A Conspiracy With a Silver Lining By WILLIAM D. COHAN

As Americans know all too well by this point, commodity prices — for corn, wheat, soybeans, crude oil, gold and even farmland — have been going through the roof for what seems like forever. There are many causes, primarily supply and demand pressures driven by fears about the unrest in the Middle East, the rise of consumerism in China and India, and the Fed’s $600 billion campaign to increase the money supply.

Nonetheless, how to explain the price of silver? In the past six months, the value of the precious metal has increased nearly 80 percent, to more than $34 an ounce from around $19 an ounce. In the last month alone, its price has increased nearly 23 percent. This kind of price action in the silver market is reminiscent of the fortune-busting, roller-coaster ride enjoyed by the Hunt Brothers, Nelson Bunker and William Herbert, back in 1970s and early 1980s when they tried unsuccessfully to corner the market. When the Hunts started buying silver in 1973, the price of the metal was $1.95 an ounce. By early 1980, the brothers had driven the price up to $54 an ounce before the Federal Reserve intervened, changed the rules on speculative silver investments and the price plunged. The brothers later declared bankruptcy.
Accusations that JPMorganChase and HSBC allegedly manipulated precious metal markets are worth looking into.



The Hunts may be gone from the market, but there are still plenty of people suspicious about the trading in silver, and now they have the Web to explore and to expand their conspiracy narratives. This time around — according to bloggers and commenters on sites with names like Silverseek, 321Gold and Seeking Alpha — silver shot up in price after a whistleblower exposed an alleged conspiracy to keep the price artificially low despite the inflationary pressure of the Fed’s cheap money policy. (Some even suspect that the Fed itself was behind the effort to keep silver prices low, as a way to keep the dollar’s value artificially high.) Trying to unravel the mysterious rise in silver’s price is a conspiracy theorist’s dream, replete with powerful bankers, informants, suspicious car accidents and a now a squeeze on short sellers. Most intriguingly, however, much of the speculation seems highly plausible.

The gist goes something like this: When JPMorgan Chase bought Bear Stearns in March 2008, it inherited Bear Stearns’ large bet that the price of silver would fall. Over time, it added to that bet, and then the international bank HSBC got into the market heavily on the bear side as well. These actions “artificially depressed the price of silver dramatically downward,” according to a class-action lawsuit initiated by a Florida futures trader and filed against both banks in November in federal court in the Southern District of New York.

“The conspiracy and scheme was enormously successful, netting the defendants substantial illegal profits” in the billions of dollars between June 2008 and March 2010, according to the suit. The suit claims that JPMorgan and HSBC together “controlled over 85 percent the commercial net short positions” in silvers futures contracts at Comex, a Chicago-based exchange on which silver is traded, along with “25 percent of all open interest short positions” and a “a market share in excess of 9o percent of all precious metals derivative contracts, excluding gold.”

In the United States, trading in precious metals and other commodities is regulated and closely monitored by a federal agency, the Commodity Futures Trading Commission. In September 2008, after receiving hundreds of complaints that silver future prices were being manipulated downward by JPMorgan and HSBC, the commission’s enforcement division started an investigation. In November 2009, an informant, described in the law suit only as a former employee of Goldman Sachs and a 40-year industry veteran, approached the commission with tales of how the silver traders at JPMorgan were bragging about all the money they were making “as a result of the manipulation,” which entailed “flooding the market” with “short positions” every time the price of silver started to creep upward. The idea was that by unloading its short positions like a time-released capsule, JPMorgan’s traders were keeping the price of silver artificially low.

Soon enough, the informant was identified as Andrew Maguire, an independent precious metals trader in London. On Jan. 26, 2010, Maguire sent Bart Chilton, a member of the futures trading commission, an e-mail urging him to look into the silver trading that day. “It was a good example of how a single seller, when they hold such a concentrated position in the very small silver market can instigate a sell off at will,” Maguire wrote.

On Feb. 3, 2010, Maguire gave the futures trading commission word about an impending “manipulation event” that he said would occur two days later, when the Labor Department’s non-farm payroll numbers would be released. He then spelled out two trading scenarios about which he had been told. “Both scenarios will spell an attempt by the two main short holders” — JPMorganChase and HSBC — “to illegally drive the market down and reap very large profits,” Maguire wrote in an e-mail to a trading-commission investigator.

On Feb. 5, Maguire took a victory lap, writing in another e-mail to the trading commission that “silver manipulation was a great success and played out EXACTLY to plan as predicted.” He added, “I hope you took note of how and who added the short sales (I certainly have a copy) and I am certain you will find it is the same concentrated shorts who have been in full control since JPM took over the Bear Stearns position … I feel sorry for all those not in this loop. A serious amount of money was made and lost today and in my opinion as a result of the CFTC’s allowing by your own definition an illegal concentrated and manipulative position to continue.”

In March 2010, Maguire released his e-mails publicly, in part because he felt the trading commission’s enforcement arm was not taking swift enough action. He was also unhappy over not being invited to a commission hearing on position limits scheduled for March 25. Then came the cloak and dagger element: the day after the hearing, Maguire was involved in a bizarre car accident in London. As he was at a gas station, a car came out of a side street and barreled into his car and two others; London police, using helicopters and chase cars, eventually nabbed the hit-and-run driver. Reports that the perpetrator was given a slap on the wrist inflamed the online crowds that had become captivated by Maguire’s odd story.

In any case, the class-action lawsuit contends that between March 2010 and November 2010, JPMorgan Chase and HSBC reduced their short positions in the silver market by 30 percent, causing the metal’s price to rise dramatically, but leaving them still with a large short position. Now, with the value of silver rising nearly every day, the two banks are caught in a “massive short squeeze,” according to one market participant, that appears to be costing them the billions they made originally plus billions more. Whether these huge losses will show up on the books of JPMorgan Chase and HSBC remains to be seen. (Parsing through the publicly filed footnotes of derivative trades is no easy task.)

Nonetheless, the conspiracy-minded have claimed that the Fed must have somehow agreed to make JPMorgan and HSBC whole for any losses the banks suffered if and when the price of silver rose above the artificially maintained low levels — as in right now, for instance. (About all this, a JPMorganChase spokesman declined to comment.)

Some two-and-a-half years later, the Commodity Futures Trading Commission’s investigation is still unresolved, and at least one commissioner — Bart Chilton — thinks that after interviewing more than 32 people and reviewing more than 40,000 documents, there has been enough investigating and not enough prosecuting. “More than two years ago, the agency began an investigation into silver markets,” Chilton said at a commission hearing last October. “I have been urging the agency to say something on the matter for months … I believe violations to the Commodity Exchange Act have taken place in silver markets and that any such violation of the law in this regard should be prosecuted.”

What’s more, Chilton said in an interview last week, that “one participant” in the silver market still controlled 35 percent of the silver market as recently as a few months ago, “enough to move prices,” he said, and well above the 10 percent “position limits” the commission has proposed to comply with Dodd-Frank financial reform law. Since that law’s passage last summer, the commodities exchanges have issued waivers permitting the ownership of silver positions above the limits the C.F.T.C. has proposed, and which were supposed to be in place by January of this year. Yet the waivers remain in place, and the big traders have not been penalized, much to Chilton’s frustration And the mystery deepens: last Thursday, the price of silver fell $1.50 per ounce in less than an hour before recovering. “This was robbery at its most obvious and most vindictive,” wrote Richard Guthrie, a London-based trader, in an e-mail to Chilton. “How many investors lost money and positions to the financial benefit of an elite few?”

It’s getting harder and harder to continue to brush off Andrew Maguire’s claims as the rantings of a rogue trader with a nutty online following. The Commodities Futures Trading Commission should immediately release the files from its investigation into the supposed manipulation of the silver market so the public can determine whether JPMorganChase and HSBC did anything illegal, with or without the help of the Fed. In addition, the commission should start enforcing the 10 percent threshold on silver positions it has proposed to comply with Dodd-Frank law. Basically, the other commissioners must join with Bart Chilton to do the job they are required to do: Protecting the sanctity of the markets and preventing the sorts of manipulation we’ve seen all too often.

http://opinionator.blogs.nytimes.com/2011/03/02/a-conspiracy-with-a-silver-lining/?hp

"Apocalypse Now" for Paper Silver sellers credibility

Its all over the blogsphere.. kudos to Tyler at Zerohedge and Mark Antony at Seeking Alpha and to the forestmeister for the lead...

I'm kicking this meme cause it looks solid and don't ya know, there a bull market in hard cynicism and scepticism and a bear market is fiduciary trust these days..

