|
The Saga of the Naked Boogieman
Exploding the Myth of Unbacked
Silver Certificates and Phony Silver Storage
Executive
summary
Analysts put their own
construction on facts coming out of the class-action suit between
Morgan-Stanley and 22,000 of its clients involving costs associated with the
storage of precious metals. They jump to the conclusion that metal supposedly
backing outstanding silver certificates does not exist and never has. Storing
silver on clients’ account is a farce. From this they conclude that the
net short commercial interest in silver on the COMEX, allegedly naked, must
further be increased by adding the amount of unbacked
silver certificates and phony storage, which they conservatively estimate at
one billion ounces.
Analysts and the 22,000 owners of silver certificates ask the wrong
question. The question that should have been asked before the Court is this:
“By what right has Morgan-Stanley been using silver belonging to
clients for covered writing, and to whom do the bounteous profits flowing
from that activity rightfully belong?
Earn interest
on your funds without transferring control
Once more, analysts have fallen victim to their own
propaganda, and thereby continue to play the role of the stooge to the large
concentrated commercial short interest in the silver market. Because of their
obsession with price manipulation and naked short selling of silver, a
magnificent opportunity has been missed to expose the best-kept secret of the
regime of irredeemable currency: monetary
metals are capable of earning a return to capital consistently while the
owner need not relinquish physical control of his metal. In other words,
a strategy of adroitly using covered writing can generate a risk-free income.
“Miracles” of risk-free gains are made possible through the
courtesy of the regime of irredeemable currency. By contrast, under a
metallic monetary standard you must give up physical control in order to earn
interest on your money. The metal is at risk. In case of a default you will
never see it again. The significance of the difference is enormous. The
choice between freedom and slavery is involved.
Symbiosis
between the “naked bear” and the “insane bull”
It is interesting to watch commercial interest as it
throws the pursuers off scent. It leads the analysts by the nose.
Morgan-Stanley freely admits to the charge of selling unbacked
silver certificates of which it is not guilty, and gladly refunds storage and
insurance charges which it has rightfully collected — as long as the
secret of the trade need not be revealed, and a much larger income to which
it is not entitled can continue to be concealed: the consistent flow of
risk-free profits from the ongoing covered writing.
Your certificates are fully backed, and the short
sales are not naked. Your silver is safe: physical control is not released
for one moment by the service-provider. Yet silver is being traded
continuously according to the demands of the market: sold high and bought
back low. Question: to whom do the profits from this trade belong? This is
exactly the issue that the Court should have decided. But the
service-provider succeeded in derailing the legal process. It did not want to
disturb the existing symbiosis between the “naked bear” and the
“insanely bullish”.
Fabulous
jackpot
From the point of view of the service-provider it is
just as well that people do not understand that its activity merely mimics
the power plant harnessing the ebb-and-flow of the oceans. The misguided
analyst plays a symbiotic role in assisting the large commercial shorts. He
fosters the belief in a fabulously large jackpot at the far end of the
rainbow: the overnight doubling of the silver price. He believes it will
happen when the naughty naked shorts are finally forced to cover. The jackpot
makes people “insanely bullish” on silver. It makes them play the
role of the “useful fool”. Without it, the task of fleecing the
silver sheep would certainly be harder. A lot of silver is held on margin by
the insanely bullish. Silver in weak hands is easy picking for the large
commercial shorts.
Waiting for Godot
Practically all analysts are devout believers in the
miracle of the coming price explosion in silver, and they are doing their
best to prepare their following for the field day. They admit that the large commercial
shorts have a higher tolerance for financial pain than most, but when they do
panic, they panic big. Analysts even divulge the trigger price: $45. This
sounds familiar, except for the figure. When silver fetched only 5 dollars,
cheer-leaders were talking about a trigger price of $15. Fifteen dollar
silver came and went, yet no explosion took place. Fifteen dollar silver is
around the corner once more, but the trigger has been moved up to 45. We
should not be surprised that, when forty-five dollar silver arrives,
cheer-leaders will make the trigger recede farther still into the misty
future.
Waiting for the explosion in the silver price is
tantamount to waiting for Godot. (In Samuel
Beckett’s play the characters keep waiting for a man named Godot who never arrives.)
Phoenix rising
from its ashes
I am a monetary scientist. My interest in silver is
keen because it is the “most misunderstood monetary metal,” with
far-reaching consequences for the overthrow of existing social order by the
regime of irredeemable currency.
Some analysts brag that in their opinion silver is
not a monetary metal. Yet the fact is that you cannot understand silver if
you do not at least consider the possibility that it is on the way to become
a monetary metal once again. A kind of phoenix, rising from its ashes. This
would guard you against making the mistake of assuming that silver
consumption is hand-to-mouth. In fact, you will never understand silver on
the basis of supply/demand analysis alone. If you want to make a half-decent
prognostication about the price of silver you must assume that hoards of
monetary silver do exist, here and now, out of which silver will be released
gradually as the price advances. In addition, there will be profit-taking by
those holders of silver who follow a different strategy involving a shorter
time-horizon. Short squeezes will occur, too, but it is most unlikely that
you will ever be able to squeeze the large commercial shorts. They are not
suicidal. They are not naked. They have a strategy far superior to naked
short selling. They take advantage of risk-free profits available to holders
of silver.
Canary in the
mine
Most importantly, silver is the canary in the coal
mine that will sing just before the lethal seepage of poisonous gas, warning
miners to escape. But the miner must have ears to hear silver sing. It sings
the song of basis, the song of the last contango,
the song of permanent backwardation. If you don’t believe that silver
is the junior monetary metal, then you have no ears to hear the songs silver
may sing, and may not escape from the mine disaster.
