Silver... justified price rise, or yet another manipulation

Argument supporting price manipulation

Another class-action silver manipulation suit hits Morgan, HSBC

Source : Gold Anti - Trust Action Committee - Daily Dispatches

As Jimmy Durante used to say, "Everybody wants to get into the act." And why not? The deepest of deep pockets are here.

Press Release via Marketwire Thursday, November 4, 2010

Kaplan Fox Sues JP Morgan and HSBC on Behalf of Investors for Silver Futures and Options Contract Losses Caused by Market Manipulation

http://www.marketwire.com/press-release/Kaplan-Fox-Sues-JP-Morgan-HSBC-on-Behalf-Investors-Silver-Futures-Options-Contract-Losses-1347390.htm

NEW YORK -- On November 2, 2010, Kaplan Fox & Kilsheimer LLP (www.kaplanfox.com), a leading plaintiffs' firm, filed a class-action complaint in the U.S. District Court for the Southern District of New York on behalf of an individual investor against JP Morgan Chase and HSBC in connection with their alleged conspiracy and manipulation of the market for silver futures and options contracts traded on COMEX.

To view a copy of the complaint:

http://www.kaplanfox.com/templates/kaplanfox/images/content/pdfs/silver%20futures%20class%20action%20complaint.pdf

The complaint alleges that around June 2008, when JP Morgan acquired Bear Stearns, including Bear Stearns' short positions in silver futures, JP Morgan and HSBC commenced a conspiracy to manipulate, and did manipulate, the market for silver futures and options contracts on COMEX. Specifically, the complaint alleges that around this time, JP Morgan and HSBC, pursuant to their conspiracy, acquired massive short positions on silver futures contracts in an effort to artificially depress the price of the silver futures market. The defendants realized substantial illegal profits in connection with their scheme, while investors who had no knowledge of the scheme, lost substantial amounts of money because of the defendants' conduct.

The complaint further alleges that the defendants' illegal scheme continued until around March 2010, when a metals trader based in London, publicly exposed the scheme. This trader has reported the scheme to the Commodity Futures Trading Commission ("CFTC"), and both the CFTC and the Antitrust Division of the United States Department of Justice are investigating the alleged conspiratorial and manipulative activities of the defendants.

If you have any information concerning any of the defendants' conduct, or wish to learn more about the litigation, please contact Kaplan Fox attorneys Robert N. Kaplan or Jason A. Zweig at 800-290-1952.

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Argument justifying price rise

At the beginning of 2010 there were some factors which were bearish for silver. With widespread use of digital photography demand for silver in photography industry was diminishing at pace around 10% a year and even 16% in 2008. Yet this decline in demand can be easily offset by demand from other industries like medicine, where silver used because of its antibacterial qualities. And while new technologies are replacing the old, silver is finding new applications, laptops and cell phones being the examples of modern technologies requiring silver.

Demand from industry rise as economy rebounds. Will supply satisfy this demand? It is not likely. It is true that output in China Russia, Mexico, Peru, Australia, Turkey and Bolivia is growing. But about 80% of silver are mined as a byproduct of other base metals and there are only a few pure silver mines left, with their reserves depleting. And we should remember that most silver is not recycled, like gold, as it has much lower value. Therefore silver is gone forever after it is used.

Demand for silver is rising while stockpiles are dwindling. Analysts had initially estimated silver prices in 2010 in the range from $25 to $27.50 by the year end. Current prices are around just below $30. But as silver is greatly undervalued compared to gold, we can expect even greater increase in price of the precious metal in the future years as trader turn their attention to this less expensive but quite profitable commodity.

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Though the argument can be equally strong on both fronts, which turns out to be true is a matter of time or just simply how soon financial regulators find out the truth behind the scenes. For now as we are left on our own to take a side and plan our portfolios, our advice to clients would be to just stay out of this game, lest we all get caught cheering for the losing side.

