Forensic Analysis of Fed Action on Silver Price

The last few days of trading in silver have been a wild ride.

On Wednesday morning in New York, six hours before the Fed was to announce its interest rate hike, the price of silver began to drop. It went from around $22.65 to a low of $22.25 before recovering about 20 cents.

At 2pm (NY time), the Fed made the announcement. The price had already begun spiking higher for about two minutes.

 

 

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Time for a Silver Trade?

The price of silver has been going down,and then down some more.From over $28 a year ago, and over $26.50 a month ago, it’s now at a new low under $22.50. Four bucks down in a month.

However, it’s been behaving differently than gold behind the scenes. Let’s look at the gold and silver basis charts to see.

 

 

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What A Gold Standard Isn’t

Can we all recognize the simple fact that every government price-fixing scheme, ever, has failed?

For example, banana republics have declared their pesos to be worth $1. But when the market decides to redeem pesos for dollars 1-to-1, the central bank abandons the peg. A less-understood example is when the Swiss National Bank decided to hold its franc down to €0.77. It boasted it could print as many francs as necessary to keep the franc down. But it hit its stop-loss limit, and was forced to abandon this peg just like all the banana republics.

The gold standard is not a price-fixing scheme.

 

 

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The Missing Link

Often, Narratives pile up lots of baggage. To effectively deal with it, one must unpack it. One bit of luggage sticking up from the heap is the assertion that now the ruble has a link to oil. This is an indirect appeal to the wet street causes rain, i.e. that the price of oil set in dollars is why the dollar is the world’s reserve currency (and why the dollar has value). But it goes beyond merely this error.

Ayn Rand said that, “in the realm of cognition, nothing is as bad as the approximate.” The word link gives an approximate understanding. Oil is valuable. Whatever currency is linked to it surely must also be valuable. More than a penny per ruble, right?!

But what is a link? We have sometimes joked about those new flavored seltzers. The can says, “peach flavor”. There is a link between this sparkling-water-that-doesn’t-quite-taste-like-water and peaches. The link could be that the truck carrying the seltzer drove past a peach orchard. Or it could be something else.

In a Narrative such as this one, the word link is meant to suggest causality, without going so far as to state the alleged cause (and thus be exposed to debunking). In other words, they prefer to say that there’s a link between wet streets and rain rather than say outright that the cause of the rain is the wet streets.

It is true that, if it is raining, then the streets are wet. But note that causality is one way. We cannot say that if a street is wet that this necessarily means it is raining. It could be that someone is washing his car with a hose.

We cannot say that if a currency is remitted to pay for oil, that this necessarily means that currency is a reserve currency.

 

 

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Part I – Unpacking the Narrative of how Russia is going to change the global monetary system.

There is a Narrative about Russia and how it will change the monetary system. Many analysts in the gold community are promoting this story. There’s just one problem with this Narrative. It is like how Michael Crichton described the Gell-Mann Amnesia Effect, stating that the newspaper is full of stories explaining how “wet streets cause rain.”

The basic premise of this Narrative is that Russia will create a new gold standard, the dollar will crash, and of course gold will go to the moon.

Author Terry Goodkind, in his Sword of Truth series, wrote about a set of Wizard’s Rules. The Wizards First Rulesays thatpeople will believe something because they want to believe it’s true, or because they’re afraid it might be true.[1]

The gold community certainly longs for gold to go up to $100,000. And anyone in the West is afraid of the collapse of America—or at least Pax Americana.That’s why the story of the impending collapse of the dollar and rise of the gold-backed ruble resonates so broadly. It appeals to both greed and fear.

Our goal in writing this article is to help people understand why this Narrative offers a false hope/fear.

 

The Gamechanger

 

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The Halo Effect

It’s not fair.

It seems everything claims to be <something something> gold. Oil is black gold. Melted cheese is liquid gold. There’s even red gold, a tomato company.

It’s just not fair!

It seems like a one-way street. They get to use (without paying!) the good name of gold, but gold gets nothing from them. How would you even say it? Gold is metallic petroleum? Or precious pasta sauce?

 

 

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Human Action in the Silver Market

We have recently seen an increase in social media posts about the big increase in short positions by the bullion banks. What would motivate them to short a commodity during this period of inflation, much less a monetary metal when central banks are printing money with reckless abandon? And doesn’t their shorting of silver push down the price?

The retail trader is thinking about what price to bet on, in either direction (usually up), or perhaps how to preserve or increase his purchasing power. Either way, it is a quest for an asset that will go up, with the only difference perhaps being the time frame of the expected gain.

But banks do not typically bet on the price (in either direction). They do not think and act like retail traders. They don’t trade price. They trade spread. They are not betting. They are arbitraging.

 

Illustration via Monetary Metals

 

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Gold and Silver: Breaking Out? Or Fundamentals Breaking Down?

Two weeks ago, we published This is NOT the Silver Breakout You’re Looking For.

