There was a mysterious crash in the spot market for silver and gold markets right in front of the G8 summit today.

Even as the panic in the market was at all time high this morning both gold and silver opened down...flatlined then mysteriously dropped like a rock.  Silver hit a multi-year low and gold returned to where it was last week.

Physical demand for gold and silver are extremely high however as the mints around the world have either stopped producing coins completely or are releasing them in scarce supply, which is causing heavy spreads in the bid/ask.  Gold can be found in limited supply for about $80 over spot for coins and silver is only available it 1000oz comex bars.  How is the spot price of silver so low yet not available for sale anywhere in coin form?

The difference between the producing value of gold miners and the spot price of gold is at all time difference.  Gold miners are trading at prices which would indicate gold being at around $600, which is predicting a big crash in gold coming soon.  Yet everyone wants gold.  My intention is that the central banks in the world are trying to force a big fall in the spot price of gold so they could accumulate it themselves on the cheap.  It looks like some big money was dumping gold and silver in advance in anticipation of the possible upcoming dumping by the G8 countries. 

Just like oil...the spot price for gold has never aligns for the actual physical demand of the commodity.  The spot prices are manipulated to the extreme by traders and hedgers trying to speculate or protect their positions.  Based on demand and availability gold should be trading much much higher but continues to be stymied by the spot price. 

And is the GLD and SLV trust stocks really backed by the underlying commodity or is it a fallacy?  And will the government mysteriously seize it one day? 

Also has anyone seen China?  I'm hearing news of oil tankers and ships filled with iron ore sitting at the ports waiting to be bought.  But they aren't buying any right now.  It looks like over the past year they've stockpiled a tremendous supply already.  They are the culprits behind the huge surge in commodity prices over the past year and as they seem to stop buying the stuff about a month before the Olympics...that's when it peaked.

And as commodity prices began to crumble due to their lack of demand, massive unwinding of the commodity related stocks and contracts began.  Dry bulk shippers are now trading at 1x p/e or for even less than the equity of their ships.  Oil and Gas stocks are down more than 50% from their highs.  Miners and Coal stocks are doing even worse. 

Some of the best oil traders in the world got completely wiped out on this trade.  Aubrey McClendon of Chesapeake Energy got completely wiped out as he was forced into liquidation at $15-$25 prices, when he bought hundreds of millions of dollar of stock at $50-$60.  Bob Simpson (of XTO), Tom Ward (of SD), T. Boone Pickens, Hedge Funds, Goldman Sachs and Morgan Stanley bought huge number of these stocks at much much higher prices.  Chesapeake had a huge secondary at $57.50 (currently $16.50), XTO had a huge secondary at $55 (currently $28.05) and Harbinger Capital bought nearly 400 million dollars of stock in Cleveland-Cliffs at around $100 a share (now $30). 

These traders are some of the most brilliant in the world historically in trading energy and at the same time pension funds, endowments and massive number of retail investors were jumping in.  China, Brazil, India and Russia were growing enormously and couldn't buy enough of these commodities.  Then all of a sudden they stopped buying, especially China.  And they all went broke.

The media doesn't talk about this much.  Our credit markets were having serious trouble long before recent times but it finally broke when the commodities markets crashed.  All of these same banks that failed (including Lehman and AIG) and endless number of hedgies were in this trade.  Europeans, Asians, South Americans and everyone around the world too.  I was in this trade.  Jim Cramer was in this trade.  If you owned a single diversified mutual fund, index fund or stock in ExxonMobil you were in this trade.  Everyone who was in this trade big had to dump other assets to cover margin calls which triggered massive forced selling across the board which continues to cause the underlying commodity to drop, which triggers a new round of selling.