Gold worries

Prices to Buy Gold held firm in London on Friday morning, nearing the end of what one London trader called “another roller-coaster week” some 1.7% lower for Dollar and Sterling investors but unchanged vs. the single Euro currency.

This morning's London Gold Fix was set at $1390 per ounce, some 2.5% below Tuesday's new all-time record.

Japanese equities ended the week unchanged, but Germany's Dax index crept back towards 7,000 – a level last seen in April 2008 – and Wall Street's Nasdaq tech-stock index was set to open near 3-year highs on Friday.

Major-economy bonds steadied, holding yields just below this week's 6-month highs, as US Treasuries headed for their worst weekly loss of 2010.

“We expect sellers of the metal near $1400,” says Gold Bullion market-market Scotia Mocatta's short-term trading note.

“The US interest-rate decision [next Weds] could give direction to the US currency and thus most probably have an effect on gold’s trajectory,” says Swiss refinery group MKS's trading desk.

“There has been an underlying shift to gold as an alternative currency,” said a London Gold Bullion trader to Reuters, “with both the Dollar and Euro weak, and a lack of confidence in global banking.”

But while “a general distaste for and distrust of fiat currencies and fears of future inflation [has] intensified investors’ desire to hold physical commodities,” notes Mitsui analyst David Jollie, “the description of gold as a currency rather than a commodity seems overblown, given the similar performance of copper.”

Both copper and Gold Prices have risen around 28% so far this year. A group of London metal traders last month wrote to City watchdog the FSA last month to warn that licensing exchange-traded investment funds – backed by physical copper stockpiles – may mean “approving the next financial bubble.”

J.P.Morgan has already received US regulatory approval for its forthcoming copper ETF, with competing products expected from BlackRock iShares, Deutsche Bank and ETF Securities amongst others.

“Output shortages of 800,000 metric tons may occur in 2011 and in 2012, compared with a balanced market this year, “ says Bloomberg, quoting Trafigura Beheer BV, “which considers itself the second-largest trader of industrial metals.”

New data from China today showed copper imports to the world's fastest-growing economy rising 29% last month from a 1-year low, while its crude oil imports rose 26% from Oct.

Crude oil prices today ticked higher above $88 per barrel, while copper held near Thursday's new record highs.

Silver Prices briefly touched $29 an ounce for the second day running.

Rubber prices hit fresh 30-year highs. Heavy rains in southern Australia led ANZ Bank to warn that 60% of the country's wheat crop may be cut to animal-feed quality.

“We think the threat of bubbles is greatest [not in emerging economies but] in commodity markets,” says Capital Economics’ chief international economist in London, Julian Jessop.

“The prices of industrial metals and agricultural commodities have already returned to the pre-crisis levels of 2008 – levels which were only achieved after the world economy had been booming for four years.”

Already the world's No.1 importer of copper and the No.1 consumer of energy, rice and wheat, China may become the world's No.1 corn importer within five years, reckon analysts at Rabobank, as rising meat consumption demands increased pig and poultry production.

Gold Bullion imports to China have jumped 5-fold so far this year, reaching more than 200 tonnes according to the Shanghai Gold Exchange.

Now the world's largest single Gold Mining nation, China does not allow large-scale exports of its near-300 tonne output.

"Tighter global monetary policy is bad for gold, and this is tighter monetary policy,” said Japanese conglomerate Mitsubishi's chief analyst Matthew Turner today, commenting on China's latest increase in banking reserve ratios – the sixth such hike of 2010.

“But [it's] only slightly [tighter], and in one part of the world, so the impact is not huge.”

Demand to Buy Gold from Indian clients was the strongest mid-week since late Oct., just before the peak Diwali festival, Swiss bank UBS's London office reported today.

Back then, “Gold was trading around $1320," notes UBS chief analyst Edel Tully. Gold Prices this week dipped below $1380 an ounce.