The whole point of investing in precious metals is that they are physical assets and they have no counter party risks. Paper assets have counter party risks, physical metals have no such counter party risk.

So what's the point of buying precious metal ETFs such as GLD, SLV, CEF,which are supposed to be backed up by physical metals. But you are not in physical control of the metals, and you just have to trust the sponsors of these ETFs.

Counter party risk, any one? DIND DING DING DING!

The London based ETF Securities Silver Fund regularly publish a list of serial numbers of the silver bars they hold in custody:

http://www.etfsecurities.com/msl/bar_list.zip

The iShares Silver Trust (SLV) also publish a weekly updated list of serial numbers of silver bars held in their custody:

https://ebts.jpmorgan.com/ebtsWebMod/ebts_downloads/BONYBARLIST.PDF

Check out page 1698-1722 of the SLV silver bars list. They have got some silver bars from China. The brand is Great Wall. The supposedly unique serial numbers are from No. 1001 - No. 1460. With many duplications.

The ETFS's silver bars list also contains silver bars of the same Great Wall brand. The serial numbers are also the same: No. 1001 - No. 1360.



And now for the forensic accounting...... a medal to Project Mayhem for sterling service disintermediating the disfunctional element in the elite.. rational rightsizing, I call it.

Silver ETFs: Multiple anomalies detected



Project Mayhem Research Inc
July 28th 2009


project.mayhem.research@gmail.com


Recently, we have developed a computer program to conduct data mining
on the inventory of publicly available silver ETFs --namely, iShares
SLV managed by JP Morgan, and the London-based ETF Securities funds.


What we found was unusual.


Abstract:


A data analysis was conducted of the inventory holdings of two
publicly available silver ETFs: iShares SLV and London-based ETF
Securities. Custom software was written to analyze published silver
bar information for anomalies. Multiple anomalies were found. We
detected numerous duplicate bar entries within both lists, which
comprised 11.88% and 0.4619% of the SLV and ETFS bar totals,
respectively. In addition, we found several 'perfect duplicate'
entries within the iShares SLV bar list: that is, the same weight,
manufacturer, and serial number were listed multiple times. These
comprised 0.0025% of the SLV bar totals. More disturbing, however,
was our accidental discovery of the presence of what we have termed
'rough internal duplicates' --bars with near-identical serial
numbers, identical weights, and identical brands. The reason the
latter are more problematic is their very low-statistical
probability, suggesting some level of fraud and or accounting
incompetence is present. We noticed other data anomalies as well,
including large amounts of low serial number clustering, which was
identified by our industry sources as 'unusual'. Furthermore, we
tested for the presence of 'weight duplicates' --which upon
exclusion --reduced the bar inventories by an astonishing 82% and
50% for the SLV and ETFS funds. We suspect the number of 'weight
duplicates' lie well outside the expected Gaussian distribution, but
leave this for the subject of future research. Finally, we found
multiple cross-referenced bars with identical brands and serial
numbers present in both the London and U.S. funds --funds ostensibly
with different custodians. Taken together with evidence of
'revisions' published to the public ETFS data after exposure of the
initial flaws, these data suggest there is a degree of systematic
fraud or gross incompetence in these funds --perhaps both.



Introduction:


Silver has functioned as money in human activities for over 5000
years, well prior to its gradual demonetization in the late 19th
century. One question most intelligent students of world finance
will ask themselves sooner or later, is how precious metals might be
expected to function under a world oligopoly? Due to silver's
historical role as currency, as well as its competition for the
position of government funds and central bank bonds vis-a-vis the US
Treasury complex, one might expect Western governments and megabanks
to be openly hostile towards silver. Indeed, after three failed CFTC
investigations and one 'Gibson's Paradox' paper, this position
appears to be the case. From a systems perspective, we may consider
the first step required to create a functional world oligopoly is
likely to both displace and suppress the monetary metals in favor of
centrally administered paper. This gives us a possible motive for
what we characterize here.


The unique position of silver, and the subject of the present
paper concerns, is that unlike gold --silver is not carried as a
reserve asset on global central bank balance sheets. This presents a
unique problem in terms of 'cartel management' for the global
monetary authorities. The problem could be written, "How do you
manage the price of an item of which you do not possess large
supply?". As silver expert Ted Butler has articulated over the past
decade or more, above ground stores of silver have been rapidly
consumed post-WWII at such a rate that silver is now several times
more rare than gold. The question is not "Why would the price of
silver be suppressed?" --as that should be obvious to any student of
20th century history and decaying empires --but rather how?


The answer is through the settlement process --and ultimately
through perception itself. Indeed, the scam is very old, and we see
it repeated to the present day through the likes of Bernie Madoff,
all the way up to our chief scam artists and criminals at the Federal
Reserve and US Treasury Department. The scam is: "Sell more of
something than you actually have , and hope not everyone asks for
their money at the same time." Recently, new developments have come
to light regarding the details on how the US/UK financial fraud
syndicate manages to accomplish this charade. Many thanks are
deserved to Ted Butler, GATA, Rob Kirby, Bob Chapman, Adrian Douglas,
Mark Anthony, and countless others.



The recently emerging details on how silver prices are kept low
without a large bank inventory are multi-faceted. Besides the
obvious hundreds of $trillions in OTC interest rate swaps which keep
the toxic US Tbond complex afloat (in direct competition to the
monetary metals), there is the process of the commodity exchanges -specifically
of the highly concentrated unhedged silver futures
position by four large banks, of which our sources indicate the top
two include JP Morgan and HSBC. Ted Butler has detailed the math at
length, but suffice to say the concentration of large amounts of
paper futures within the COMEX, minus spreads, in the hands of four
banks goes a long way towards enabling world silver price management
and a functional oligopoly for the elite.


The last piece of the puzzle, which brings us back to our
present topic of the ETFs, is that of the use of ETF shares as
settlement on these very same COMEX futures exchange. The final
piece was provided to us by GATA and Adrian Douglas in an article
published on July 11, 2009 entitled "The Alchemists". Douglas notes
that a year prior to the launch of the silver ETF, the COMEX
published a rule change, on February 18, 2005, which allowed ETF
shares to be used as settlement in lue of physical delivery of a
commodity. Convenient timing. No doubt this impacts silver the
most, as silver has the most concentrated and leveraged short
position of any COMEX tangible. Gold comes a close second. The
outcome of allowing ETF shares to be used as settlement instead of
physical delivery --as well as increasingly scarce global silver
supply considerations --is a byproduct of fifty years of industrial
consumption and systemic fraud. This situation is both worsening and
destabilizing despite increasingly draconian attempts at generalized
'price management' by the authorities, who are now seeking to
consolidate their respective dictatorships in thinly-disguised global
power plays. Needless to say, this will only end in tears.


Regarding our topic at hand of the silver ETF --since the
silver ETF shares are now used as settlement for price discovery on
the futures market, one would think it would be imperative that there
was careful accounting and open information in order to facilitate
proper price discovery? After all, if one can deliver paper promises
to the COMEX, there should be a physical asset backing up the paper,
right? Unfortunately, our research on the matter indicates this is
not the case, and in fact, there is now information to suggest data
anomalies in the holdings of the silver ETFs and possibly even fraud.



Methods:


Project Mayhem Research obtained the latest bar lists from
iShares SLV managed by JP Morgan, and from the London ETFS silver
funds managed by ETF Securities. After obtaining the lists, we
converted both data sets to plaintext (flat-file) using open source
tools on a Linux platform. We then constructed several iterations of
custom Perl software (written in vi of course) which analyzed the
data sets by loading silver bar information into memory, and cross
referenced the information against itself as well as with the
opposite list. Eventually we decided on three forms of indexing -in
other words, the selection of the primary key --the first was to
use a standardized manufacturer name appended to bar serial number,
and the second, to use manufacturer name, bar serial number, and
specific bar weight appended together, and the third, to use the
manufacturer name appended to the four digit bar weight. After
experimenting with various parameters, we conducted data runs to
calculate various statistics on these data sets, mainly to include
analysis of forms we initially termed 'collisions', perhaps better
identified as 'duplicates'. We found numerous duplicates of various
forms. These are characterized as follows:


Definitions:


Internal Duplicate:
A silver bar with identical serial number and
brand, listed two or more times within a single inventory list.


Rough Internal Duplicate: A silver bar with an almost-identical
serial number (AB1024 vs 1024), yet identical brand and weight,
listed two or more times within a single inventory list.


Perfect Internal Duplicate: A silver bar with identical serial
number, weight, and brand listed two or more times within a single
inventory list.


