Honest Money Gold & Silver
Report
Market Intervention
Laying Off Risk - Derivatives Of Hell
Douglas V. Gnazzo
Jun 26, 2006
"A promise is
a debt; it is nothing else; and the attempt to make debt serve
the purpose of money always has been and always will be a failure.
Money and debt are as opposite in nature as fire and water;
money extinguishes debt as water extinguishes fire." [1]
Abstract
Market intervention is not
new - it has been with us since ancient times that witnessed
the birth of the first marketplace. Once men came together to
trade - markets were born. It did not take long for those who
always try to find a way around - to find a way around.
With the advent of indirect
exchange - gold and silver coin circulated as money. Soon Kings
and Queens became greedy, ordering the masters of the mint to
debase the coin of the realm, in both regards to weight and purity.
Market intervention blossomed
alongside of man's greed - as that is all it is - a means to
an end: the desire for more by the appearance of less. Man has
yet to learn the lesson that to try to obtain more for less goes
against natural law. The greater the effort - the greater is
the reward. The less the effort - the less is the reward.
Historical Record
Throughout history, there have
been numerous attempts to intervene and control various markets.
From taking a small piece of the action - to going for the big
score - to settling back and collecting a steady piece of the
pie on every transaction.
"An important factor in
the commerce of Athens is the money-changer. There is
no one fixed standard, which has very wide acceptance,
but Corinth has another standard, and a great deal of business
is also transacted in Persian gold darics.
The result is that at the Peireus
and near the Agora are a number of little "tables"
where alert individuals, with strong boxes beside them, are ready
to sell foreign coins to would-be travelers, or exchange darics
for Attic drachma, against a favorable commission."
[2]
The moneychangers - busy plying
their trade that transfers this to that - with some left over
for their part. Such was the beginning of banking in Athens -
based upon the exchange of different monies. From such
a meager beginning came forth masters of credit and capital.
The House of Pasion and The House of Nicanor were among the first.
"A Large Banking Establishment.
Enter now the "tables" of Nicanor. The owner
is a metic; perhaps he claims to come from Rhodes, but the shrewd
cast of his eyes and the dark hue of his skin gives a suggestion
of the Syrian about him. In his open office a dozen young half-naked
clerks are seated on low chairs--each with his tablet spread
out upon his knees laboriously computing long sums. The proprietor
himself acts as the cashier. He has not neglected the exchange
of foreign moneys; but that is a mere incidental.
His first visitor this morning
presents a kind of letter of credit from a correspondent in Syracuse
calling for one hundred drachmas. "Your voucher?" asks
Nicanor. The stranger produces the half of a coin broken in two
across the middle. The proprietor draws a similar half coin from
a chest. The parts match exactly, and the money is
paid on the spot.
The next comer is an old acquaintance,
a man of wealth and reputation; he is followed by two slaves
bearing a heavy talent of coined silver, which he wishes the
banker to place for him on an advantageous loan, against
a due commission.
The third visitor is a well-born
but fast and idle young man who is squandering his patrimony
on flute girls and chariot horses. He wishes an advance of ten
mine, and it is given him--against the mortgage of a house,
at the ruinous interest of 36 per cent, for such prodigals
are perfectly fair play.
Another visitor is a careful
and competent ship merchant who is fitting for a voyage to Crete,
and who requires a loan to buy his return cargo. Ordinary interest,
well secured, is 18 per cent, but a sea voyage, even at the calmest
season, is counted extra hazardous. The skipper must pay
24 per cent at least.
A poor tradesman also appears
to raise a trifle by pawning two silver cups; and an unlucky
farmer, who cannot meet his loan, persuades the banker to extend
the time "just until the next moon" of course at an
unmerciful compounding of interest." [3]
Disadvantage
Such have been the ways of
the moneychangers, since the dawn of man - taking advantage of
the disadvantage of others. Some call it business, some call
it trade; some call it usury, and some call it intervention -
of the natural inalienable rights of man.