Now was this crash engineered by China who stockpiled in mass for years jacking up prices for everyone (and thus slowing down economies), getting everyone and their mothers aboard on this trade and then pulling the rug from underneath everyone?  Believe me, we would all rather return to paying $4.50 for gas rather than enduring this commodities crash.  How could so many people have been so wrong when it made so much sense?  The commodities surge, was not a bubble, there was real backing behind it but it popped like a bubble.  Steel producers, coal miners, gold miners, zinc/nickel/copper/palladium/silver miners, oil drillers, gas drillers, integrates/supermajors, oil refiners, chemical companies, fertilizer producers, aluminum producers, pipeline owners, propane producers and anything commodities related companies have all melted down and are at prices unseen since 2004.  Many of these commodities companies won't survive as now their underlying assets are worth so little and they don't have access to the credit markets.

This was what broke the camel's back, I am sure of it.  And there was a lot more to it than just some "demand destruction".  The "demand" was clearly manipulated and then the "demand destruction" even more.  Who wasn't in this trade?  It was China.  Their state-controlled oil companies CNOOC, Petrochina and Sinopec were subsidizing oil for the country and at the same time they were hedged in a lot of their commodities buying.  Only in 2008 were they paying the skyrocketing prices for a few months before the Olympics.  Trillions of dollars around the world was lost in this commodity trade and has absolutely devasted Brazil, India and Russia along with US, Britain, France and many others.  Even OPEC is beginning to suffer.  At the same time China owns trillions of dollars in US Agency and Treasury Bonds, which have surged in value (due to the fall in interest rates). 

We've been worried about inflation for so long but what we're now facing is a deflationary spiral.  Treasury bills are yielding 0%, fed futures rate is virtually zero, and 10 year treasury notes are yielding a surprising low of 3.5% and falling!  Municipal bonds are yet fetching rates of 5% or more.  This is scary folks.  Japan's never ending recession (now going on 20 years) and the US Great Depression is the only time we've seen similar situations. 

As part of the 700 billion dollar TARP program, the US Govt will be buying equity stakes in commercial banks, in a partial nationalization.  The federal reserve & treasury took unprecedented measures to bailout Bear Stearns, AIG and Fannie/Freddie, opened the discount window for dealers, paying interest on reserves and now buying commercial paper.  But why didn't they bailout Lehman?  That devasted AIG, Reserve Fund and countless others which caused a chain reaction on top of the already ongoing commodities meltdown.  And then short selling ban on financials (which resulted in billions of more losses for institutions) then its undoing (which result in billions of more losses for institutions) on Thursday and may possibly derail the Mitsubishi investment in Morgan Stanley. 

The next logical step for the fed is to buy index futures (which amounts to the govt owning a part of the entire stock market), then maybe bailout GM and Ford, bailout failing pension funds, bailout California, Alabama, Michigan and New York and then start the Amero to help pay for all the old dollar denominated debt we owe.  Then the end of capitalism and the start of the USSA is not far away. 

The early year commodities surge (and so much big money behind it) and then the huge pop along with the fed not bailing out Lehman Bros is not something that can explained.  And the SEC knew very well how damaging the short sale ban could do for the confidence of the markets but they did it anyways.  It is all very suspicious. 

Why are JP Morgan Chase and HSBC stocks unscathed by the credit crisis, although their tentacles are deeper than most other banks?  How did Warren Buffett so sucessfully avoid both the commodities and credit surges?  Why was Bill Gates aggressively selling Microsoft stock so much and putting his money into silver and shorting the dollar?  How did so many smart people get it so wrong with the exception of a few?  Is there something else behind this?  I want answers.  This situation is not a joke.  Something is really wrong here and just doesn't make sense.

That is what they call "Market Crash" - it is when a lot of "smart people" make mistake in thinking that they can fool other "not so smart people" (read "not so rich and corrupt") for a little longer...

Not to be paranoid, but everything that is going on lately surely does not make lots of sense...unless explanation is very simple "Government cannot govern anymore and the big changes in social structure are coming"

On a side note, I will be really upset if Morgan Stanley will be gone - I own them precise timing of my "short oil/commodities trade"

Great post. I know your focus here isn't really on China, but the United Stats, but we need to wake up and realize that the next biggest threat of his century will be dealing with China. Not with terrorists in the middle-east, not with anything over there. The real threat will the growing threat of a "soft" China.

'D' for deleverage.
'M' for margin calls.