Early Friday morning, December 26th, the morning after Christmas, the big banks, having blown YOUR MONEY shorting silver, had to grab boxes full of Treasury bonds (T-Bills) and run to the Federal Reserve's Repo window and get a US$17+ Billion bailout because their short position on silver collapsed. The Fed could have let the free-market handle the problem and let those banks collapse because of their own bad behaviour, or it could choose to print money to prop up the banking system, at the expense of devaluing the dollar. They ALWAYS choose that option. So now the Fed, normally the backstop to the stock market, has moved into supporting a commodities market, and consider how such actions end, as with the London gold collapse in the late '60s.
This all ties back to allowing derivatives markets as a means of creating wealth through financilization rather than via actual production. Banks were trading in paper silver – silver futures contracts, which is an interference into the actual supply/demand market for silver. So it came to a point where there were 12,707 paper contracts for silver, covering 5000 ounces each, for a total of 63.535 Million ounces which are now standing for delivery – the actual users of the metal want the actual metal, not the paper. These are not your local banks in trouble, it is the G-SIB, the Globally Significantly Important Banks, four in the U.S. and four international. For around 15% deposit, they can obtain a futures contract from one of the clearinghouses. If a bank can' pay up when the contract comes due, the clearing house can seize the bank's assets or draw on the clearinghouse default fund which is partly funded by every bank. Having them all show up at the default window at once doesn't work. So the banks ran to the Fed for a bailout to cover that position. But that's just the tip of the iceberg, it just bails them out at the clearinghouse – it will get far worse. The US$17B is just the first tranch, and a significant devaluing of the currency, but it is just the beginning. The risk that the Fed saw was collateral damage throughout the default swap and derivatives markets, which are a daisy-chain of interconnected liabilities. So, prop up the greedy banks yet again, and inflate the problem away with a devalued currency.
Going forward, watch the price of silver try to find a level that balances supply and demand – in trading Monday, it could hit US$85, up from $77, and go way higher, since finding that missing 63.535 Million ounces of silver is no easy task, and the banks have to actually BUY some at these new high prices to over their contracts. Good luck with that. Keep an eye on the spread between the paper (contract) price and the physical price. The short positions by the banks had held down the price of silver for about 40 years, essentially kept the value of the dollar up – now, with the short squeeze over, silver rises and the dollar falls. And it will get worse, with the Fed printing money to keep the banking system from collapsing, by allowing the currency to collapse. The U.S. Dollar and the associated investment vehicle, Treasury bonds, is no longer the world's safest asset.
For further perspective, see:
IT'S OVER:
Banks Tap Fed for $17 BILLION as Silver Shorts Implode
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