Mar 062011

Massive Collapse

Ref: 2011/01/Post of March 7, 2011 (update 6 of  8 March, 2011)

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Read the following:
Bank of England Governor Mr. Mervyn King warned “Britain could face another financial crisis if the banking sector is not reformed. ..that imbalances in the banking sector remain and are “beginning to grow again”. …The U.K. allowed a banking sector to build up –which contained the seeds of its own destruction. In the interview, he also expressed regret for not sounding a louder warning over his concerns before the last banking crisis, which culminated in a multibillion pound (dollar) bail out…”

The European Central Bank’s President Jean-Claude Trichet shocked the markets Thursday by saying interest rates could be raised as soon as the next policy meeting in April – far earlier than expected – to fight inflation across the 17-nation eurozone.

Wall Street Journal reports that …The Brazilian real posted modest gains at the opening Thursday following a Brazilian Central Bank decision to raise the country’s base interest rate by a half point to 11.75%. ….Russia is all set to increase interest rates for the first time since financial crisis…China PBOC (China’s Central Bank) Officials: “May See Money Market Interest Rate Rises, Fluctuations -Report”, and in USA the banks such as Citibank and Bank of America have started raising 5 year CD Rates to 2%. Swiss National Bank also says that low rates are no longer sustainable.” George Soros said only today (6/March/2011) that “Act II of Global Financial Crisis is here”

In short, we have chorus of banks singing of higher rates in 2011. In short, the world is entering into vicious cycle of rising interest rates. The 2 years old party is over.

When the rates rise, the derivatives collapse which was the main cause of financial crisis at first place, and another derivative debacle would result into second wave of financial crisis. The third stage will be final one. Most derivative trades are almost 30 times leveraged. If the rates rise by 0.25%, the potential cost effect on margin cash is 30 x 0.25 = 7.5%

In short, the Long Term Rates have begun to take hold and they are entering the first wave of interest rate rise. Read my article ” Maturity Mismatch” published almost 13 months ago (on 20 Jan 2010) – which clearly illustrates where the Bankers would face the next crisis – and that prophecy is about to come true in next 6 to 9 months, rising in intensity from July onward, but strongly in September to December.

Is that all that may cause the financial crisis again? Well, it is not the question of again because the first financial crisis never ended – they were touted to have ended but it has not. Now, apart from Interest rates, which factor will cause the real financial crisis. Read the banner title of this report – yes, you read correctly – Silver and Gold to (will cause) collapse of the American Banks and several other banks in UK and Europe.

Top American, British, German and some Swiss Bank have reportedly amassed “huge short position in the real money metals ” – Gold and Silver. The position is so huge that it will take at least next 3 years of full production of Gold and Silver to cover the shorts if entire world production is given to these banks without even an ounce entering the private consumption market. In reality, it will take at least 10 years to cover some short positions of gold and silver by these banks.

The buyers of futures in gold and silver have become emboldened, and have begun to assert on physical delivery on expiration months (Trade At Settlement) rather than traditional cash settlement in the form of reversing original buy or sell positions or roll over to future months.  A rumor is taking hold that JP Morgan Chase, the most infamous shorter of Gold and Silver, is so much worried about the rise in gold and silver prices that it has begun to acquire Copper by spending over $ 1 billions as hedge. How could a copper with over 1 million tonnes of production be a hedge for gold with only 2,500 tons of production of gold and silver.

While Gold is patronized by the Central Banks, silver is where the private investors play huge role
. Even United States has stopped minting Silver Dollar Coins due to enormous shortage of metal. In 1959, US Treasury held 2.06 billions ounces of Silver most of which was sold later to contain the silver prices. Treasury has virtually no silver inventory and it has turned buyer for the first time last year for its requirements of silver for minting coins (Silver Eagle and Buffalo). It stopped minting coins in September, 2010 – 4 months ahead of schedule – due to heavy demand and shortage of supply. You can not use paper derivative to mint coins, by the way!


Gold future contract ended in February, and next major contract to expire will be April delivery. Silver contracts on other hand, will expire this month, that is, on 29/3/2011 and in May (active month now for roll over)  Almost all major buyers of Silver future contracts are insisting on physical delivery, not cash settlement. This is where the trouble comes. If one major bank needs gold, it can still be borrowed from one of the central banks – but who will be the delivery based seller for Silver?


When the gold to silver ratios was hovering between 58 to 60, we suggested that we would sell some when the ratio improves to 40 or about. Today, the gold is at $1430 and silver at $ 35.55 which gives the ratio of 40.28. Our prophecy has turned out to be right spot on within few months (less than 4 months).

The rumors circulating in the market suggest that the Gold may rise to $ 1680 this time before meaningful correction. If Gold prices do go to $ 1680, and Gold/Silver ratio improves further to 32, then silver prices could rise to $1680/GS Ratio of 32 = $52.50. In India, if Rupee rate remain constant at Rs 45/dollar, the silver price may rise to $52.50 x 45 x 32.15 (1 kg = 32.15 troy ounce) = Rs 75,954 or about Rs 76,000. Allowing 10% chance for judgment error, the price could hit anywhere between Rs 65,000 to Rs 68,000 per kg in less than 4 to 8 months.

The March 2011 itself might see its price well above $41 or about Rs 60,000 to Rs 65,000 per kg.

Our old article in December 2009   as it appeared in this blog. Click it to read it and see how prophetic it was. CLICK THE IMAGE below to read the article now.