Weight Duplicate: A silver bar with identical brand and weight listed
two or more times on a single inventory list.


Cross Reference Duplicate: A silver bar with identical serial number
and brand listed on two or more separate inventory lists.



Results:


We found a large number of internal duplicates --far more than
we expected. Internal duplicates were much higher on the iShares
silver ETF list than on the ETFS list, although they were present on
both. Internal Duplicates comprise an astonishing 11.77% of the
iShares SLV list and 0.4619% of the ETFS list. A common objection
that may be raised is that perhaps many of these manufacturers
duplicate their serial numbers --but the bars can be told apart by
their weights. We have taken this possibility into consideration.
Our subsequent data run for perfect internal duplicates indicates
this claim regarding bar weight may have some merit, at least on
paper, as these forms of duplication comprised a substantially
smaller fraction of the lists: 0.000242% and 0.00% respectively.
Furthermore, the published weight of 281,863,452 ounces for the
iShares SLV ETF is roughly consistent with our estimation --one
which includes internal duplicates yet excludes perfect duplicates
from the published inventory list, which according to our
calculations yields 281,670,356 ounces --a figure relatively close,
within three significant figures, yet not identical the published
iShares figure.


Unfortunately we believe even these mildly positive facts are
completely dispelled by our trials with what we have termed 'rough
internal duplicates' and 'weight duplicates', among other disturbing
ancillary information including statistical clustering. A 'rough
internal duplicate' characterizes inventory bars with identical
manufacturers and weight, and 'almost-the-same' serial numbers.
'Almost the same does' not mean sequential, but rather means simply
the removal of alphanumeric prefixes or suffixes from the serial
number. Our search algorithm returns twice as many hits on the
iShares list when 'rough duplicates' are enabled. The presence of
even a few rough internal duplicates is highly disturbing, as the
mere presence of rough duplicates indicates possible bar 'cloning'
--where prefixes or suffixes are added to legitimate bar serial
numbers in order to pad the list. Since the weight of these 1000oz
bars is recorded to four significant figures, even a few numbers of
bars with "almost-the-same" serial numbers (yet perfectly identical
weights and manufacturers), gives us serious reservations regarding
the veracity of these inventory lists --due to the statistical
unlikelihood of four significant figures being identical within the
same manufacturer yet having an 'almost-the-same' serial number.



The second aspect of these rather disturbing anomalies are the
presence of 'weight duplicates', internal to both lists, where we
disregard the serial number in favor of using the manufacturer name
and four digit bar weight appended together as the primary key to
identify a bar. When using this method, the inventory of both these
funds contract via an astonishing 82% and 50% for the SLV and ETFS
funds, respectively. While obviously inventory can be expected to
contract when disregarding the bar serial number, as a certain number
of weights will overlap by chance, we suspect that the magnitude of
these contractions lie well outside expected standard deviations
(using a normal Gaussian distribution of bar weights centered on or
around 950-1000oz.) We leave this as an open question and as a
subject for future research by statisticians more capable than
ourselves as to whether this is indeed the case. However, we would
be remiss to point out that our finding here --if indeed it lies
outside the expected statistics --this could be easily explained by
bar "cloning" --an explanation consistent with our findings of both
'rough internal duplicates' as well as 'weight duplicates'.


Another strange finding we discovered was evidence of unusual
statistical clustering in the iShares SLV bar list. Many of the
internal duplicates were clustered towards early bar serial numbers
--that is, those close to zero. We have consulted with an industry
source who says this is unusual, as low serial numbers indicate older
bars. We have yet to come up with a suitable explanation for why this
anomaly would be present, and why internal duplicate concentration
would cluster towards zero. We leave this particular item as another
in an escalating series of problems with these funds and as another
subject for future research.


Lastly we note the presence of 'cross-reference duplicates',
where we found bars with identical serial numbers and manufacturers
which occurred on both the iShares and the ETFS lists. This was
despite these lists supposedly having different custodians. We
detected 80 bars, listed in Appendix C, which appear on both lists
yet have identical manufacturer and serial number. We believe this
is unusual and cause for concern, especially since this number of
bars comprises almost 0.5% of the full ETFS bar list. The brands
involved in these anomalies include Krasnoyarsk, MET/Mex,
Novosibirsk, and Nordeutsche.



Conclusions:


During our research into the inventory lists of the iShares SLV
and London-based ETFS physical silver funds, we discovered multiple
anomalies which cannot be easily dismissed. These included the
presence of internal duplicates, rough internal duplicates, weight
duplicates, statistical clustering, and cross-reference duplicates.
Taken together, these anomalies are cause for concern, and we suggest
that more capable teams conduct further research into these issues,
as they effect price discovery within the precious metals market, as
these ETF shares are being used for settlement and possibly price-
suppression on the COMEX.


If these problems are caused by accounting errors, they are
disturbing and perhaps profoundly incompetent, and we suggest both
these funds should have their senior management replaced. We cannot
recommend these shares to anyone to do these glaring anomalies. In
our opinions, the only way for all of these anomalies to occur
together as noted in this paper, is via systemic fraud or gross
accounting error bordering on jaw-dropping incompetence.


Unfortunately, our private considerations are for the former,
especially considering 'revisions' published to the ETFS bar list
after the appearance of Mark Anthony's July 14th 2009 article on
Seeking Alpha regarding possible ETF fraud. The ETF Securities bar
lists were changed after the Anthony's discovery of duplicate bars in
the Great Wall brand. To us, this suggests criminal activity. We
suggest immediate future research by others to investigate these
findings.



APPENDIX A --iShares SLV 'Perfect Internal Duplicates'


***Perfect Internal Duplicate Detected: ASARCO_INC_AMARILLO_146230_997_8
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_1655_951_2
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_1804_1007_9
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_2283_966_8
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_2318_946_4
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_3491_995_8
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_5351_929_0
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_5394_978_9
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_5447_964_9
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_5764_962_9
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_6996_960_7
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_8021_906_5
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_V2029_977_3
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_W10613_956_3
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_W11430_1034_0
***Perfect Internal Duplicate Detected: BRITANNIA_REFINED_METALS_UK_W11436_1001_8
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_1_1038_6
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_2_1055_5
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_3_1050_7
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_4_1053_7
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_4_1064_7
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_7_1043_7
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_9_1042_7
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_10_1063_7
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_13_1059_8
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_15_1051_2
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_15_1052_3
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_15_1067_1
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_17_1056_0
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_22_1056_7
***Perfect Internal Duplicate Detected: COMINCO_LTD_TADANAC_CANADA_23_1066_6
***Perfect Internal Duplicate Detected: EMPRESA_MINERA_PERU_544_1050_4
***Perfect Internal Duplicate Detected: EMPRESA_MINERA_PERU_873_1027_4
***Perfect Internal Duplicate Detected: INNER_MONGOLIA_QIANKUN_GOLD_&_SILVER_62_1056_9
***Perfect Internal Duplicate Detected: INNER_MONGOLIA_QIANKUN_GOLD_&_SILVER_607230_987_8
***Perfect Internal Duplicate Detected: KGHM_POLAND_3107_1011_7
***Perfect Internal Duplicate Detected: KGHM_POLAND_3152_1009_8
***Perfect Internal Duplicate Detected: KGHM_POLAND_3188_1025_7
***Perfect Internal Duplicate Detected: KGHM_POLAND_5447_1022_6
***Perfect Internal Duplicate Detected: MET_MEX_PENOLES_MEXICO_36860_1053_2
***Perfect Internal Duplicate Detected: NIPPON_MINING_JAPAN_9383_940_8
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_1118_947_3
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_1337_939_1
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_1126_952_4
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_13411_959_9
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_1423_956_2
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_1453_947_8
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_16311_948_8
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_1641_937_8
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_1643_965_0
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_1668_954_4
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_1941_952_2
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_19411_947_6
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_20210_951_5
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_2033_946_9
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_2044_976_8
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_2134_962_7
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_21911_957_7
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_2209_974_5
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_22211_970_5
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_2653_943_2
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_2916_953_4
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_2985_956_3
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_39910_948_0
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_5654_952_6
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_M1343_944_0
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_N2311_950_7
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_T0736_959_6
***Perfect Internal Duplicate Detected: RUSSIAN_STATE_REFINERIES_T981_975_8



APPENDIX B --ETFS 'Internal Duplicates'