New data today showed India's industrial production growing by nearly 11% in Oct. from a year earlier. Twenty-nine economists surveyed by Bloomberg News forecast an average rise of 8.5%.

Source : bullionvault.com

Copper over the next decade

Copper, it turns out, is a cold blooded killer..."DRUGS, domestic violence, copper theft and burglary lead the list..."

So says Orangeburg County interim sheriff Barbara Walters (no, not THAT Barbara Walters) to The Times & Democrat of South Carolina newspaper, writes Dan Denning in his Daily Reckoning.

She was talking about what's killing people in South Carolina. And you might be surprised to see copper on the list...mostly since copper is just your normal, self-respecting, malleable, ductile, corrosion resistant industrial metal, located at spot number 29 on the periodic table.

But copper, it turns out, is a cold blooded killer.

"The one [crime] that has increased almost beyond belief is copper theft," says Sheriff Barbara. "It's so much in demand by manufacturers, the price has doubled or more in the past two years.

“Today's price, $3.18 a pound, could get higher tomorrow. The thieves watch outdoor machines, old-model cars and collections of electric wire. Often they return to check out the location and number of people who live or work nearby. To them, old copper is future cash; sometimes big cash."

The reason "old copper" is "big cash" is that copper futures closed at an all-time closing high in New York trading yesterday at $4.10 a pound. The intra-day high is higher still at $4.28. But it's not far off. Sheriff Barbara needs to check her prices more carefully.

There was some disagreement in the office recently about whether copper or iron ore deserves the moniker of "red gold". It turns out we've smacked the label on both at one time or another. Copper turns red when it's exposed to air. But when it's first rolled into coils for use in electricity (because of its conductivity) or in plumbing, it's just a red coppery colour.

Iron ore, on the other hand, starts of as red dirt before becoming steel. And iron ore is a lot more important to Australia as an export commodity. Exports of iron ore should generate nearly $53.4 billion this year, due to rising prices and rising export volumes, according to the Australian Bureau of Agricultural and Resource Economics (ABARE).

Exports of refined copper and copper concentrate, on the other hand, are only going to generate $6.5 billion according to ABARE. But if you're a contrarian, should you really trust the prices the market is throwing at you right now? A price should normally tell you exactly where buyers and sellers are finding each other in the exchange for a given good or service. It's the signal that tells producers what consumers are willing to pay for something.

But if the price includes a lot of noise in it-garbage pumped in from somewhere else-then instead of communicating useful information to you it might actually be lying to you. And if you act on that deceptive, low-down, good-for-nothing information, you'll probably lose money.

The copper move is terrifying and exhilarating. But what is it really telling you? Well the move from $1.25 a pound to over $4 a pound took place during the Bernanke reflation and the massive Chinese credit expansion via bank lending (another US$1 trillion this year, on top of last year's $1 trillion). Copper's strength is the US Dollar's weakness, with a strong tail wind from Chinese fixed asset investment.

There's a fundamental aspect to it, of course. The copper supply bottlenecks Alex has documented in Diggers and Drillers are providing support. There's demand too. China Securities Journal reports that the Chinese government will spend three to four trillion Yuan (or US$451.5 billion to US$602 billion) to expand its railway network in the next five years.

If you view the emerging world (the BRIICs) as finally decoupling form the developed world (the bankrupt welfare states of Europe and America) then copper tells that story. It's the story of fixed asset investment in a modern industrial economy and growing domestic consumption. And the story, despite the de-leveraging death spiral of 2008, is basically bullish.

But let's not forget investment demand for metals. How much of copper's rise is being fuelled by investors? With exchange traded funds and similar vehicles, big institutions and retail investors can now bet on higher metals prices by buying shares in a fund that stockpiles those metals.

It sure seems like a good thing to be able to conveniently bet on (and profit from) higher metals prices without the unlimited exposure you'd get in the futures markets. But are investment flows distorting metals prices to the point that the price isn't a real price? What if it's not telling you the underlying demand...but has instead become the volatile plaything of hot institutional money flows?

