Why Jeff Christian is wrong.

I just heard an interview with Jeff Christian here:

http://www.netcastdaily.com/broadcast/fsn2010-0410-1.asx .

I was so incensed by Jeff Christians omissions that I decided to start a Blog to help people see through his deeply flawed reasoning.

Firstly in describing how a Swap Dealer Hedges (shorts) Gold on the Comex he makes many HUGE omissions. The most notable may be that the largest Gold Miners have stopped hedging their gold production. Why doesn't Christian raise this point? Secondly Swap Dealers aren’t the large shorts on the Comex. The largest shorts are the big Commercial banks like JPMorgan and HSBC and they reside in a different category called Producer/Merchant commercials or PMs. This is where the large Bullion banks live. So in mentioning Swap Dealers Short Hedging he is simply misrepresenting the facts. Swap Dealers are legitimate hedges but Bullion banks while they may hedge their predominant positions are taken for speculative gain only. In other words they are naked short selling gold so it's in their interest to suppress the price.

Before I explain in more detail his other mistakes I should review the Miner/Swap Dealer relationship. First a miner will pull raw Gold out of the ground and sell it to the Swap dealer before the Gold is in its final form (usually of London Good Delivery Bars). The Swap Dealer will then go Short on the Comex to Hedge their position. So far so good, everything makes sense. During the interview Jeff Christian speaks based on this assumption. And in the interview Jeff Christian, just as he did for the CFTC, provides a perfectly rational explanation of why Hedgers enter Short trades on the Comex.


Where Jeff Christian runs out of bounds is that he omits to explain why Short positions are routinely entered so recklessly. Common sense would dictate that a legitimate Hedger who buys Gold from a miner at $1200 would then proceed to Hedge that purchase by going Short on the Comex at $1200. But that's not what happens in reality.

What we see time and time again is the Short positions are entered by traders acting like bulls in a China shop. They don't spread the Short sale out over minutes and hours like a legitimate Hedger would who wanted to protect themselves. They slash and burn often driving the price down $10,$20, $50 even $100 at a time.

When you are Long Gold at $1200 and Short Gold at $1150 that isn't a Hedge that's $50 of risks the trader repeatedly takes on. This is worse in the Silver market. First of all because the price moves are far more drastic and secondly the largest Short positions on the Comex are not Held by Swap Dealers who hedge legitimate mine production but are simply naked short positions of Bullion banks. Jeff Christian mentions that this 100 to 1 short position is "normal" when you consider Gold and Silver as monetary assets like Treasuries or Currencies. There 100 to 1 leverage is the norm. However this is disingenuous. A monetary metal like Silver is also an industrial metal used in cell phones, dvds and countless other electronic applications. Manufacturers don't grind up T-Bills and put them in television sets. Silver is very much in need outside of any monetary application. As such the 100 to 1 leverage puts shorts at great risks of a squeeze should Silver supply get too tight. Jeff Christian knows this but for some reason doesn't think it's relevant. Well I can assure him if there is a run on Silver JPMorgan may have a different opinion as they are on the hook for 6 months of Silver production. Let's do a quick back of the envelope calculation based on the fact that JPMorgan and HSBC are short 170 million oz of silver. Let's just say each hold %50 of that evenly. Then JPMorgan is on the hook for 85 million oz. Say Silver will trade for $20/oz, that translates to 1.7 Billion Dollars! Of course if there's a Comex Default Silver would trade much higher wouldn't it? Let's give Silver a price of $100/oz in that scenario. 85 million ounces translates to 17 Billion Dollars that JPMorgan must pay to all Silver Long Contract Holders! Given the amount of risk in these numbers it makes you wonder if JPMorgan hired Jeff Christian for advice. I know if I ran a bank I would think twice before hiring Jeff Christian to navigate the waters of the Silver market. But then again I don't run a Bullion bank.

The truth is Jeff Christian is completely out of touch with the Bullion market for Silver and Gold. You just have to look at his benign justification for the almost weekly fleecing in the Gold and Silver. His ignorance is so laughable that I wonder whether the truth would shatter Jeff Christian's reality to the extent he would never recover. To merely keep his sanity he can't broach the subject of market manipulation. So he ignores it and the scam continues. In interviews like the one with Jim Puplava he just relies on Puplava's ignorance of the Gold and Silver markets to let him by.