The silver price had gone from $24 to over $26 and the gold price was up about $50/oz over the same period. Our basis indicator made it clear that the rapid runup in prices was driven primarily by paper traders buying futures contracts (with leverage). To say it was clear is an understatement. It was crystal. Here’s another look at the chart we published:

The price of silver promptly dropped around $1.50.

But since then, it is back up to almost the same level. Is this time different, is this move now driven by stackers of physical metal? Or is it, once again, buyers of futures using margin accounts to maximize their hoped-for returns of $$$ on a quick flip of a metal position? Here’s the chart.

 

Silver Basis, Continuous

Silver Basis, Continuous

 

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Dear Readers,

the following post has been published on the 3rd of March 2014. Due to the recent historical events we are reposting it, conscient of the prescience of the meanwhile passed author, Pater Tenebrarum.

Michael, Editor

 

Russian Troops in the Crimea

John Kerry is appropriately aghast at the “incredible act of aggression” by Russia in the Ukraine:

 

“You just don’t in the 21st century behave in 19th century fashion by invading another country on completely trumped up pre-text,” Kerry told the CBS program “Face the Nation.”

 

This new-found respect for the sovereignty of foreign nations represents a laudable 180 degree change in US foreign policy. You just don’t do that in the 21st century! Like e.g. invading Iraq by making up tall stories about “weapons of mass destruction” hidden there. It’s just not done. As an aside to this: in February, the civil war currently raging in Iraq has cost yet another 1,705 lives, with 2,045 wounded. The death toll is a considerable increase from January’s 1,284 dead and 2,088 wounded. Perhaps you weren’t aware there is a civil war raging in Iraq? If so, that is no surprise. The Western media have fallen almost completely silent on the topic. Yet, this is what the famous ‘mission’ has actually ‘accomplished’.

As Jason Ditz reports regarding the recent escalation in the Crimea:

 

“While US politicians have also ratcheted up the rhetoric, US officials concede that Russia’s troops in Crimea are setting up defensive positions and are in a “self-defense posture only.”

Reports from Crimea’s government say they’ve got Russian troops helping them protect government buildings in anticipation of the referendum, and with a sense that will easily back secession and re-accession into the Russian federation, it seems that Russia doesn’t need to “invade” at all, but simply needs to keep the interim government at bay until Crimean voters affirm the switch.”

(emphasis added)

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Can Russia Enact a Gold Standard?

 

In Part I we discussed how the fallout from the Russian invasion of Ukraine will lead to inflation, but not in the way most people think.  In Part II we discuss the possibility of Russia repudiating the dollar and going on a gold standard. Can they do it? How would the world react? Why not enact a Bitcoin Standard instead?

The Russian central bank reportedly has over 2,000 tonnes of gold. We have seen three arguments repeated many times, both in finance/economic articles and on social media.

One is that Russia can pay gold for goods, to work around being locked out of the SWIFT payments system.

Two is that Russia could use this to declare a gold standard, which would really piss off the Western powers.

Three is that a number of other countries will see the now-revealed threat of being locked out of SWIFT, and switch from the dollar to rubles/yuan/rupees/real or to gold.

Let’s address these in order.

 

Водка Русский Стандарт, Голд

 

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This is Not the Silver Breakout You’re Looking For!

Every once in a while, one regrets not acting sooner, not acting soon enough. In our case, we did not publish this Tuesday evening. We should have. Today the price is down, and others may also call for lower silver prices.

Oh well. They are not calling for that, based on the same indicator we observe – the silver basis.

 

Silver Price Basis Chart

 

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Inflation from Useless Ingredients

The cause of rising prices is not always monetary. Before Covid, we wrote a lot about mandatory useless ingredients. This is when regulators and taxinators force producers to add things to their products, which buyers do not care about (and often do not know about).

There has been a steady march of added useless ingredients over the decades. But, like watching a child grow taller every day, you may not always think about the big change compared to five years ago (or 50 years ago, in the case of useless ingredients). It would be very difficult to estimate how much useless ingredients have added to the prices of each good.

How much do all the required airbags add to the cost of every new car? How many costs are added by all the emissions gizmos, and safety devices? The same is going on, in the fuel you pump into the car, the tires you drive on, and everything you put in the trunk when you go shopping.

The cost of these useless ingredients is high and rising. Before Covid, this was the biggest driver of inflation.

 

Image via rte.ie

 

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      Time for a Silver Trade? The price of silver has been going down,and then down some more.From over $28 a year ago, and over $26.50 a month ago, it’s now at a new low under $22.50. Four bucks down in a month. However, it’s been behaving differently than gold behind the scenes. Let’s look at the gold and silver basis charts to see.     Gold Fundamentals – Gold Basis Analysis     The gold basis (i.e. abundance to the market) was...
  • Forensic Analysis of Fed Action on Silver Price
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