Our original prophecy in the article Gold $6400 Silver $80 may come true within 12 to 18 months at least for silver, if not gold. We may see the silver prices in India reaching Rs 100,000 per kg level. I would sell almost 80% of my total silver holding at that time, regardless of what the market says at that time. Also look at the historical prices of silver since 1792. Look at the prices from 1979 to 1983 and then from 2003 onwards.

Following banks could be vulnerable:
JP Morgan, Citibank, Bank of America, HSBC USA (USA, HSBC Holdg (UK/Hong Kong), its subsidiary Hang Sang Bank, Bank of China (Hong Kong), Royal Bank of Scotland, Barclays (UK) Deutche Bank (Europe – Germany), UBS (Switzerland) and some leading Investment Banks like Goldman Sachs, JP Morgan Securities, Morgan Stanley may come under attack. There could be huge outflow from managed funds that might trigger stock market collapse.

Look at the following table which contains the Gold derivative position as of latest quarter.  The Gold derivative position is

Look at the derivative exposure on Gold for <1 year which is $106 billion, that is, equal to
(1 tonne = 32,150 troy ounces @ $1435 = $46,135,250 or $0.04613 Bln; 106/0.04613 = 2,300 tonnes. This is the position only in United States. We are not counting other major markets such as London. Further, above numbers are not enough. The gold liability of top bank is valued at $42.2222/troy ounce against present market price of $ 1435, that is, the liability is understated by nearly 34 times. In other words, the Gold shorted in United States alone is almost one year’s global production or consumption. If we use today’s gold price, then the gold shorted by them will be anywhere between 2300 tons to any number of times between 1 and 34 depending on the valuations used for derivative exposure. only US treasury is using $ 42.2222 for valuing its gold assets (and liability under lien).

Yes, Gold and Silver – the real money – might destroy paper money such as US$, GBP and Euro and all paper derivatives such as US$ Index. Gold and Silver ETF (if they do not have back up metals) , Gold and Silver futures. Cash money and spot market will dictate the future markets in days to come.

Derivative Sand Castle:
Now look at the total derivative exposures of entire banking system of United States from the following latest figures from the Office of the Comptroller of Currency Administrator of National Banks, United States. There is over 234 trillion dollar of total derivative exposures (of all kinds) of American Banking System of which nearly 96% belongs to top 5 banks – viz. JP Morgan, Bank of America, Citibank, Goldman Sachs and HSBC USA. Imagine $ 234 trillion notional exposure is nearly 17 times the size of entire US economy! The top 4 banks are those who nearly failed during first financial crisis.

There is total of $234 trillion of exposures in all kinds of derivatives valued at notional value of contracts. They count only 3% to 5% as real exposure. In other words, entire banking system of United States and for that matter, including UK and Europe, live on borrowed time. When the time ends, we do not know because almost all central banks are pumping trillions of dollars to save them but they are not able to because the inflation is exploding, and if the rates go higher, even by 5oo basis points (5%), everything will collapse. The interest rate swap alone constitute $196 trillions of exposure or about 83.4% of total exposure.

Will Silver break the 31 Year high soon?
Look at the above graph. The 31 year high was $ 50 achieved during market manipulation days of Hunt Brothers. It is far away from current level of $35.50 – almost 40%. The newspaper columnist and some analysts would go on commenting that the silver is not able to break the 31 year high, so it is relatively weak – but it is not so. The price of $50 in 1979 was only temporary and can not be used as standard reference point. If we take the average price of $20 as base, and considering about 6  times valuation, it could reach $120 at reasonable potential. Allowing overshoot level by another 20% in huge short covering rally, it could go to at least $ 138 level. The True measure or level to arrive at would be the Money in Circulation (MIC) now divided by MIC in 1978.  That is, take the price of silver pre-1979 days (weighted average of 1975 to pre-1979) multiplied by the ratio of MIC 2011/MIC 1978. With trillions of dollars or currencies being printed with physical supply increasing only marginally, the price of silver has to be several times than it is now.

What about Indian Rupee? Good question, if the government allows some freedom to Rupee to firm up, it may go to Rs 41 or about. The gold and silver prices in rupees in India will be about 10% lower than above target in rupees.

India was once upon a time a “bullock cart country” and old congress had symbol of two Oxes – one black and another white. India is still a bullock cart country – but this time around the two bulls are Gold and Silver.

Will the silver or gold or both will correct next week? Normally they go down during the early phase of the expiration month cycle (that is, if the futures expire in April, the initial few weeks of March is a golden period for the derivative players to short) and pick up in last two weeks ahead of settlement month (April in this case) in short covering. You have to look at US Dollar Index too, because they buy the dollar index to convey the dollar strength, and short the gold and silver to cause them fall.

This month around it happened only for one day but the trend reversed immediately. If they do not correct until Wednesday next week, the silver bull will run riot. We are going to be in fast market. Let us see how far do we go?

The Second Stage of Financial Crisis is coming. Silver and Gold will cause it. Both bond and equity markets may correct violently due to higher interest rates.

It is also possible that Government of India might sell 200 tons of gold in next 8 months to book profit that may reduce its budget deficits. When it happens, the gold price may correct strongly on downside for short period and back up again. Silver will also follow its elder companion Gold and may react more on the downside same way it is reacting more  upside.

We have not had exciting action movie on Hollywood or Bollywood for quite some time. Wait – your wish will be fulfilled soon when Silver and Gold bull will run riot and there will be many headlines on the first and third page.

Kalidas (Anil Selarka)
USA,  March 6, 2011


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