Analysts add
whereas they should subtract. They
should subtract what they call the “unbacked
silver certificates and phony storage” from “naked short
interest”. It never occurs to them that the first aggregate is merely a
subset of the second. They ignore the possibility that the large concentrated
short commercials offer a service to smaller service-providers who hold the
silver for customer account, and profitably trade it for a fee. This explains
the inordinate size and concentration of short interest in silver —
without conjuring up the naked boogieman.
“Bulls
in bear’s skin”
It is understandable that those who draw an income
from their control of silver (whom elsewhere I have called “bulls in
bear’s skin”) are edgy. They wish to keep a low profile. They
might even encourage speculation that they are naked sellers, and no silver
to speak of exists above ground as all monetary silver “has been
consumed”. These people are already using silver as a monetary metal
drawing a silver income from their holdings through covered short selling, or
through writing call options, or any other of the more exotic dynamic hedging
techniques available. They want to guard their trade secret even at the pain
of being duplicituous. Spreading the gospel of
silver as a monetary metal is not in their interest. Bulls in bear’s
skin have preference for a controlled increase of the price of the silky
metal. They prefer evolution to a cataclysmic revolution.
Fraud cannot
be proved by the fraudster’s own admission of guilt
I have no expertise in law and cannot pass judgment
on the contract Morgan-Stanley has with its clients. It is possible that it
has been drawn up with fraudulent intent, but if so it has to be proved. I
would suspect that there is plenty of small print and technical language in
the contract making it opaque, designed to provide an excuse for the
service-provider to use swaps and swaptions,
futures and derivatures, or other exotic instruments
to generate an income on silver which would otherwise lay idle. Fraud cannot
be proved by referring to the fraudster’s own admission of guilt, which
is a red herring. After all, the fraudster may be covering up an even bigger
fraud by admitting to the smaller charge. I have no sympathy for
Morgan-Stanley’s apparent attempt to pocket all the gains as a
service-provider, to the exclusion of principals. I would wholeheartedly
welcome an initiative to regulate the allocation of profits from covered writing
between the principal and service-provider. Above all I want to see
obscurantism and the use of smoke and mirrors in the silver trade dispelled
which, I believe, would decisively show that in silver we behold a nascent
monetary metal.
The poison of lasting risk-free profits
While on the subject of fraud and morality, we must
name the real culprit, the regime of irredeemable currency making, as it is,
risk-free profiteering possible. Note that under a metallic monetary standard
the opportunity to earn risk-free profits could never last longer than a
fleeting moment. As long as it is ephemeral, risk-free profit plays a
positive role in the economy. It is the driver of economic progress. It is
the reward reserved for the most progressive entrepreneurs for tracking down
misalignments in economic relations, and for anticipating sea-change
correctly. The problem is with the perpetuation
of risk-free profits. Then they become poison that is injected into the body
economic by irredeemable currency.
Exotic derivatives such as higher-order hedges would
not be possible under a metallic monetary standard. First-order hedging
would, but only for risks given by
nature, as in the case of the price of agricultural products. Risks
created by man would be confined to gambling casinos where they belong. Under
a metallic monetary standard, tricksters could not gamble with the savings of
people or with the funds of widows and orphans.
Analysts have gone wrong because of their dogmatic
insistence that silver is not a monetary metal. The important fact to keep in
mind is that under a metallic monetary standard lending is never risk-free.
It involves the transfer of physical control, and the borrower may default.
By contrast, under the regime of irredeemable currency it is possible to draw
an income from the possession of monetary metals without surrendering physical control. It is this that makes the
social poison of lasting risk-free
profits possible.
Nature has provided a prophylactic against this
poison that makes the beneficiaries of lasting risk-free profits into
slave-drivers, and the rest of society into slaves. The prophylactic is: a
metallic monetary system. The regime of irredeemable currency is incompatible
with stable social relations based on the system of division of labor. It
allows the concentration of the monetary metals in a few hands, conferring
unlimited power upon those in control. This is the main reason that militates
against embracing irredeemable currency. It is a great historical tragedy that
this socio-economic danger was not investigated before the official adoption
of irredeemable currency by every country in the world in the wake of the
U.S. default on its international gold obligations in 1971. The world then
made its fateful U-turn back to slavery.
Self-destruction
of the regime of irredeemable currency
The regime would have come to an inglorious end
already in the twentieth century but for the possibility of lasting risk-free
profits, lending the parasitic regime exceptional staying power. Through the
linkage between the rate of interest and the price level (a.k.a.
Gibson’s Paradox) it may be able to rein in runaway inflation.
Paradoxically, it is precisely lasting risk-free
profits that will bring about its downfall — but not without extreme
social pain. As the monetary metals get concentrated in ever fewer hands, the
rest of society is being condemned to slavery. Ultimately, slaves will rise
and overthrow the tyranny of the slave-drivers.
These remarks put my disagreement with the analysts
into high relief. We all see the menacing concentration. Analysts warn of
dangers inherent in the concealed concentration of short interest. I warn
of dangers inherent in the concealed concentration of long interest, a combination far more threatening to social
peace.
References
Ted Butler, Money
for Nothing, October 23, 2007
Antal E. Fekete, What
Gold and Silver Analysts Overlook, May 3, 2004
Antal E. Fekete, Bull
in Bear’s Skin?, May 4, 2006
Antal E. Fekete
Gold Standard University
aefekete@hotmail.com
Copyright © 2007, Antal E. Fekete
|