It has been with us, as long
as we - have been with it. There is always a choice. Perhaps
it is better "to never a borrower nor a lender be",
as one never knows when the tables will turn - but turn they
must:
"Many a table has been
closed very suddenly, when its owner absconded, or collapsed
in bankruptcy, and the unlucky depositors and creditors have
been left penniless, during the rearrangement of the tables,
as the euphemism goes." [4]
History is replete with examples
of the intervention by man to manipulate the markets to make
a killing: The Tulip Mania in Holland in the 1600's, the British
South Sea Bubble in the 1700's.
Then there is John Law's infamous
Banque Générale and the Mississippi Company, which
he used to issue stock in the Compagnie d'Occident, which he
then used as the cause to change the Banque Générale into the Banque Royale, which meant that
the King of France guaranteed the notes of the Bank. Smart
guy - would a made a great bookie or central banker.
Eventually Law had one company
swallow up another until he ended up with the Compagnie Perpetuelle
des Indes in 1719. In 1720 Law was appointed Controller General
of Finance.
One year later in 1721 the
value of the stock of the Compagnie Perpetuelle des Indes had
lost 97% of its value - causing an economic crisis in France
and in Europe in general. So much for intervening and manipulating
the market. Law was demoted from his Controller General title
and position. John boy was actually lucky to make it out of France
alive.
We have written previously
on the early American episodes attempting to manipulate finance,
see Gold
Wars: Intervention and Manipulation.
More Recent History
More recently, we have the
London Gold Pool and the reputed present day manipulation of
the gold market by the Federal Reserve in collusion with other
central banks, as well as the Bank for International Settlements,
The International Monetary Fund, The World Bank, The United Nations,
and the World Trade Organization to name a few of the New World
Order Gang. We have written on this previously in Gold
Wars: Gibson's Paradox & the Gold Standard.
We must not forget Mr. Soros
- and his generosity for his fellow man when he provided help
to re-adjust the British Pound to its proper value according
to his determinations. A kinder, gentler and nobler gentleman
would be most difficult to emulate.
Exchange Stabilization Fund
In Gold Wars: Gibson's Paradox
and the Gold Standard we read J. Virgil Mattingly's 1995 statement
to the FOMC:
"It's pretty clear that
these ESF (exchange stabilizing fund) operations are authorized.
I don't think there is a legal problem in terms of the authority.
The statute [31 U.S.C. s. 5302] is very broadly worded in terms
of words like 'credit' -- it has covered things like the gold
swaps -- and it confers broad authority."
US TREASURY EXCHANGE STABILIZATION
FUND
Introduction
"The Exchange Stabilization
Fund (ESF) consists of three types of assets: U.S. dollars, foreign
currencies, and Special Drawing Rights (SDR's) Currently,
the ESF has approximately $38 billion in these three assets.
The ESF can be used to purchase
or sell foreign currencies, to hold U.S. foreign exchange and
Special Drawing Rights (SDR) assets, and to provide financing
to foreign governments. All operations of the ESF require the
explicit authorization of the Secretary of the Treasury (the
Secretary).
The Secretary is responsible
for the formulation and implementation of U.S. international
monetary and financial policy, including exchange market intervention
policy. The ESF helps the Secretary to carry out these responsibilities.
By law, the Secretary has considerable discretion in the use
of ESF resources.
The legal basis of the ESF
is the Gold Reserve Act of 1934. As amended in the late 1970s,
the Act provides in part that "the Department of the Treasury
has a stabilization fund Consistent with the obligations of the
Government in the International Monetary Fund (IMF) on orderly
exchange arrangements and an orderly system of exchange rates,
the Secretary, with the approval of the President, may deal
in gold, foreign exchange, and other instruments of credit and
securities." [5]
A Pattern of Behavior
It is quite apparent that man
has always tried to intervene in the markets, to direct and to
manipulate in search of profit - the ever-fleeting temptress
who teases with her daunting reflection - to both excite and
to extinguish - at the same time.
And now we have the wizards
and magicians of finance who conjure up the strangest of brews:
derivative debt instruments that bet upon they know not what
- as long as chance is offered - for the sake of chance and nothing
more.
It is in the chase the perceived
value lies - never satiated - never fulfilled. A sentence more
terrible then even Sisyphus knows.