***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1204
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1205
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2494
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2495
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2501
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2502
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2491
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2492
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2493
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2531
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2532
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2533
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2534
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2535
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2571
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2572
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2573
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2574
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2575
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2581
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2582
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2583
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2584
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2585
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2591
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2592
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2593
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2594
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_2595
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1273
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1275
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1023
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1032
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1234
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1133
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1138
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1142
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1067
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1068
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1070
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1079
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1083
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1085
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1092
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1096
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1298
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1302
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1309
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1317
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1318
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1171
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1183
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1184
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1189
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1195
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1038
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1041
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1047
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1063
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1064
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1065
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1199
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1200
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1203
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1222
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1226
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1230
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1109
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1110



***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1119
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1126
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1106
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1108
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1112
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1115
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1122
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1125
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1127
***Internal Duplicate Detected: KRASNOYARSK_RUSSIA_1111
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4611
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4512
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4540
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4614
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4542
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4610
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4612
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4517
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4524
***Internal Duplicate Detected: PRIOKSKY_RUSSIA_KP4544



APPENDIX C --iShares SLV and ETFS 'Cross-Reference Duplicates'


Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2295
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2483
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2484
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2485
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2531
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2532
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2533
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2534
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2535
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2541
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2542
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2551
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2552
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2553
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2554
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2555
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2561
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2562
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2563
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2564
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2565
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2571
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2572
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2573
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2574
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2601
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2602
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2603
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2604
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2605
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2611
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2612
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2613
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2614
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2615
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2621
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2622
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2623
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2624
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2631
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2632
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2633
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2634
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2635
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2651
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2652
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2653
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2654
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2655
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2661
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2662
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2663
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2664
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2665
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2671
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2672
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2673
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2674
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2675
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2681
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2682
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2683
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2684
Cross Referenced Duplicate Detected: KRASNOYARSK_RUSSIA_2685
Cross Referenced Duplicate Detected: MET_MEX_PENOLES_MEXICO_21866
Cross Referenced Duplicate Detected: MET_MEX_PENOLES_MEXICO_21932
Cross Referenced Duplicate Detected: MET_MEX_PENOLES_MEXICO_21934
Cross Referenced Duplicate Detected: NORDEUTSCHE_GERMANY_2607
Cross Referenced Duplicate Detected: NORDEUTSCHE_GERMANY_2608



Cross Referenced Duplicate Detected: NORDEUTSCHE_GERMANY_2609
Cross Referenced Duplicate Detected: NORDEUTSCHE_GERMANY_2610
Cross Referenced Duplicate Detected: NORDEUTSCHE_GERMANY_2611
Cross Referenced Duplicate Detected: NOVOSIBRISK_REFINERY_RUSSIA_1395
Cross Referenced Duplicate Detected: NOVOSIBRISK_REFINERY_RUSSIA_354
Cross Referenced Duplicate Detected: NOVOSIBRISK_REFINERY_RUSSIA_355
Cross Referenced Duplicate Detected: NOVOSIBRISK_REFINERY_RUSSIA_356
Cross Referenced Duplicate Detected: NOVOSIBRISK_REFINERY_RUSSIA_357
Cross Referenced Duplicate Detected: NOVOSIBRISK_REFINERY_RUSSIA_358
Cross Referenced Duplicate Detected: NOVOSIBRISK_REFINERY_RUSSIA_359
Cross Referenced Duplicate Detected: NOVOSIBRISK_REFINERY_RUSSIA_360




The IMF's gold gambit ~ Wall Street Journal

The Fund's Misuse of Bullion Reserves is Crucial to its Plan to Use the Financial Crisis to Expand its Power.

By Judy Shelton
The Wall Street Journal
Monday, April 27, 2009

http://online.wsj.com/article/SB124078772568857401.html

The International Monetary Fund deserves credit, figuratively speaking, for cleverly manipulating the financial troubles of emerging and low-income nations to procure a fresh infusion of capital for itself. But its tactics at this month's G-20 summit in London -- where President Barack Obama signed off on tripling the IMF's lending resources -- should not hoodwink anyone, least of all American taxpayers who pay the largest share of IMF expenses.

Lost in the lofty talk about putting the IMF in the center of world economic recovery is the fact that the organization has been quietly attempting to ensure its own survival by seeking permission to engage in gold sales. While IMF officials insinuate that the receipts would be used to help poor countries, the real goal is to set up a permanent endowment fund for the IMF.

The U.S. should not replenish the coffers of a multilateral bureaucracy that quite literally lost its reason for being on Aug. 15, 1971 -- the day President Richard Nixon "closed the gold window" and brought an end to the Bretton Woods agreement, which allowed countries to convert their dollar holdings, via the IMF, into gold at a fixed price. Instead, Congress should call for the IMF's dismantlement and restitution of its assets.

The most solid asset owned by the IMF, purely as a legacy of its original incarnation, is gold. The IMF holds 3,217 metric tons (103.4 million ounces) of gold, which makes it the world's third largest official holder. Actually, it's a misnomer to say the IMF "owns" the gold since the bullion belongs, according to the IMF articles of agreement adopted at Bretton Woods in 1944, to its member nations.

Nevertheless, the IMF is now seeking to sell a considerable chunk of those gold holdings -- some 12.9 million ounces -- which it insists are exempt from restitution to members in the event of IMF liquidation.

Its reason? Between December 1999 and April 2000, to fund its Heavily Indebted Poor Countries (HIPC) initiative, the IMF arranged to sell gold it held on its books at a price of roughly $50 to two member countries, Brazil and Mexico, at the market price of $355. It put the profits of close to $4 billion in a special HIPC account; simultaneously, the IMF accepted back the gold sold to Brazil and Mexico in settlement of their financial obligations of that amount.

Bottom line: The balance of IMF holdings of physical gold was left unchanged, although it raked in the substantial difference between the gold's market price and its book value. The IMF asserts a propriety claim over the 12.9 million ounces it "acquired" through these transactions.

Unfortunately, artful accounting -- from the deceptive practice of carrying gold at its former official price (about $52) rather than its current market value (about $914), to the arcane usage of an intangible monetary unit called a Special Drawing Right (SDR) -- has become the IMF's defining characteristic.

The IMF once served as administrator for the gold-anchored Bretton Woods system of fixed exchange rates among currencies. It now stands for laxity, for endless government fixes, for ineptitude, and political compromise. The IMF preaches budgetary discipline one moment, only to abandon it under pressure from the current crop of presidents, prime ministers, and potentates who authorize its spending.

Now the IMF is attempting an end run around Congress, as it quietly moves toward selling gold, most likely to China. Why does the IMF need the money? Just three years ago the bloated organization (half of its 2,600 staff are economists) was nearly defunct; headquartered in Washington, the IMF was desperate to create an endowment fund to provide for its continued existence.

But in 2007 a specially convened committee of "eminent persons" helpfully suggested that if the IMF could sell those 12.9 million ounces of gold and set up a trust fund with the windfall profits, the investment returns could plug the gap between its administrative expenditures and the amount it earns as an intermediary that channels funds from rich countries to poor countries.

Sound familiar? Only one problem: IMF gold sales must be approved by an 85 percent voting majority of its members. The U.S. has a 17 percent vote; thus the IMF cannot sell gold without the explicit consent of Congress. But Rep. Barney Frank, D-Mass., who chairs the House Financial Services Committee, has indicated his openness to approving IMF gold sales -- conditional that some of the receipts be used to "help finance debt relief for poor countries."

Ah, yes, it is always about helping the poor. Which is why the IMF emphasized its willingness to assist "poor countries" in its carefully calibrated request for additional resources from G-20 nations. Not surprisingly, the London stratagem proved successful. It was readily embraced by G-20 leaders eager to demonstrate how much they care about the human consequences of economic meltdown. Ironically, the IMF has been widely blamed by recipient nations in Africa and Latin America for perpetuating poverty. Excessive transfers to less-developed countries have the perverse effect of suppressing the entrepreneurial reserves of citizens. It is only when nations manage to get off the global dole that they are taken seriously by global capital markets and can start to achieve bankable growth.

The IMF has shown an uncanny ability to transmogrify into whatever politically acceptable form necessary to ensure its survival. Throughout the intervening decades since the end of Bretton Woods, the IMF has scrambled to redefine itself as (in rough chronological order): a global debt-collection agency, an economic-research organization, a referee for financial disputes among the Group of Seven leading industrialized nations, and a front to permit Western nations to avoid being blamed for problems arising in the transition to democratic capitalism for formerly communist nations.

In its latest manifestation as global financial surveillance monitor and G-20 sidekick, the IMF has taken to delivering somber pronouncements about the world economic outlook, concluding in mid-April: "The current recessions are likely to be unusually severe, and the forthcoming recoveries sluggish." And what does the IMF recommend? "Aggressive monetary and, particularly, fiscal policies could strengthen and bring forward recoveries."

