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Edited by Alfred Adask
Friday, August 15thA.D. 2014

Between Friday, August 8th, A.D. 2014 and Friday, August 15th, A.D. 2014, the bid prices for:

Gold fell 0.3 % from $1,309.10 to $1,304.50

Silver fell 1.8 % from $19.91 to $19.55

Platinum fell 1.3 % from $1,471 to $1,452

Palladium rose 3.7 % from $858 to $890

DJIA rose 0.6 % from 16,553.93 to 16,662.91

NASDAQ rose 0.2 % from 4,370.90 to 4,464.93

NYSE rose 1.0 % from 10,691.10 to 10,796.00

US Dollar Index fell 0.1 % from 81.51 to 81.42

Crude Oil fell 0.1 % from $97.35 to $97.24


"Only buy something that you'd be perfectly happy to hold
if the market shut down for 10 years." --Warren Buffett 

"If the markets shut down for 10 years, what investment would you dare to hold-- 
other than gold"? --Alfred Adask

The Silver Fix is Dead--Long Live the Fix!


by Alfred Adask


On Thursday, August 14th, Money Morning published "Here's What the New Silver Price Fix Means for Prices".  That article discussed the end of the 117-year-old "London Silver Fix" on Thursday, August 14th and its replacement by a new "silver fix" starting on Friday, August 15th.


That article offers a first glimpse of how the new "silver fix" is supposed to function.  I'm going to dissect the Money Morning text in order to illustrate how the new silver fix may be irrational or potentially dangerous.  I'll include my comments on each word or phrase that strikes me as interesting immediately below each sentence from the Money Morning text. 


This form of analysis may seem a little confusing at first, but if you'll stick with it, you may find some interesting insights.


 According to Money Morning:  


*  "The much-maligned London silver price fix ended yesterday (Thursday) after 117 years, and market observers are hoping the new pricing mechanism will herald an era of true and transparent silver price discovery."


Previously, the London Silver Fix did not "discover" the price of silver so much as set and even manipulate the price of silver.  (Which is why the former silver-fix operators are being sued out of business.)


The big "hope" is that the new "silver fix" will not set and manipulate the price of silver but will instead allow a "true and transparent" process of price discovery for the price of physical silver.  But, if we read the Money Morning article closely, that hope seems unlikely to be fulfilled.


*  "Silver pricing could definitely use more transparency, following a century-old mechanism that involved three banks negotiating prices in secret.


"The three member banks were facing lawsuits after accusations arose that they were manipulating prices, so it's no wonder that some are expecting a free market transition.


Yes, we're all expecting a "free market" in stocks, bonds and commodities.  However, the Powers That Be believe that they're so smart, or at least so in love with money, or at least so psychopathic that they're entitled to provide and profit from markets that are manipulated by the elite rather than freely accessible to the masses of people.


*  "Here's how the new procedure will operate:"


Note that they describe the new-and-improved "silver fix" as a "procedure" rather than a "market".


*   "At midday (London time), an electronic auction will take place on a trading platform provided by CME Group Inc.


Could an "electronic auction" take place entirely inside a computer and without virtually any immediate human input?


What's a "trading platform"?  A public market-or an isolated computer?


CME Group Inc is the Chicago Mercantile Exchange.


*  "Members will begin a bidding process at a price based off quoted rates for silver across the market." 


Who are the "members" of the new silver-fix?  As of Thursday, August 14th-just one day before they were supposed to start setting silver prices-their identities remained unknown, but they were reported (below) to be primarily bankers.   


Will these "members" have any personal say this "electronic auction" or are they merely along for the ride and intended to give the computerized "bidding process" the illusion of authority and a free market decided by real people


Whatever "market" will provide these "quoted rates" to the new "silver fix" is unknown to me.  However, that source of "quoted rates" must be a "market" other than the new-and-improved "silver fix".  So, whatever market(s) provide the new "quoted rates for silver" in our brave, new "silver fix"-will these other markets be markets for physical silver, paper silver, or both? 


Is it possible that whoever controls the base price for silver in these "other markets" will thereby also control the final prices set by the new silver fix?


*  "Members will process buy and sell volumes at the initial seed price for 30 seconds


Membership is, for now, primarily restricted to bankers.  Thus, the new silver fix is not a "free market" composed of all of the people who'd like to buy or sell physical silver.  This new "free market" will not be free to participation by the great unwashed.  It will be "free" to the member-bankers. 


But are even these "member-bankers" actually living men or women?  Or at these "members" merely other computers owned by bank-members that merely follow the other markets?


Are the "volumes" being bought or sold the same as "orders" for an amount of physical silver that's actually exchanged on the new silver fix?  Or are the "volumes" composed only of paper silver? 


Who sets this daily "seed price"?  How does this "seed price" affect the computer algorithm?  Can whoever sets the "seed price" thereby control the results calculated by the new silver fix computer?