The greatest magicians have
tried and tried - and yet failed to control the markets. They
have indeed accumulated great wealth, however, their insatiable
greed has been and will be their demise - the never ending pursuit
to obtain more, which puts at risk that which they have already
obtained.
The Land of Make Believe Wealth
Nothing exemplifies this better
than the Bank for International Settlements most recent publication
of the values of existing derivative contracts. Presently the
total stands at $284 TRILLION as denominated in U.S. Dollars
or Federal Reserve Notes.
Outstanding Over-The-Counter
Derivatives
(In billions of US dollars)
If that is not enough to make
your stomach queasy, there is the following that should do the
trick. Pay close attention to not only the notional dollar amounts,
but also the time in which they occurred: the first
quarter or 3 months of 2006.
That means the yearly totals,
if they continue at the same pace - would be4 times the total
numbers indicated. That is a significant amount of money
- even for paper fiat debt-money.
"The pace of trading on
the international derivatives exchanges quickened in the first
quarter of 2006. Combined turnover measured in notional amounts
of interest rate, equity index and currency contracts increased
by one quarter to $429 trillion between January and March
2006 (Graph 4.1) The year-on-year rate of growth rose to 28%,
after 23% in the previous quarter, which indicates that the expansion
in activity went considerably beyond the seasonal acceleration
usually recorded in the first quarter."
"The increase in turnover
was particularly strong in interest rate products (26%), as changing
perceptions about the future course of monetary policy in the
United States and Japan lifted activity in money market contracts
in the dollar and yen."
Graph 4.1
... "Uncertainty about
Federal Reserve rate setting contributed to a 38% surge in trading
in derivatives on short-term US interest rates. Turnover in futures
and options on 30-day federal funds, which permit a more precise
positioning on the timing of Fed decisions than the more heavily
traded three-month eurodollar contracts, doubled to $36 trillion
in the first quarter. Open interest in these contracts rose from
$7 trillion at the end of 2005 to almost $12 trillion three months
later. By contrast, trading volumes and open interest in derivatives
on three-month eurodollar deposits went up by only one third
to $166 trillion and $35 trillion respectively.
"The end of the policy
of quantitative easing by the Bank of Japan and the prospect
of the first rise in interest rates since 2001 led to a sharp
increase in activity in money market contracts denominated in
yen in February and March." [6]
Keeping It In Perspective
Kind of brings a new perspective
to the word perspective, which if it sounds a bid odd - it should.
As the saying goes: "those whom the gods wish to destroy,
they first make mad."
Comic books do not have stuff
as bizarre as this in them. Truth is indeed stranger than fiction,
especially in the 21 st Century New World Order. I mean just
how much is $429 trillion dollars - are there that many grains
of sand passing through the hour glass?
The inordinate amount of
such sums indicates how valueless a dollar has become.
It is a tragedy unparalleled
in history that will ultimately cause more suffering than any
single war has. Its vibration will resonate across the ethers
- requiring a balancing of huge proportions.
Obviously from all of the above
there can be no doubt that intervention within the markets has
and does take place - and to obscene degrees. Dante may have
to come up with another circle to house the usurpers of such
perverted extremes. Man doth know no bounds - yet.
What Remedy
The question before us is -
what do we do with the information? Knowledge is power - IF it
is used to accomplish something positive, otherwise it is worth
nothing. It is not in the knowing - it is in the doing.
So we must do something - take
action of some kind. The choices are several. First, there is
the spreading of the information so that others become aware:
the spreading of the word.
Next, there is the use of the
information to try to implement change, which is a monumental
task - which is ever more reason to take it on. It is all grist
for the mill. There is nothing that cannot be accomplished -
nothing. Whatever thought gives rise to - can be accomplish and
acted upon, as all is but a thought made manifest.
Third, the knowledge should
play a part in all investor's investment decisions. Presently
most investors use technical analysis and or fundamental analysis.
In today's New World Order, interventional analysis is mandatory.
When properly coupled with
a contrarian understanding of how markets work, it provides a
powerful tool along with technical and fundamental analysis.