This sage advice conveniently dovetails with the agenda of Mr. Obama, who, as mentioned earlier, agreed to tripling the IMF's lending resources at the London summit. And to remain au courant with British Prime Minister Gordon Brown, IMF chief Dominique Strauss-Kahn has also called for expanding "the regulatory perimeter to encompass all activities that pose economy-wide risks."

Zhou Xiaochuan, China's powerful central banker, has authored a proposal for international monetary reform that would replace the dollar with "a super-sovereign reserve currency managed by a global institution." Citing "the inherent deficiencies caused by using credit-based national currencies," he suggests the SDR could assume this role. In the view of Mr. Zhou, the way to enhance international monetary and financial stability is to have member countries gradually entrust their reserves "to the centralized management of the IMF."

Before anyone gives any credence to the notion of having the IMF take on the task of issuing a new global currency, however, we need to remember that the original Bretton Woods system worked precisely because the dollar was convertible into gold at a fixed price. And gold is real money.

Congress should just say no.

-----

Ms. Shelton, an economist, is author of "Money Meltdown: Restoring Order to the Global Currency System" (Free Press, 1994).

Anglo bankings off the freeway heading for a donkey track

The banking system is broken. Repeat it after me, the banking system is broken. Australian Banks will one day have to deal with falling housing prices, bad commercial real estate loans, high unemployment, credit card blowups and a loss of guaranteed funding via the Federal government.


Obviously these news attempts are offered to sooth the herd. We’ve got some news for Timmy. That bag of tricks and sleight of hand promulgated by our government, its lackies, minions, and the Goldman Sachs crowd, is in the open and on the table. Not only are the Sheeple getting the drift but we envision pitchforks and torches after our current Tea Parties. No wonder the Defense Department is training 80,000 troops to protect against domestic insurrection this summer.

Other signs of trauma related to these messes were provided yesterday by Mr. Ken Lewis, the CEO at Bank of America. This morning’s Wall Street Journal is splashed on page one with photos of Lewis, Hank Paulson and Chopper Ben Bernanke. This latest story is not a pretty one as Liz Rappaport (the WSJ writer) sez ‘ol Hank told Kenny to shut-up about undisclosed troubles at Merrill during BOA’s Merrill Lynch acquisition. It seems Hank forbid Mr. Lewis to disclose Merrill’s woes while the international financial system was drain diving. Now, Mr. Lewis is between a rock and hard place.

CNBC reported today that Mr. Lewis was instructed to do some things by Paulson that fly in the face of SEC Rules in an effort to keep the lid on the Merrill transaction. Lewis, it appears to us, violated these rules as instructed but is now wide-open to Merrill and BOA shareholder criticism. We noticed too, that Hank Paulson was quick to pin the blame (the government’s gag order to Lewis) on Chopper Ben, so he himself is not caught-up in this mess. What a circus!

As it turns out relative to these massive acquisitions, Lewis got stuck with two huge, stinking piles of dung; one was Merrill and it’s previous good name overloaded with derivatives. And, the second big mistake was his purchase of Countrywide Financial proving to be a worse turkey than several Enron’s combined. Now, we suspect Mr. Lewis loses his job for following Paulson’s orders.

Next, it appears judicial vultures have arrived and perched in rows on the fence at Wall & Broad. Perhaps Mr. Lewis is steering toward an early and unexpected retirement. But, his proposed beach and golf time might revert to something unkind if New York’s Attorney General has something to say about these things. And, this AG is looking with new interest and a magnifying glass as lots of this naughty stuff apparently happened in the Big Apple on New York AG Andrew Cuomo’s turf.

The United States Of Goldman Sachs, Inc.

Some how, some way, despite their reptilian attempts to smother and hide these scams, the light of day is getting much brighter-much faster. Paulson and Timmy along with Benny have conspired to reflate Goldman’s balance sheet tossing nearly, or over $200 Billion of taxpayer cash to AIG. Of course it’s not AIG that’s getting healed. Its Goldman getting most of the AIG funneled billions in derivative pay-offs leaving some other scraps for a few others. We saw an email from Germany yesterday indicating a majority of the top twenty banks were toast and that Goldman in particular was 1,000% underwater on derivatives versus capital. The original information source on this was Turner Radio but the delivery man remains unnamed. Is this just internet gossip? We doubt it.

Ya gotta wonder how many other fiscal tragedies were residing in this global derivatives debacle and were made whole by similar actions. We would suggest less than five major banks and their associated cohorts were the strongest beneficiaries from this honey pot of taxpayer benevolence.

When you have your key soldiers (Goldman) in every important economic, banking, and government controlling position in the western hemisphere, you not only own Wall Street but you own the US Government’s mint keys and all related media. The next big question is; how many more bad loans and debts are out there in the economic mist? We think only 10-15% has surfaced so far. Even if our estimate is mostly wrong, capitalization of the bigger banks is a goner. These banks are technically bankrupt right now. How bad does it get? We cannot tell and neither can anyone else.

http://www.kitco.com/ind/Wieg_cor/roger_apr242009.html

Asia's miners line up for Outback

SYDNEY - Asian mining firms are closely watching developments related to the US$19.5 billion bid by Chinese aluminum giant Chinalco for a stake in multinational Rio Tinto, amid a developing buying blitz on Australia's cheap resources stocks.

Corporate lawyers say that Japanese, Chinese and South Korean companies are locked in negotiations for equity in a host of mid-sized miners, but the fate of the deals may hinge on whether the Chinalco-Rio deal gets regulatory approval.

"You have a weak Australian dollar, very low price/earning ratios of resource stocks and a lot of cashed-up Asian firms that are underwritten - in some cases at least - by official reserves," said one lawyer involved in acquisition talks. "[But] it counts for nought if the [Australian] regulators start talking tough."

State-owned Chinalco have met with Australia's Foreign Investment Review Board (IRB) to push its case for the purchase of sizeable stakes in some of Rio's key ore, aluminum and power assets, including the vast Hamersley Iron operation in Western Australia.

Chinalco has offered US$7.2 billion in the form of convertible bonds which, once converted to shares, would increase its stake in Rio from 9.3% to 18%. The bonds, which have a 60-year term, would attract annual interest of 9-9.5% and would be redeemable after seven years.

Rio badly needs the cash injection to clear US$38 billion of debt incurred when the multinational bought Canadian aluminum producer Alcan Inc in 2007, and board members are expected to approve the bid when they meet in May. The company is committed to repay US$8.9 billion in October and a further US$10 billion next year.

But investors argue that Rio, Australia's second-biggest resources company, could mortgage its future by hiving off key assets. The Australian government also fears that a takeover could allow the Chinese effectively to dictate terms in their tortuous annual price negotiations with the resources sector.

Big exporters like Rio and BHP-Billiton benefited from annual increases of 80-90% in shipment value during the boom years of Chinese economic expansion. But they were told last week by Baosteel's Shanghai steelworks that they could expect cuts of 30-50% this year due to waning demand.

There is plenty at stake for the slowing Australian economy: the country earned A$31 billion from iron ore exports last year and A$46 billion from coal, and government leaders are anxious that the miners keep the upper ground in negotiations.

The new president of Chinalco, Xiong Weiping, said in Sydney the Rio would set up a separate committee of independent - that is, non-Chinalco - directors to handle price talks and avoid a conflict of interest. That might be enough to mollify the IRB, especially if the review board also imposes a limit on Chinalco's future stake and withholds a board seat.

But that may not satisfy the government. The Australian treasurer (finance minister), Wayne Swan, has said he will seek parliamentary approval to amend the Foreign Acquisitions and Takeovers Act so that access to resources firms is tightened.

The biggest change is likely to be that any investment - particularly those involving instruments such as convertible notes - would be treated as equity. Swan said that Australia welcomed investment but treated resources as a special category. Intending buyers would have to prove that investments in the mining sector were in the "national interest".

Shareholders, especially institutional investors, will also have a strong say in the outcome, as many have been angered that the offering was made to Chinalco at a premium - and that they were left out. There are reports that Chinalco might substitute a rights issue of US$10 billion, but Xiong said in Sydney the firm was unwilling to alter the terms.

"We do not want to see any changes to the packaged agreement. I think the Rio Tinto board and its management team will listen very carefully to the requirements and requests from the shareholders."

Yet while opening the deal to outside investors would water down Chinalco's stake, that might be the price the firm has to pay to force the deal through. And it might be vital if Rio is to keep faith with shareholders and rescue its floundering share price.

