident that the Chinese are diversifying their portfolio into metals without forgetting to sustain the yuan/dollar exchange rate.

Interestingly enough, the price of silver and gold hasn’t followed this purchasing lift. What’s holding these prices down?

I ran into this startling interview. Andrew Maguire, an independent metals trader at the LME, whistle-blowed his findings of a concerted effort to short the silver market to the CFTC, which has received very little attention from the authorities, nor press coverage.

Apparently, central banks through HSBC and JP Morgan have wholeheartedly shorted the silver (and potentially the much larger and shadowier gold) COMEX market in an attempt to avoid the debasement of their currencies.

Is this too far fetched?

I don’t think so, and it gets worse. In a meeting attended by Andrew, Adrian and GATA members, one of the CFTC officials spilled out the fact that… the ratio of paper gold to the actual physical holdings is… 100 to one.

Which leads me to believe that there is an enormous naked short silver and gold position… held by no other than the Fed… and supported by Chinese US Treasury purchases.

The Fed is a tough hand to bend; but, not impossible under the right set of circumstances. We tread in very thin ice. In these past couple of weeks we’ve seen the largest US trade deficit in history and the largest drop in Treasury prices in a year. We also know that bank fraction reserves are being thrown in to cover the commercial real estate debt crisis. Greece is also a non resolved issue. I don’t dare imagine what would happen if the holders of these gold foil papers got antsy, and attempted to get actual delivery of the metal.

On the other hand, I read the good news that AIG is closer to paying its debts.

But we need to realize, that globalization and technology have made our world much more fragile by increasing volatility —there are no filters for contagions.

It doesn’t help to see that the authorities are no closer to getting the regulations to avoid the recurrence of a new financial crisis. I recommend you watch this Taleb – Kanehman video on why this is so. I’ll give you a couple of hints: managers and traders at these financial firms still get paid huge bonuses even when their companies are on a path to fail; and these companies are winning the fight to stay in a size too large to fail.

Even as it has been overwhelmingly demonstrated with the advent of this recession that economists still have no idea of what they are doing, I wish Ben Bernanke the best —he’ll need all the help he can get.