However, they all have their place; and they all have their limitations.
To underestimate or overestimate either - is pure
folly.
Parameters
To be aware that large entities
intervene within the markets and have a significant affect is
one thing - to be able to make precise predictions on subsequent
market action is another.
If these elite moneyed interests
have the capabilities of the latest cutting edge technology (which
they do), as well as pockets deeper then deep to pay for it all
- they are without doubt a most formidable opponent.
This does not mean that they
cannot be beat. It does, however, suggest that it may be best
to let them beat themselves. The proverbial "give them a
long enough rope with which to hang themselves" comes to
mind.
Buyers and Sellers
We want to make note of what
we consider a very important and relevant issue at hand: for
every buyer there is a seller - for every seller than is a buyer.
This distinction carries much weight when extrapolated to the
farthest reaches regarding the issue of manipulation and intervention.
Whenever a market manipulator
intervenes within the market - they either buy or sell or both.
It is even possible to have a net neutral position, although
on the scale we are considering, such would be quite an accomplishment.
If they sell - someone must
be on the other side of the trade. Likewise, if they buy, someone
must be on the other side of the trade.
With futures and options and
other derivatives of structured finance - the buying and selling
on either side of the trade may not occur immediately, or simultaneously,
nevertheless it must occur or the markets will seize up, which
we hasten to add is always a distinct possibility.
Alf Field put it very
nicely the other day in his article Gold Update VII:
"At the outset let me
say that I believe that GATA has done a good job in fingering
the points of manipulation in the gold market, although I prefer
to use the word distortion. The main areas where interference
with normal market patterns has taken place are:
- Excessive short selling in
futures markets either to extend a decline or prevent a rapid
upward price thrust;
- Selling of physical gold by
Central Banks;
- Leasing of physical gold to
facilitate hedging or carry trade activities.
It should be noted in points
1 and 3 that for every downward price distortion caused by excessive
short selling there should also be a countervailing upward price
distortion when the trade is unwound. In the case of excessive
selling of futures, these short positions will have to be closed
eventually by corresponding subsequent purchases.
Hedging and carry trade activities
are unwound by buying back what was sold or by delivering newly
mined gold back to the Central Bank that supplied the leased
gold, thus reducing physical sales to the market.
Selling of gold by Central
Banks has had the purpose of limiting the gold price rise. A
sharply rising gold price would attract attention to the rapidly
declining purchasing power of the irredeemable currencies that
all countries now issue.
This artificial lid on the
gold price will in due course (already happening) attract the
attention of countries accumulating large surpluses, mainly of
US dollars, resulting in purchases of gold for reserve purposes.
In other words, all these distortions
tend to be of relatively short term duration, and are followed
by countervailing upward distortions. The underlying primary
trend of the market will always flow through to be expressed
in the major waves while the distortions will tend to be apparent
in the minor waves." [7]
In other words, whatever extent
the market is manipulated by or intervened within, over the intermediate
term it tends to smooth itself out as water seeks its own level.
Point Of No Return
Granted, there can be some
immediate distortions and imbalances, but over the long term,
they will balance out - unless the market experiences a 10-sigma
event greater than three standard deviations from existing computerized
black box trading programs.
The mantra of the day would
then be: Houston - we have a problem - copy. It would
play out like a global game of dominos - a ring around the rosy
of sorts, especially the part about "ashes, ashes, and they
all fell down." This lovely nursery rhyme is about the plague.
Such an event comes closer
to reality every day, as the mal-investments and stress in the
system increases. Eventually the bifurcation point will be breached,
and chaos theory will take over - with an example not soon to
be forgotten - that markets are non-linear in form and function.
When faced with a herd of rogue
elephants rushing at you it is best to get out the way. To try
to take them on face to face is utter folly.
However, if one has planned
their strategy out well in advance, and has just behind them
a cliff or large pit unknown to the elephants - their wild charge
will be their own undoing - they will destroy themselves. All
you have to do is get out of the way and watch.
A wise saying in Judo is: let
your opponent make the first move that starts his downfall. When
facing the rogue interventionists in today's market - such wisdom
is well advised.