Market analysts say a substantial number of institutional investors were caught out when they shorted Rio shares in anticipation of a rights issue to cover the debts and they have lots to lose from the deal. So do Rio's board members, who are struggling to convince analysts the deal is the best option.

There has already been one casualty: the designated chairman, Jim Leng, quit two weeks ago when his case for a rights issue found no support with other board members.

Nationalist sentiment is unlikely to have much bearing with remaining board members, as only two are Australian. One of these, former Cathay Pacific and British Airways boss Rod Eddington, has said he will not vote on the deal due to a perceived conflict of interest: he chairs the Australian operations of investment bank JP Morgan, one of Chinalco's advisers.

Rio chief executive Tom Albanese, a US national, said he stood by the deal, saying it would allow Rio to reactivate iron ore, alumina and coal projects that had been put on hold due to the company's difficult financial situation.

There is still a possibility of a rival bid from another suitor, as the Chinalco deal has not yet been voted on by investors. BHP, which considered launching a formal bid last year, is one possible investor, though it would mean Rio would have to pay a US$195 million "break fee" to Chinalco.

Other Asian miners also cannot be ruled out. China Minmetals wrapped up a A$2.6 billion (US$1.7 billion) takeover of OZ Minerals earlier his month, and Chinese steel producer Anshan Iron & Steel Group will pay A$162 million for a bigger stake in Gindalbie Metals.

Legal firm Corrs Chambers Westgarth, which specializes in mergers and acquisitions, confirmed it had had inquiries from Korean, Japanese and Chinese investors looking to acquire gold, coal, uranium and iron ore projects in Australia.

The investors include Japan's Sumitomo, Mitsui and Mitsubishi UFJ. They are believed to be looking at medium-sized producers such as Aquila Resources, Felix Resources and Gloucester Coal.

Alan Boyd, now based in Sydney, has reported on Asia for more than two decades.

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Massive rally in Gold dead ahead

Backwardisation means big gold price rally coming!
Filed under: Uncategorized — peterjcooper @ 5:02 pm

Please forgive this late contribution - I have been distracted by the delights of ancient Egypt in Luxor - but this is highly significant.

Professor Emeritus of Mathematics Antal E. Fekete says that December 2nd marked the beginning of the end for paper currencies and wealth based on such currencies. The reason, backwardisation.

Since at least 1972, the price of gold futures has been higher than the spot price. But on December 2nd, the futures price went below the spot price - and has stayed there for several days.

Fekete argues that this means that gold owners are hoarding their gold because (1) they’re not confident that they’ll be able to buy it back in the future, and (2) they have lost all faith in paper currency. He says:
Back to the future

‘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.

Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks.

They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system.

Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days.

In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?

Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.’
A big change

PhD economist James Conrad confirms the backwardation of gold:

‘Backwardation is always the first sign that a huge price rise is about to happen. In the absence of backwardation, there is no rational explanation as to why HSBC, Bank of Nova Scotia(BNS), Goldman Sachs, and others are forcing COMEX to make large deliveries.

Things … are changing fast … the first major mini-panic among COMEX gold short sellers happened last Friday. As of Wednesday morning, about 11,500 delivery demands for 100 ounce ingots were made at COMEX, which represents about 5% of the previous open interest.

Another 2,000 contracts are still open, and a large percentage of those will probably demand delivery. These demands compare to the usual ½ to 1% of all contracts.

European central banks no longer want to sell gold. China wants to buy 360 tons of it as soon as humanly possible, and as soon as it can be done without sending the price into the stratosphere. A close look at the Federal Reserve balance sheet tells us that Ben Bernanke eventually intends to devalue the U.S. dollar against gold.

Anyone who reads the written works of our Fed Chairman knows that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of most prior Fed Chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman.

He often extols the virtues of former President Franklin Roosevelt’s gold revaluation/dollar devaluation, back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.

Huge international banking firms normally do not take metal deliveries from futures markets. They normally buy on the London spot market. The fact that they are demanding delivery from COMEX means one of two things. Either the London bullion exchanges have run out of gold, or these firms are finding it cheaper to buy gold as a ‘future’ than as a spot exchange.

Smart traders at big firms may be buying on COMEX to sell into the spot market, for a profit. This pricing condition is known as backwardation.’

Red Alert: Gold Backwardation!!!

December 2, 2008, was a landmark in the saga of the collapsing international monetary system, yet it did not deserve to be reported in the press: gold went to backwardation for the first time ever in history. The facts are as follows: on December 2nd, at the Comex in New York, December gold futures (last delivery: December 31) were quoted at 1.98% discount to spot, while February gold futures (last delivery: February 27, 2009) were quoted at 0.14% discount to spot. (All percentages annualized.) The condition got worse on December 3rd, when the corresponding figures were 2% and 0.29%. This means that the gold basis has turned negative, and the condition of backwardation persisted for at least 48 hours. I am writing this in the wee hours of December 4th, when trading of gold futures has not yet started in New York.



According to the December 3rd Comex delivery report, there are 11,759 notices to take delivery. This represents 1.1759 million ounces of gold, while the Comex-approved warehouses hold 2.9 million ounces. Thus 40% of the total amount will have to be delivered by December 31st. Since not all the gold in the warehouses is available for delivery, Comex supply of gold falls far short of the demand at present rates. Futures markets in gold are breaking down. Paper gold is progressively being discredited.



Already there was a slight backwardation in gold at the expiry of a previous active contract month, but it never spilled over to the next active contract month, as it does now: backwardation in the December contract is spilling over to the February contract which at last reading was 0.36%. Silver is also in backwardation, with the discount on silver futures being about twice that on gold futures.



As those who attended my seminar on the gold basis in Canberra last month know, the gold basis is a pristine, incorruptible measure of trust, or the lack of it in case it turns negative, in paper money. Of course, it is too early to say whether gold has gone to permanent backwardation, or whether the condition will rectify itself (it probably will). Be that as it may, it does not matter. The fact that it has happened is the coup de grâce for the regime of irredeemable currency. It will bleed to death, maybe rather slowly, even if no other hits, blows, or shocks are dealt to the system. Very few people realize what is going on and, of course, official sources and the news media won’t be helpful to them to explain the significance of all this. I am trying to be helpful to the discriminating reader.



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. I dubbed this event that has cast its long shadow forward for many a year, the last contango in Washington ― contango being the name for the condition opposite to backwardation (namely, that of a positive basis), and Washington being the city where the Paper-mill of the Potomac, the Federal Reserve Board, is located. This is a tongue-in-cheek way of saying that the jig in Washington is up. The music has stopped on the players of ‘musical chairs’. Those who have no gold in hand are out of luck. They won’t get it now through the regular channels. If they want it, they will have to go to the black market.



I founded Gold Standard University Live (GSUL) two years ago and dedicated it to research of monetary issues that are pointedly ignored by universities, government think-tanks, and the financial press, centered around the question of long-term viability of the regime of irredeemable currency. Historical experiments with that type of currency were many but all of them, without exception, have ended in ignominious failure accompanied with great economic pain, unless the experiment was called off in good time and the authorities returned to monetary rectitude, that is, to a metallic monetary standard. It is also worth pointing out that the present experiment is unique in that all countries of the world indulge in it. Not one country is on a metallic monetary standard, under which the Treasury and the Central Bank are subject to the same contract law as ordinary citizens. They cannot issue irredeemable promises to pay and keep them in monetary circulation through a conspiracy known as check-kiting. Not one country will be spared from the fire and brimstone that once rained on the cities of Sodom and Gomorrah as a punishment of God for immoral behavior.



In all previous episodes there were some countries around that did not listen to the siren song and stayed on the gold standard. They could give a helping hand to the deviant ones, thus limiting economic pain. Today there are no such countries. If you want to be saved, you must be prepared to save yourself.



You cannot understand the process whereby a fiat money system self-destructs without understanding the gold and silver basis. The Quantity Theory of Money does not provide an explanation, because deflation may well precede hyperinflation, as it appears to be the case right now.



For these reasons I placed the study of the gold and silver basis on the top of the list of research topics for GSUL. These can serve as an early warning system that will signal the beginning of the end. The end is approaching with the inevitability of the climax in a Greek tragedy, as the heroes and heroines are drawn to their own destruction. The present reactionary experiment with paper money is entering its death-throes. GSUL has had five sessions and could have established itself as an important, and even the only, source of information about this cataclysmic event: the confrontation of the Titanic (representing the international monetary system) with the iceberg (representing gold and its vanishing basis) as the latter is emerging from the fog too late to avoid collision.



