Chinese State-Owned Companies Can Default on Commodity Derivative Trades!!!

Almost from the moment that trading began in the Far East, both gold and silver were off to the races. But with gold heading north of $960, and silver knocking on the $15 door, the New York bullion banks stepped in. And by half past lunchtime in Hong Kong, they had both markets back under their thumbs...and with London closed for the day, gold didn't do a thing until about 7:30 a.m. in New York, when a wave of selling started. The moment that the Comex opened at 8:15 a.m... it was obvious that the N.Y. bullion banks had pulled their bids, as the gold price fell like a stone. A bid returned to the market at 8:30 a.m. and gold moved higher until the Comex close... and in after-market electronic trading... the gold price moved sideways... and closed down about three bucks from Friday's close.

Silver was a different animal yesterday... mainly because after the smacking in Hong Kong, there didn't appear to be much price interference for the rest of the day. Of course silver got sold off a bit in sympathy with gold, but from there, silver finished strongly... actually closing up on the day.

The precious metals weren't enthralled with the price action and both indexes finished close to their low of the day.

Friday's big spike in both gold and silver produced monstrous increases in open interest in both precious metals. Gold o.i. increased a knee-wobbling 17,792 contracts to 393,013... on big volume of 104,330. This o.i. number exceeding even my wildest guess. Silver was just as outrageous, with o.i. rising 4,453 contracts to 104,810... on volume of 50,819. So you can see that the New York bullion banks really had to pour in on the short side to kill Friday's rally. But you knew that already.

You will also notice that the bullion banks tried to get everything back on Monday that they were forced to give up on Friday... which they attempted to do by engineering this sell-off. This isn't the first time this has happened either. Open interest for Monday will be available in a few hours. It will be an improvement... as there was short-covering yesterday... but not 18,000 contracts worth. The dealer net short position is now even worse than what I estimated on Saturday.

There's always an outside chance that this net short position hole that the bullion banks are digging themselves, could turn into a grave if they get overrun. And there's a story towards the end of this column that suggests that that possibility took a giant step forward yesterday.

Well, yesterday was first notice day for the September contract. Only 22 gold contracts were delivered... but 965 silver contracts were delivered. That's 4,825,000 ounces. Almost the entire amount was issued [delivered] by JPMorgan... and almost the entire amount was stopped [accepted] by Scotia Mocatta. If my math is correct, there are still about 2,900 silver contracts left to deliver... subject to any increase as the month unfolds, of course. There were no changes in either GLD or SLV yesterday... but last week over at the Zürcher Kantonalbank in Switzerland they increased the holdings in their gold ETF by 57,952 ounces... and they added another 427,069 ounces to their silver ETF. I thank Carl Loeb for those numbers. Much to my surprise, the U.S. Mint had a finally update to their production numbers for August. They added another 7,500 gold and another 475,000 silver eagles to their totals. Final numbers for August... 82,000 gold and 2,130,000 silver eagles... the second lowest month for gold eagles, and about average for silver eagles. And lastly, over at the Comex-approved warehouses, silver inventories fell a smallish 60,268 ounces.

In his one and only missive yesterday, the usual N.Y. gold commentator had a fair amount to say... "Friday's intraday high of up $17.50 and up $11.50 close turned out to be far more bitterly contested than the outside observer could see. On actual volume of some 104,330 lots [25% above estimate and the highest since early August] open interest surged 17,793 lots [55.34 tonnes, or 4.7%]."

"At a glance, this is the biggest change since March 26th when gold was breaking down from its late March secondary top, and the biggest rise in well over a year. If December gold had moved proportionately, it would have been up $44.90!"

"Obviously, serious objection is being registered to gold going up. It is hard to believe that a purely commercially-motivated short would be so rigid on a summer Friday. But, to the extent that such parties joined the bandwagon, gold must have upside risk."

"With London closed, European gold drifted sideways around the TOCOM close. Heavy selling hit on the Comex open, slashing $10 off gold in half an hour. Euro gold notably tracked US$ gold action. Estimated volume at 9:00 a.m. was a fairly heavy 40,802 lots. Once again, it is curious how gold-positive actions by The Gartman Letter [buying sterling gold on Thursday... kind words on Friday] seems to stimulate aggressive selling."

"While the open interest and today's trading action indicate the Bears are making a stand, the seasonal and chart situation is very threatening for them."

I have several precious metals-related stories today... and I'll link them all in this paragraph. The first story is filed from the indiatimes.com and is headlined "Singapore, Bangkok may be new gold trade centres" and the link is here. And a Reuters story posted at mineweb.com is headlined "ETF gold holdings jump 6%" and the link is here. And for you palladium fans, here's story from mining weekly.com with a headline reading "Russian palladium stocks depleted - ARM" and the link is here. And lastly, in this story posted at Kitco, comes the headline from the "New Zealand Herald"... "'Good as gold' still rings true"... and the link is here.

