6 May 2009

Round the traps.... Silver and the bankers at Gallipoli

thx to the Duncan

Last week, Douglas reported receiving information from two confidential sources that JPMorgan Chase and Goldman Sachs had been buying large amounts of COMEX gold and silver call options in both the June 2009 and December 2009 contracts.

His analysis of the COMEX June 2009 gold option contracts shows that calls (which are contracts where the owner has the option to demand delivery at the contract price prior to the expiration date) outnumber puts (where the owner has the option to demand that the seller of the contract buy at the contract price up to the expiration date) by more than 80 percent. In addition to being overly skewed toward call contracts, there is an exceptionally large quantity of contracts.

The COMEX December 2009 gold option call contracts outnumber puts by 130 percent.

In the silver market, the COMEX June 2009 call options exceed puts by 80 percent. December 2009 call options exceed puts by 68 percent.

Activity in options for both metals is especially concentrated in the June and December contracts.

Douglas considers options traders generally to be highly sophisticated speculators. They can purchase large quantities of contracts at very low prices if the strike prices are considered to be "out of the money" (that is, it is so far from current spot prices that the seller of the contract thinks there is little likelihood that the contract will be executed). Such traders make a profit if they acquire their options ahead of the major price moves in the futures markets.

Douglas interprets this data to mean that smart money is being positioned in anticipation of a massive rise in the price of gold within 30 days and in silver's price within the next 60 days. Then he looks for another jump in prices by December. There could be a price pullback in between the two major rises.

Douglas included two other bits of data as part of this analysis. First he notes that the call/put ratio in the stock market is usually a contrary indicator because such options are mostly purchased by unsophisticated retail investors who often get it wrong. In contrast, the bulk of activity in precious metals options tends to be from sophisticated investors. Second, both the gold and silver futures markets are now bordering on backwardation, which signals a near-term major physical supply shortage.

New York Times...

Malcolm Gladwell, a New Yorker staff writer and the keynote speaker, just gave an interesting speech on the financial crisis. He argued that the financial crisis was not due to incompetence or regulatory failure, but psychological failure — the fact that bankers were overconfident.

Bankers were “miscalibrated,” he says, referring to an overestimation of their ability to make predictions and control the somewhat random environments surrounding them.

“Incompetence is certainty in the absence of expertise,” he said. “Overconfidence is certainty in the presence of expertise.” As an example, he cited doctors as “among the most spectacularly miscalibrated people on the face of the earth.”

He quoted at length William D. Cohan’s book “House of Cards,” about the collapse of Bear Stearns, and drew parallels between Jimmy Cayne’s handling of the last days as chief executive of his now-nonexistent company and Britain’s failed 1915 Gallipoli campaign. In both cases, leaders showed overconfidence and nonchalance, precisely because they knew the situations they were in were so “important.”

Overconfidence, Mr. Gladwell says, is likely, and unfortunately, an evolutionarily adaptive trait, because appearing “bigger and stronger” than you really are keeps you from being attacked. And the people most likely to appear “bigger and stronger” than they really are tend to be the ones who have “miscalibrated” beliefs that they really are bigger and stronger than they really are.

The suburban living arrangement is over, along with all its accessories and furnishings. Taken as "all of a piece," the suburban expansion was one sixty-year-long orgasm of hypertrophy. We did it because we could. We won a world war and threw a party. We had lots of cheap land and cheap oil. It made lots of people lots of money and all its usufructs have become embedded in our national identity to the dangerous degree that the loss of them will provoke a kind of national psychotic breakdown. In fact, it already has. The completely unrealistic expectation that we can resume this way of life is proof of it.

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