Unfortunately, this was not meant to be: GSUL has to terminate its operations due to a decision made by Mr. Eric Sprott, of Sprott Asset Management, to terminate sponsoring GSUL, saying that “results do not justify the expense.”



I sincerely regret that our activities did not live up to the expectations of Mr. Sprott, but I am very proud of the fact that our research is still the only source of information on the vanishing gold basis and its corollary, the seizing up of the paper money system that threatens the world, as it does, with a Great Depression eclipsing that of the 1930’s.



Let me summarize the salient points of discussion during the last two sessions of GSUL for the benefit of those who wanted to attend but couldn’t. The gold basis is the difference between the futures and the cash price of gold. More precisely it is the price of the nearby active futures contract in the gold futures market minus the cash price of physical gold in the spot market. Historically it has been positive ever since gold futures trading started at the Winnipeg Commodity Exchange in 1972 (except for some rare hiccups at the triple-witching hour. Such deviations have been called ‘logistical’ in nature, having to do with the simultaneous expiry of gold futures and the put and call option contracts on them. In all these instances the anomaly of a negative basis resolved itself in a matter of a few hours.)



In the commodity futures markets the terminus technicus for a positive basis is contango; that for a negative one, backwardation. Contango implies the existence of a healthy supply of the commodity in the warehouses available for immediate delivery, while backwardation implies shortages and conjures up the scraping of the bottom of the barrel. The basis is limited on the upside by the carrying charges; but there is no limit on the downside as it can fall to any negative value (meaning that the cash price may exceed the futures price by any amount, however large).



Contango whereby the futures price of gold is quoted at a premium to the spot price is the normal condition for the gold market, and for a very good reason, too. The supply of monetary gold in the world is very large relatively speaking. Babbling about the ‘scarcity of gold’ reflects the opinion of uninformed or badly informed people. In terms of the ratio of stocks to flows the supply of gold is far and away greater than that of any commodity. Silver is second only to gold. It is this fact that makes the two of them the only monetary metals. The impact on the gold price of a discovery of an extremely rich gold field, or the coming on stream of an extremely rich gold mine, is minimal ― in view of the large existing stocks. Paradoxically, what makes gold valuable is not its scarcity but its relative abundance, which evokes that superb confidence in the steadiness of the value of gold that will not be decreased by a banner production year, nor can it be increased by withdrawing gold coins from circulation. For this reason there is no better fly-wheel regulator for the value of currency than gold. The same goes, albeit to a lesser degree, for silver.



Here is the fundamental difference between the monetary metal, gold, and other commodities. 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.



Negative basis (backwardation) means that people controlling the supply of monetary gold cannot be persuaded to part with it, regardless of the bait. These people are no speculators. They are neither Scrooges nor Shylocks. They are highly capable businessmen with a conservative frame of mind. They are determined to preserve their capital come hell or high water, for saner times, so they can re-deploy it under a saner government and a saner monetary system. Their instrument is the ownership of monetary gold. They blithely ignore the siren song promising risk-free profits. Indeed, they could sell their physical gold in the spot market and buy it back at a discount in the futures market for delivery in 30 days. In any other commodity, traders controlling supply would jump at the opportunity. The lure of risk-free profits would be irresistible. Not so in the case of gold. Owners refuse to be coaxed out of their gold holdings, however large the bait may be. Why?



Well, they don’t believe that the physical gold will be there and available for delivery in 30 days’ time. They don’t want to be stuck with paper gold, which is useless for their purposes of capital preservation.



December 2 is a landmark, because before that date the monetary system could have been saved by opening the U.S. Mint to gold. Now, given the fact of gold backwardation, it is too late. The last chance to avoid disaster has been missed. The proverbial last straw has broken the back of the camel.



I have often been told that the U.S. Mint is already open to gold, witness the Eagle and Buffalo gold coins. But these issues were neither unlimited, nor were they coined free of seigniorage. They were sold at a premium over bullion content. They were a red herring, dropped to make people believe that gold coins can always be obtained from the U.S. Mint, and from other government mints of the world. However, as the experience of the past two or three months shows, one mint after another stopped taking orders for gold coins and suspended their gold operations. The reason is that the flow of gold to the mints has become erratic. It may dry up altogether. This shows that the foreboding has been evoked by the looming gold backwardation, way ahead of the event. Now the truth is out: you can no longer coax gold out of hiding with paper profits.



If the governments of the great trading nations had really wanted to save the world from a catastrophic collapse of world trade, then they should have opened their mints to gold. Now gold backwardation has caught up with us and shut down the free flow of gold in the system. This will have catastrophic consequences. Few people realize that the shutting down of the gold trade, which is what is happening, means the shutting down of world trade. This is a financial earthquake measuring ten on the Greenspan scale, with epicenter at the Comex in New York, where the Twin Towers of the World Trade Center once stood. It is no exaggeration to say that this event will trigger a tsunami wiping out the prosperity of the world.

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Presentation to CFA association, New York

A recent example of the flawed nature of this market came to my attention when my associate, Julian Mann, showed me a very garden variety LIBOR sub-prime floating rate security. A major pricing service valued this bond at par, while on March 19, 2007, one of the major rating agencies rated this bond A3. To affirm the accuracy of this bond's pricing, we went to two brokerage firms that traffic in this type of security and requested what their bid might be, if we owned this security. One responded with a $7 bid. In other words, a 7% of par bid, a difference of 93% to the pricing service. The other firm declined to bid, but they did indicate that, if they were to, their bid would have probably been around this level. Julian has found several other similar examples, so this one does not represent the proverbial “needle in the haystack.”

We believe that many of these models are flawed and give a spurious representation of accuracy. Given the deterioration in underwriting standards, models predicated on prior experience have little value when compared to the data of the last two or three years. In essence, one is assuming a normal distribution curve of data for modeling purposes, while in reality you have data that comes from a highly skewed distribution. We are beginning to see the negative effects of flawed modeling by the growing number of downgrades in the sub-prime sector. This trend is also starting to develop in the Alt-A sector as well. We believe these trends will continue to unfold over the next two or three years and should lead to a retrenchment in the securitization/origination industry. If our assessment is reasonably correct, mortgage credit availability will likely contract and, therefore, exacerbate the housing contraction and its effects upon the general economy. We disagree with the opinion expressed by our esteemed Federal Reserve Chairman Bernanke, when he said in his speech of May 17, 2007 at Chicago's 43rd annual conference on Bank Structures and Competition, “We believe the effect of the troubles in the sub-prime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the sub-prime market to the rest of the economy or to the financial system.” We will see if this optimistic assessment proves to be the correct one.

We are of the opinion that the distancing of the borrower from the lender has contributed to the development of lax underwriting standards. Each participant, in the securitization/origination process, takes their ounce of payment, but no one truly worries about the underlying credit quality since the loan will be sold. Furthermore, most participants are compensated on volume and not quality of loan originated. In our opinion, “a rolling loan gathers no loss.” Possibly, with so many sub-prime originators failing because of loan put-backs to them, some degree of underwriting discipline will return to the market; however, with so many types of loan originators operating outside of the regulatory system with minimal capital, it is far better to originate a loan, capture the fee, and then get out of Dodge, should the business go bad. One can always return another day.

Finally, the securitization market and the multiplicity of products that have been created have never been truly tested in a major credit contraction like that of 1990-94. This is because most of today's securitization products did not exist back then. Another risk is how have they been used in various types of leveraged investment strategies? Have the creators of these products structured their operations to be able to handle a contracting market? It remains to be seen how this all works together. One may gain some insight to the potential risk by reviewing the collapse of the manufactured-housing securitization market. After seven years, it is still a fraction of its former size with all the former major originators gone.

Another example of risk knowing no boundaries, on June 1, the Government of Pakistan issued a $750 million 6.875% of 6/1/2017 dollar denominated bond priced at par and rated B1/B+ at barely 200 basis points above the ten-year Treasury bond yield. The following week in the Los Angeles Times, the headline read, “Musharraf's grip falters in Pakistan.” The second headline, “Dismay over U.S. support of general.” I guess the market believes the extra 200 basis points of yield spread is sufficient compensation for risk. I think not.