Insofar as each "electronic auction" in the new silver fix is conducted in 30 seconds or less, it's not being conducted by a human auctioneer who's saying,  "I got $19.50/per ounce!  Who'll go $19.60? . . .   Going once, going trice, SOLD for $19.50!"  The operating process of such human auctions is too slow to be concluded in just 30 seconds. 


That means the new silver-fix "auction" is being exclusively conducted by means of a computer program almost devoid of direct human participation.   


*  "If after that auction buy and sell volumes are in tolerance, that is, if they are within 300,000 ounces of each other, a new price will be set."


Apparently, the new silver fix will not discover "price," per se, but will discover the "volumes" of "ounces" being bought or sold. 


But "ounces" of what?  Ounces of physical silver?  Or ounces of paper silver? 

Q:  "A new price will be set"-by who?  Set by the bankers or set by the computer algorithm? 

A:  computer algorithm.  

Q:  Who wrote the algorithm? 

A:  Bankers?  

Q: Who currently knows what the algorithm says?   After all, whoever knows both the text of algorithm and the "seed price" on any given day, should be able to predict what the silver fix "market" will do and might thereby make a fortune. 

Q:  Will the algorithm be made known to the public so we, the great unwashed, can understand the formula? 

A:  Probably not. 


*  "If not, the auction will restart at a new price determined by an electronic algorithm."


Wait a second.  I thought the initial "price" was set by some markets outside of the new "silver fix".  But now, it appears that the "seed price" may be sometimes set by the new silver-fix computer, itself, and then be subjected to a "bidding process" conducted entirely within the new silver-fix computer. 


Again, we see evidence that the "auction" process of the new silver fix may take place entirely within the silver-fix computer.  If so, there'll be no direct human participation in the price "discovery" process. 


Again, the "free market" of the new silver fix will be "free" from the influence of the people who actually buy and sell physical silver.


We duh pee-pul will be expected to wait patiently for the silver-fix computer to spit out a "price determination" like so many ancient Greeks straining to hear prophetic words from an Oracle.


*  "Auctions will continue to reset until the buy and sell orders are properly balanced at the prevailing price." 


Can anyone define "properly balanced"?


"Properly balanced" according to who?


What is the "prevailing price"?  Does this price "prevail" on any free market on the face of the earth-or does it only "prevail" within the new silver fix computer?


Will the new silver fix deliver a "real" price for the "real" world?  Or will it deliver a "virtual" price for a "virtual" world that exists entirely within the silver fix computer?


*  "The list of members within the price discovery mechanism had not yet been formally announced as of Thursday [August 14th] . . . the application deadline for participants."


How crazy is that? 


Just one day before the new silver fix begins setting the benchmark price of silver for the globe, the members of that new silver fix remained unknown.


Does that anonymity inspire confidence?  Or does it suggest that some of the "members" had not yet even consented to be members?   Could it be that some people or entities were being forced to be "members"?  


*  "Rhona O'Connell, Head of Metals at Thomson Reuters GFMS, told Money Morningin an email that the initial members are largely from the banking sector, but there are hopes that 'that may expand into industry as time goes on.'"


The "members" who will set the benchmark price for silver will definitely include bankers.


And, someday, maybe, membership might even expand to include people from the silver industry who mine, refine or actually use silver.


But, apparently, membership will never expand to include the public.


The new silver fix will provide a "free market" to "discover" the price of silver that's free from the price influence of physical silver and free from public participation.


Why exclude the public? 


Because if the public were involved in setting the price of silver, the price would probably explode to the upside (as would the price of gold) and the value of fiat currencies would plummet.  In order to protect the fiat currencies, the people can't be allowed to participate in a free market for determining the price of silver.   The silver fix must be somehow maintained in order to protect the illusion of value for fiat currencies.


But, how can there be a true free market that doesn't include public participation? 


How long can an economic system (that claims to be based on a free market) survive based on market manipulation (central planning) and without public participation in price discovery?


Not much longer.


The contradictions inherent within the new silver fix may be enough to destroy it even before the end of this year.


The Powers That Be are trying desperately to hold the silver fix together and they might even succeed a little while longer.  But a moment is approaching when the silver fix will, in fact, die.  Silver prices (and gold prices) will again be discovered by the people in free markets, and the prices of silver and gold will soar.


Chinese Silver Market Inventory Nearly Depleted


by Alfred Adask


According to the SRSrococ Report ("Chinese Silver Inventories Nearly 90% Depleted at Shanghai Futures Exchange"):


"The Shanghai Futures Exchanged experienced a net decline of 995 million tons (90% of its inventory of physical silver) from March, 2013 to the end of July this year. . . . [a] fall to record low levels.


"It's important to understand that the Shanghai Futures Exchange as well as the Shanghai Gold Exchange behave more as a physical delivery market than the COMEX. 


"Chris Marchese, analyst at said the most of the silver and gold contracts at the COMEX are settled in cash, whereas the vast majority of contracts on the Shanghai Exchanges are settled in physical metal.


"Which is probably thereason we are seeing a huge draw-down of silver stocks at the Shanghai Futures Exchange."