When Jeff Christian did this interview the Andrew Maguire story was out. So at one point in the interview Jeff Christian talks about how "conservative" these Bullion banks are and how they would "never naked short" Silver. I felt like laughing if I hadn't been so sickened by his comment. He said this only a couple of months after Andrew Maguire provided a complete play by play example of how JPMorgan and HSBC routinely manipulate the Silver market down through Naked Short Selling. I know Jeff Christian heard of Andrew Maguire because Bill Murphy read his testimony at the infamous CFTC hearing this past March. Again Jeff Christian consciously and willfully ignores this fact when he talks about Bullion Banks disproportionally large Short Position. Did it ever occur to Jeff Christian that given Andrew Maguire’s testimony the only way you could arrive at such a large Short position is not through legitimate Hedging but through blatant naked short selling and market manipulation? Perhaps Jeffrey Christian would benefit from a few days on a trading floor to help visualize just how much money JPMorgan and HSBC make when they collude to drive the markets lower, scare small speculators away and then circle back to rake up the profits. I can assure you JPMorgan and HSBC are making a killing by using their position limit "exemption" to paint the tape whenever they see fit.

When I listen to Jeff Christian's interview I think back to a term Stalin once used to refer to communist sympathizers in the west: "useful idiots". These were individuals whose blind faith in communism let them suspend any manner of disbelief. Jeff Christian's blind faith in the Bullion banks trading tactics gives Stalin’s moniker new meaning. These are people who History will look upon and ask how did they not know, why didn't they get it as they were so close to the facts. But as we all know there are two sides to every story. As a History Major I'm very fond of the term "the winners write the history". While Jeff Christian’s interpretation of the facts seems to have held sway, events are now unfolding that will shed light on this fraud and change History forever.


1) This Fall the CFTC will introduce Position Limits in the Gold and Silver markets.
2) According to Bill Murphy at GATA, a major news outlet is finishing a piece on the Gold Price suppression scheme due out in October.
3) Like Sharks smelling blood, The Markets are circling and demanding physical Gold and Silver. This winter the Sprott Physical Silver ETF will come online. The IMF is quietly selling 15 tons of Gold a Month and at that rate will run out in January of 2011. Numerous examples abound and the trend is toward physical possession and this will kill the 100 to 1 paper Gold and Silver markets.


As an avid student of History what I am sensing now is historic. Something is happening that Historians will revisit time and time again in the years and centuries to come. Something is going to give in the next year or two and it's either going to be very good or very bad depending upon where you sit. I plan on profiting handsomely from this. I know Jeffrey Christian has no intention of making a dime because he can’t see the forest for the trees. But a worse fate awaits Jeffrey Christian I’m afraid and that is his treatment by History. The Historians are sharpening their pencils and his fate ironically is to be flayed with a thousand Paper cuts.

I kept thinking of Jeff Christian acknowledging there have been examples of price manipulation in the Metals market but the only examples he could think of were where the price went UP and not DOWN and those examples seemed to end around 1999 as if metals pricing stopped in 2000. What about 2008? In 2008 one of the most bizarre incidents in Economic history occurred when the law of Supply and Demand were briefly negated as the price of Silver dove from 18 to under 10 while the physical demand for it skyrocketed. Why doesn't Jeff Christian attempt to explain this? He can't because the explanation would throw his entire "Bullion Banks don't naked short" argument in jeopardy.

The entire fiasco was created after JPMorgan inherited Bear Stearns massive Short Silver position. In order to unwind this deeply underwater trade they needed to drive the market down from 18 to under 10! This is trading 101 but Jeff Christian isn't a trader so he completely misses the point. This is the only rational explanation why Silver could drop 10 dollars amid the virtual collapse of the financial system. Precious metals go up in times of crisis they don't cut their price in half! As I recall from his CFTC testimony Jeff Christian at first explained the suspension of Supply and Demand in 2008 as Bullion banks shorting Silver to drive the price down. But after challenged on this by CFTC Chairman Gensler, Jeff Christian recanted and said he misspoke (or did he?) and meant to say that the Bullion banks were in fact buying Silver from clients who were liquidating. But again he fails to explain why those same Bullion banks then slaughtered the price as they entered their positions on the Comex to Hedge to Silver they just bought. For example if a client wanted to liquidate Silver for cash at 18/oz and you as Bullion Banks slaughtered the price down to 15 you then would carry $3 of price exposure of your books.