Laws of the Market
Another point for consideration
is to realize that although the opponent is strong and formidable
- they do not, and cannot, completely control the markets.
They can and do direct them,
and sometimes to large degrees - but no one or no one entity
can completely control the market; for the market is the sum
total of all players, and is consequently, larger than any individual
player or group of players.
The market is a law unto itself
and it will not be denied. The longer and harder that the primary
trend of the market is manipulated by intervention, the larger
and more powerful will the adjustment be when the market returns
to its mean.
Just as a pendulum swings to
and fro on either side of balance - the degree of opposition
on either side are equal - forever seeking balance.
The best course of action is
to take what the market offers. Do not fight the market. Accept
whatever it offers. If one is aware that the trend is being manipulated
in any one direction, let the rogues elephants run to they wear
themselves out.
Then take the opposite position
when the market has reached an extreme level. The risk to reward
ratio will be quite favorable at such time. If one scales into
their positions there is even less risk. In a bull market, one
sells into strength and buys on weakness. In a bear market, one
buys on strength and sells into weakness.
Buy or Sell
We have done exactly that in
the recent top and retreat there from. When gold went over $700
I started selling as everybody was yelling. Once gold went down
far enough and everybody was crying - I started buying.
So far - so good, as this is
but a short-term play, unless it decides to run - and if it wants
to, I will oblige and give it more slack. To have a contrarian
point of view is mandatory in today's manipulated markets. Let
them sell - then you buy. Let them buy - you sell to them.
Bond yields have been going
up - not down. They have broken above significant resistance
of a long-term nature. Perhaps it is a ploy - perhaps a misreading
of the tea leaves. Time will tell.
In my opinion the opponent
is strong - but he shows his weakness by relying on $284 TRILLION
DOLLARS of make believe money-values in make believe derivatives
- derived there from.
He adds to his weakness by
employing them repeatedly, turning them over to the tune of $429
TRILLION every three months.
I was going to state the yearly
total but my calculator does not go that high. I am not even
sure what comes after a trillion - perhaps God only knows and
he is not telling - yet. I am not sure I even want to know.
Weak Links
A chain is only as strong as
its weakest link: 284 trillion are a lot of links. When one of
them breaks it will be because the bifurcation point has been
breached, and once that occurs, chaos theory takes over and there
is no coming back - it's straight on till morning - just follow
the fairy.
There is no stopping it - it
is a run away vibration whose exponential amplitude must play
itself out. Such events throughout history have taken down huge
bridges and buildings by a single vibration run amuck.
So yes it is true that the
opponent is strong, and yes he can conduct large and powerful
operations to direct the markets - but outright control: no -
it would run against not only natural law but cosmic law - against
Destiny. Even the gods pay heed to Destiny - as they are Destiny's
Child.
OCEANIDS: Who then is the steersman of Necessity?
Prometheus: The three-shaped MOERAE and mindful
ERINYES.
OCEANIDS: Can it be that Zeus has less power
than they do?
Prometheus: Yes, in that even he cannot escape
what is foretold. [8]
[1] Organization
of Debt into Currency and Other Papers of Charles Holt Carroll
[2] Title: A Day
In Old Athens Author: William Stearns Davis
[3] Same
[4] Same
[5] Exchange Stabilization
Fund
[6] BIS
Quarterly Review, June 2006 12 June 2006
[7] Elliott
Wave Gold Update VII - Field
[8] Aeschylus,
Prometheus Bound 515
Jun 24, 2006
-Douglas V. Gnazzo
email: Douglas V, Gnazzo
Douglas
V. Gnazzo
is CEO of New England Renovation LLC, a historical restoration contractor
that specializes in restoring older buildings that are vintage historic
landmarks. He writes for numerous websites and his work appears
both here and abroad. Just recently he was honored by being
chosen as a Foundation Scholar for the Foundation for the
Advancement of Monetary Education (FAME).
In March 2006 Douglas V. Gnazzo started his own Honest Money
Gold & Silver Report website. Read the Open
Letter to Congress.
©2006 Douglas V. Gnazzo. All Rights Reserved
321gold
Inc
|