“The copper market has been hurtling headlong into a prolonged shortage. Loads of copper projects shut down during the financial crisis. Now that demand is rising fast again there's just not enough new mines producing copper to keep everyone happy. In this mad scramble for copper, the highest bidder wins.

“Now the opportunists are turning up the heat. Those nice chaps at J.P.Morgan have apparently got their grubby little mitts on over HALF of the copper on the London Metal Exchange (LME). This represents 175,000 tonnes, or a THIRD of the world's reported copper stash.

“Imagine you went to the pub with a hard earned thirst. It's been a hot day and you're up for a good few beers with some mates. You then find some punter got in early, and bought up a third of the pub's beer. Then he says ‘when you really want this beer, I'll sell it to you at a profit.'

“The people that actually need the copper; sparkies, plumbers, and manufacturers are all in the same predicament. In my pub analogy you'd most likely be having words with the publican. But the genuine users of copper don't have this choice.

“This is a game-changer for the copper market. The price is going to jump on this sudden market tightness.”

J.P.Morgan are using the copper to build a copper backed ‘exchange traded fund' (ETF). This makes it possible for anyone to buy ‘shares' in actual copper metal, with the aim of sell it for a profit to the guys that actually need the stuff. Copper producers are laughing all the way to the bank. Their comfortable margins are looking even sweeter.

Source: bullionvault.com

FMC in Index Mutual Funds

Did you know? There is a difference of between 0.5% to 1% on the Fund Management charges between an Index Mutual Fund and a diversified Mutual Fund. The definition of a diversified mutual fund we are using here will encompass diversified equity funds, sectoral funds, ELSS, market capitalisation oriented funds, etc. For long term investors there is a clear case for shifting a significant portion of investments into Index funds. In economies with a long history of equity markets, it has often been observed that Mutual Funds which digress from an index find it very difficult in the long run to catch up, let alone beat index performance. In a country such as India equity is more of a recent investment avenue spanning only a few decades; and that too the inclusion of equity as a part of a average portfolio has happened only recently. Still a major part of savings in India happen in Fixed Income securities and only a very small percentage actually finds its way into equities. As the markets move forward with underlying intrinsic and economic growth, a new interest in equities from a fresh set of investors who were hitherto uninclined or financially incapable is pushing the markets in completely untested territories. At this juncture it would be good if there was a way to educate these new investors to follow a principle of index investing... because at the end of the day if the index (which essentially means a compilation of some of the best corporates in India, the list being periodically revised to filter out under-performers) does not perform, then it is highly unlikely that there would be any other investment idea within the equities space that would have performed over a similar duration.

Beware of certain ULIPs - 100% charge in 1st year

Did you know? There are certain ULIPs where your first year premium allocation charges are 100%. They claim that they are investing your funds in a so called fixed deposit type fund wherein you will not have to take market risk on the first year investment, and the company guarantees some return on this corpus. Now here's the actual deal. If you go into the fineprint (very few of us actually do), you will realise that they are giving you a return of around 120-130% of your first year premium in the 10th year, in some cases around 200% in the 15th year, and in yet other policies around 250-300% in the 20th year. If you actually compound these returns you will be startled to see that the actual annual return is only around 3-5% p.a. much lesser than any deposit. This is nothing but a marketing gimmick to ensure a very high payout (almost 40%) to the advisor recommending this policy to you.
In almost all cases there are certainly other policies from the same insurer wherein neither do you have to pay such high charges, nor does the advisor earn such absurd fees. Please go through the fineprint before you make a buying decision.

Mis-selling of ULIPs

I feel there should be penalties for banks who mis-sell Unit Linked Insurance products to their customers who have no clue what they are getting into. Few years down the line they suddenly realise that they haven't even broken even on their investment in spite of the markets having delivered 25%+ CAGR. There should be a forum where such complaints can be registered, and appropriate financial compensation can be levied.