As Jeff Christian says these Bullion Banks are very “conservative” and don’t take risks something has to be wrong somewhere. In other words this reckless trading strategy would drive any bank out of business very quickly wouldn’t it? These events of 2008 don’t make sense unless Jeff Christian’s explanation is erroneous and in fact the Bullion banks had an ulterior motive. Of course as we all know that motive was to unwind the Bear Stearns short position they inherited.

Jeff Christian goes on further to throw his view point in doubt when he mentions how banks have under-priced risk to get clients. He talks about how Chuck Prince couldn't "bring in his horns" in 2005,6 and 7 because pulling back on risk would allow his traders to be picked off by more risky banks. He gives other examples as well of the propensity for institutions to look the other way with regard to risk in order to generate more business. But then Jeff Christian makes another one of his glaring omissions. He doesn't include the exchanges in this same vein! In other words it's in the Comex's interest to look the other way when JPMorgan massively shorts Silver and Gold. JPMorgan is creating transactions and the Comex makes money off of each trade so they would be loathe to limit the number of contracts JPMorgan can sell short right? This is the same economics that Christian recognizes as dangerous. It's obvious to us to include an exchange and a bank in the same line of thinking. But Jeff Christian doesn't even think of it. How is this guy in business giving advice to clients when he consistently misses the point?

Finally I thought I'd leave you with this point. Jeff Christian mentions AIG's 40-1 metals leverage as being risky. He mentions knowing a trader who declined a job at AIG "in the 90s" because he couldn't work in such a risky environment. Jeff Christian leaves it there again failing to delve deeper into reality to draw some conclusions based on AIG performance post “the 90s”. What he leaves out is that in 2004 AIG left the Gold and Silver market. There's been no "official" explanation given other than AIG essentially saying they wanted to leave the London Metals market so they could basically "spend more time with their family”. Here’s the actual announcement:


"LONDON, June 1, 2004 (Reuters) -- AIG International Ltd., part of American International Group Inc., will no longer be a London Bullion Market Association (LBMA) market maker in gold and silver, the LBMA said on Tuesday."


Did Jeff Christian ever ask himself what they could have done specifically to sour their interest in making money? Remember Jeff Christian acknowledged the 40-1 risk as dangerous and conceivably knows they left the LBMA. Could this 40-1 risk have had larger implications when it went awry? Allow me to fill in the dots that the LBMA's opacity may obscure.
It's highly likely Bullion banks like AIG were tied up in Shorting Gold and got caught on the wrong side the Gold price in 1999. Gold spiked in 1999 and because of their 40-1 leverage AIG among others was exposed to several Billion dollars in losses. Had they been unable to deliver the Gold (or settle in cash) many banks would have gone bankrupt and brought the financial system to its knees. But the financial system didn’t collapse in 1999, so what happened? Of this I am sure and Jeff Christian can’t spin. The Gold Price miraculously dropped as quickly as it rose when out of the blue Gordon Brown announced from the top of a mountain that he planned to sell half of England's Gold on the open market. This indeed lowered the price and Bullion banks like AIG were granted a temporary reprieve.

What no one can explain is why in 2004 "out of the blue" AIG decided to drop out of the LBMA. Did AIG's 40-1 leverage run afoul of the markets one too many times to justify the thinner and thinner margins on the LBMA? Since Brown's Bottom Gold has kept rising. The Gold carry trade has been less and less attractive. There are many reason why AIG could have left. We'll never know.

What is increasingly clear is that "Brown's Bottom" of 1999 was a backdoor bail-out of Bullion banks like AIG. It makes perfect sense. I'd be curious how Jeff Christian would explain the following quote from Bank of England Governor Eddie George.
"In front of 3 witnesses, Bank of England Governor Eddie George spoke to Nicholas J. Morrell (CEO of Lonmin Plc) after the Washington Agreement gold price explosion in Sept/Oct 1999. Mr. George said ‘We looked into the abyss if the gold price rose further. A further rise would have taken down one or several trading houses, which might have taken down all the rest in their wake.


Therefore at any price, at any cost, the central banks had to quell the gold price, manage it. It was very difficult to get the gold price under control but we have now succeeded. The US Fed was very active in getting the gold price down. So was the U.K.’"

For a more detailed explanation see:

 
http://jessescrossroadscafe.blogspot.com/2010/03/browns-bottom-is-enormous-issue-in-uk.html
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