Prob'ly maybe-but not necessarily. 


If the Shanghai Gold Exchange and/or Shanghai Futures Exchange are selling physical gold and silver at the prices set on COMEX, they're stupid.   They're giving their gold and silver away at paper-gold and paper-silver prices.


The only way that the Shanghai Gold/Futures Exchanges can prosper or even survive is to let the demand for physical gold and physical silver increase the prices for those precious metals above the prices set by COMEX.


 If the prices for physical precious metals rise at the Shanghai, that price rise will attract whatever physical gold and silver are being sold in the world.  As a result, physical gold/silver should flow to the Shanghai exchanges and the nearly-depleted silver inventory should start to rise.


However, so long as the Shanghai Gold Exchange is selling its physical gold and silver at COMEX prices for paper-gold and paper-silver, their inventories should decline as buyers seeking physical metal and wanting to avoid the red tape at COMEX, buy their physical gold and silver in Shanghai. 


It's even possible that the US government is secretly buying physical gold and silver at the Shanghai Gold/Future's exchanges to be used as a secret supply of precious metals to back up COMEX sales.


The Shanghai Gold Exchange can't survive if it continues to sell physical gold and silver at paper-gold and paper-silver prices.  If the Chinese don't pay a significant premium for physical metals, the "wily Orientals" are stupid and going to go broke.



Japan's Ongoing Decline


by Alfred Adask


Agence France-Presse reports in "Japan protests Russian drills on disputed islands" that,


"Japan lodged a 'stern' protest with Russia Wednesday over military exercises that are being held on the disputed Kuril islands, the Japanese foreign ministry said.


"Moscow launched drills Tuesday on the long-contested islands, which are located off Russia's far eastern coast and just north of Japan.


 "Responding to questions about the drills, Japanese Prime Minister Shinzo Abe told reporters earlier in the day that 'our country, for its part, can't accept this at all'.


"The exercises came after Russia scrapped a meeting with a Japanese minister in response to a new round of sanctions by Tokyo against senior figures involved in the annexation of Ukraine's Crimean peninsula."


Japan is composed three major, and roughly 145 minor, islands that extend in a 2,000 mile-long arc from near Taiwan (Republic of China) in the south all the way up to the Sea of Okhotsk and Russia in the north.


The total area of Japan (146,000 square miles) is less than that of California (164,000 square miles), but the total length (over 2,000 miles) of the arc of islands claimed by the Japanese is about the same as the distance between San Diego, California and Jacksonville, Florida.  That means that the relatively small nation of Japan has a disproportionately huge perimeter to defend.  As a result, it's unlikely that Japan could successfully defend its claims on two sets of islands separated by 2,000 miles.


Lessee . . . over the past two years, Japan has been issuing "stern protests" to China over who will control the Senaku Islands to the south of Japan.   And now, after jumping on Russia with some Japanese sanctions to go along with American sanctions for the Ukrainian conflict, Japan is issuing more "stern protests" to Russia over who will control the Kuril islands to the North of Japan. 


Thus, China is threatening to seize control of the Senaku Islands in the south and Russia is threatening to take control of the Kuril islands in the north-and Japan probably lacks the resources to resist either China or Russia singly, let alone China and Russia acting in concert.



1)    Japan's economic sanctions on Russia almost certainly precipitated Russia's increased attempts to take control of the Kuril Islands.  Japan has enough economic troubles of its own and shouldn't be meddling with Russia. 


2)    Japan is militarily weak.


3)    The US military can no longer be relied on to defend Japan's claims to the Senaku Islands against China and/or Japan's claims to Kuril Islands against Russia. 



1)  Is Russia's response in the Kuril Islands just tit-for-tat (a consequence of Japan's economic sanctions on Russia), or does it signal something more significant?


2)  I.e., seeing Japan has disputed control of islands with China and, now, also with Russia, is it possible that China and Russia have formed an alliance to challenge Japan's power and authority?  



1)    Japan, weakened by 20 years of stagflation, a low birthrate and an aging population (Japan sold more adult diapers last year than baby diapers), is already in big trouble on a demographic and economic basis.  By adding its sanctions against Russia to those of the US government, Japan has increased its vulnerability on a political and military basis. 


2)    Japan's future appears increasingly bleak.  I'll bet that Japan's perceived strength and prosperity will continue to fall over the next twenty years.   As Japan's perceived power declines, it will become a smaller player on the world stage and an increasingly poor destination for foreign investors' wealth.


3)    Japan continues to remind me of the phrase "dead man walking".  I don't expect a sudden collapse of the nation of Japan.  But I also don't expect to Japan to still exist in its current size and form by A.D. 2020.


4)    Japan's problems may not be isolated or unique.  Japan shares a common denominator with other western democracies:  they all rely on currencies that are fiat and debt-based.   Does Japan's continuing decline signal the fate of all western democracies (US, EU, Australia, etc.) whose economies rely on fiat, debt-based monetary systems?


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