This weakening in credit quality trend also applies to the corporate bond market. High-yield bond spreads are at record lows, with the CCC component of the Merrill Lynch high-yield index at 18%, more than double the proportion ten years ago. 7 High-yield spreads have declined from nearly 1100 basis points over the Treasury yield in 2002, to barely 240 basis points recently. We believe this narrowing of credit spread is being driven by the near-record low default rates. For this trend to continue, a near “perfect” credit environment must continue. We see virtually no margin of safety for this sector. This narrow credit spread environment is the key driver that is propelling Private Equity and their bids for companies. As Dan Fuss, manager of the top-performing $10.7 billion Loomis Sayles Bond Fund, recently said, “I haven't felt this nervous about a market ever.” 8

PRIVATE EQUITY
The Private Equity (PE) industry is flourishing. PE has seen its capital raising rise more than ten-fold between 1990 and 2000, only to witness a temporary pullback in 2002, and then more than double between 2000 and 2006. PE is no different than any other hot investment trend, in that its peak capital raising and capital deployment occurred in 2000, the stock market peak, only to see this process collapse in 2002, the stock market trough. Capital deployment fell from $270 billion in 2000 to $49 billion in 2002, per the Leuthold Group. I call this process “buy higher” and then “don't buy lower.” Now we've seen PE fundraising rise to new all-time highs and along with that, acquisitions as well. Leuthold estimates that in 2006 $469 billion in cash acquisitions were announced and/or completed. While this was occurring, valuations have skyrocketed, according to JP Morgan's data. 9 Between 2001 and 2006, the average EV/EBITDA multiple paid rose 41%, from 6.1x to 8.6x. Leverage increased 54%, with the Average Total Debt/EBITDA multiple rising from 4.6x to 7.1x.

We are of the opinion that PE is pushing the boundaries of prudence and that this trend is elevating valuations in the equity market. It would not surprise us that there will be many other Chrysler situations in three to five years. By that I mean, Daimler-Benz A.G. paid approximately $36 billion for the Chrysler Corporation in 1998, only to sell 80.1% of its ownership for $7.4 billion in 2006. Given that this is other people's money, why worry.

HEDGE FUNDS
Since 2000 hedge funds have more than doubled in number, while their assets have tripled. They too are using elevated levels of leverage, as are PE firms and investors in highly leveraged fixed income securities. These funds are heavy users of derivatives. The Global derivatives market grew nearly 40% in 2006--the fastest pace in the last nine years--to $415 trillion, per the Bank of International Settlements. The amount of contracts based on bonds more than doubled to $29 trillion. The actual money at risk through credit derivatives increased 93% to $470 billion, while that amount for the entire derivatives market was $9.7 trillion. 10The International Monetary Fund, in its April 2006 Global Financial Stability Report, estimated that credit-oriented hedge fund assets grew to more than $300 billion in 2005, a six-fold increase in five years. When levered at 5-6x, this represents $1.5 to $1.8 trillion deployed into the credit markets. Fitch, in their June 5, 2007 special report, “Hedge Funds: The Credit Market's New Paradigm,” says that despite the upward trend in maximum allowable leverage, “notably, no prime broker reported raising margin requirements in response to historically tight credit spreads and growing concerns about the general level of risk-complacency in the credit markets.” The report provides a forced unwind example where an initial 5% price decline in the value of a hedge fund's assets could lead to a forced sale of as much as 25% of its assets, assuming leverage of 4.0x (20% margin). They conclude that liquidity risk is among the more important issues facing credit investors. In an era of constrained returns and narrow yield spreads, increased leverage is the solution since volatility is low; therefore, a higher level of leverage may be utilized. We question this logic.

EQUITY MARKET
Enhanced risk taking is widespread here as well. Equity mutual funds are now at or near their all-time record low cash percentage holding of 3.6%. According to the Leuthold Group's data, investors are directing their cash flows to among the riskiest areas of the equity universe—foreign focus equity funds. $80 billion has flowed into these funds through May compared to $11.8 billion for large-cap domestic equity funds and a net outflow of $4.2 billion for small-cap equity funds. This is the second year in a row that the foreign sector has overwhelmed the flows into domestic equity funds. We are of the opinion that investors are chasing the enhanced returns in the foreign sector but do not realize the extent of the risks they may be taking. We see little value in the domestic equity market since we view valuations as being elevated because, in our opinion, consensus profit expectations are assuming unsustainably high operating margins. There appears to be minimal valuation differentiation across most market cap sectors. For example, my value screen just hit a new low in terms of the number of qualifiers. Prior to the recent equity market decline, only 33 companies, with market caps between $150 million and $3 billion, were identified out of nearly 10,000 in the Compustat universe. The previous low was 46 this past February, and before that, it was 47 for both January 2004 and March 1998. When the market cap upper limit was expanded to $150 billion, only ten additional companies qualified. In times past, I would generally get 250 to 400 companies in just the smaller market cap range alone.

Bond insurers and rating agencies in bed

Short-Seller Fires Torpedo at Biggest Bond Insurer: Joe Mysak

By Joe Mysak

March 23 (Bloomberg) -- If you want to piece together the sad recent history of MBIA Inc., the biggest municipal bond insurer, you could go through articles, sift through disclosure documents, attempt to gain access to transcripts of board meetings.

Or you could read through a 32-page letter written by William Ackman of Pershing Square Capital Management in New York.

The letter, a copy of which was obtained this week by Bloomberg News, is dated March 2 and was sent to John Siffert of Lankler Siffert & Wohl.

Siffert is a lawyer who was hired by MBIA Inc. at the behest of regulators after the firm settled a federal fraud investigation in January. He is looking into how the company does business.

The letter doesn't make for cheery reading, if you are an MBIA shareholder or if you own bonds insured by the firm. In fact, it reads a lot like an indictment, with prescriptive remedies including axing management, making them give back their bonuses and installing an independent board of directors.

Ackman has been a bear on MBIA stock for years, and in the letter says he expects ``having a net short position'' in MBIA Holdings, which is the insurer's parent, ``for the foreseeable future.'' That is, he's betting that MBIA stock goes down.

Happy Days

If you have been following the story at all, and you probably have if you either own the company's shares or some of the almost $1 trillion in bonds it has insured, you probably thought that all of its troubles were behind it.

That was certainly the opinion of investors and analysts contacted after the firm paid $75 million in January to conclude the federal inquiry into the securities and accounting fraud regulators said MBIA engaged in to conceal some stiff losses, the result of a hospital bond default. MBIA neither admitted nor denied wrongdoing.

Not so, says Ackman. ``We believe that there are a substantial number of additional troubled exposures at MBIA Insurance that are not properly accounted for, thereby giving the NYSID and members of the investment and analyst community a false sense of MBIA Insurance's capital adequacy,'' he writes.

NYSID is the New York State Insurance Department.

Ackman wants the Armonk, New York-based MBIA Insurance to hire an independent consultant to look at what the company has insured as well as its reserves and capital.

Conflicts of Interest

And then there's this little bombshell.

``While MBIA might claim that the ratings agencies effectively serve this function, we believe that the rating agencies have actual and perceived conflicts of interest in that MBIA Insurance is effectively one of the largest customers (if not the single largest customer) of Moody's, Standard & Poor's and Fitch as one of the largest public finance guarantors and structured finance issuers in the world.''

The rating companies regularly are paid by MBIA to evaluate the bonds it insures. They are the ones that determine the firm's so-called claims-paying ability. If you want to be a big-time municipal bond insurer, you want this to be AAA.

But wait a minute, as they say on late-night television: That's not all!

``Over the coming weeks and months we anticipate providing you with additional analysis of Holdings' other business practices that fall within the broader scope of your investigation,'' Ackman writes.

So, yes, it seems there's more.

Sleep Insurance

The Ackman letter was featured in a story on Bloomberg News on Wednesday. Predictably enough, nobody wanted to talk about it. But it doesn't look like Ackman is going away.

What a mess. Bond insurance didn't start this way. The insurers were supposed to underwrite business to a famous ``zero- loss standard,'' as they called it. That is, they never really expected to pay a claim. Can you imagine? The stuff they insured -- state and local bonds -- hardly ever defaulted.

There was a lot of resistance to using this new product when it was introduced back in the 1970s. Bond insurance? Who needed such a thing? Who would want it?

Well, a lot of people, it eventually turned out. Issuers liked it because it put a triple-A rating on their bonds, which meant they wouldn't have to pay as much to borrow. Investors liked it because even if the unimaginable happened and an issuer failed to make its debt service payment, they would still receive timely repayment of principal and interest. More than half of the municipal bonds that are sold every year are now insured.

The model works, until the insurers start looking for profits in other businesses and riskier credits. And now comes a great unraveling.

Bond insurance used to be known as investor's sleep insurance. How quaint.

(Joe Mysak is a Bloomberg News columnist. The opinions expressed are his own.)