On top of that light reading, I have a bunch of stories from the weekend. The first is a foxnews.com story headlined "Senate Bill Would Give President Emergency Control of Internet"... "Details of a revamped version of the Cybersecurity Act of 2009 show the Senate bill could give the president a 'kill switch' on the Internet and allow him to shut out private networks from online access." The original bill was authored by Senator Jay Rockefeller, D-W.V... and "was blasted in Silicon Valley as dangerous government intrusion." If you, dear reader, decide to Goggle Jay Rockefeller, you will find out more about this man than you'll probably ever want to know... and it will scare you half to death. The link to the story is here.

The next story is courtesy of the King Report. The story is posted over at americanbanker.com and is bears the headline "Bids for Failed Banks: A State Secret?". "Industry insiders are crying foul... because for decades, the FDIC disclosed all bids on failed banks to the public. That was then... and this is now." The story is worth your while, and the link is here.

Next is another story courtesy of the King Report. This one is from The Telegraph in London... and the author is, as usual, Ambrose Evans-Pritchard. It's obvious that Ambrose 'gets it'... as he goes on to say... "Never in modern times has there been such a flat contradiction between the euphoria of markets and the stern warning of officialdom at central banks and financial watchdogs." The headline reads "Our quarter-century penance is just starting"... and as I've said many times before in this column over the last couple of years, dear reader... I'll be 61 on my next birthday, and a very old man before this "greater depression" [as Doug Casey so accurately puts it] breaths its last. The link to the story is here.

And lastly is this Reuters piece that was [courtesy of Ted Butler] the first story of the day in my in-box yesterday morning. If this doesn't shake the ground under the U.S. banks... nothing will. The headline reads "Beijing's derivative default stance rattles banks". "A report that Chinese state-owned companies will be allowed to walk away from loss-making commodity derivative trades provoked anger and dismay among investment bankers on Monday, as they feared it may set a damaging precedent." [Ya figure!!! - Ed] "Spokespersons at Goldman Sachs and UBS declined comment, and media officials at Morgan Stanley and JPMorgan were not immediately available for comment. All are major global providers of commodity risk management." [They left out HSBC USA Ltd. - Ed] The story, which is a must read is linked here.

And there's a silver tie-in to this story... which I thought about the moment I read the headline. For years, Ted Butler has made the assumption in writing [to the public and the CFTC] that a lot of these big silver shorts were being held by foreign entities. In a piece Ted wrote back in 2007 to CFTC Commissioner, Bart Chilton, Ted Butler said the following... "If and when these four large traders decide they have had enough of the short side of silver, instead of covering their short positions or delivering actual silver, they could declare force majeure and simply walk away and leave the regulators and NYMEX clearing members holding the bag. Since they are outside the jurisdiction of the Commission, there is, currently, little to prevent this."

"The silver [and gold - Ed] price reaction will be violent and disorderly to the upside if the controlling foreign shorts fold their tents and walk away. How could the COMEX continue to function as a market if its most dominant force suddenly disappeared? Aside from that shock to the system, the NYMEX, because it was repeatedly forewarned, will then be faced with a firestorm of litigation that could destroy it, if it was still standing. This could be another American financial scandal that will damage us all, only this time it will be caused by corrupt foreign interests, in conjunction with lax regulatory oversight."

"If all this comes to fruition, the only question everyone will ask in hindsight is, "how could the regulators and NYMEX directors have allowed this to happen after they were warned?"

"Commissioner Chilton, this is truly a grave situation. This is not about the sharply higher silver prices to come, as nothing can prevent that. This is about doing the right thing for our country."

The entire essay, entitled "The Cop On The Beat - Part 3" is another must read and the link is here.

Central banks in recent years have been selling constantly, and I’m strongly suspicious that the President’s Working Group on Financial Markets—the "Plunge Protection Team"—participates in the gold market as well, to keep the price suppressed.

As recently as November 2008, Bernanke admitted to me in a Financial Services Committee hearing that the only time gold is discussed with other central bankers is for the purpose of selling—never to consider its merit in serving as a reserve for a new currency agreement. - Representative Ron Paul, R-Texas, from his new book End the Fed to be published on September 16, 2009

As I search for the 'send' button, I see that gold and silver, which were both up in Far East trading this morning, have come under heavy selling pressure by the U.S. bullion banks the moment that London opened for trading. But that weekend story about China and its default stance on commodity derivatives may have put a whole new spin on things. If true, then all these silver and gold short positions that the N.Y. bullion banks are holding for Chinese firms, could become like the proverbial "dust in the wind" in a heartbeat. The Commitment of Traders would mean nothing... and all bets would be off. And, as Ted Butler said in a prior paragraph..."The silver [and gold - Ed] price reaction will be violent and disorderly to the upside if the controlling foreign shorts fold their tents and walk away." The mind boggles at the scenario.

See you Wednesday.