Daily Dispatch – July 27, 2009

July 27, 2009 | www.CaseyResearch.com How Long Can the Wonder Rally Last?
Welcome to Casey’s Daily Dispatch!

Dear Readers,

Welcome to the first edition of Casey’s Daily Dispatch, formerly (and forever in my heart) The Room).

This experiment in daily musings will go on for as long as you all enjoy it and find it of value. Unlike its weekly predecessor, the Daily Dispatch will be (hopefully) shorter and more timely.

Other than that, I expect the content to flow pretty much the same way: namely whatever pops out when I sit down to write. And what usually pops out are observations on the passing parade, a parade that includes the fearsome economy, growling investment markets, the elephant of government, and the general idiosyncrasies and inanities that make life so darn interesting.

And, on occasion, I’ll share with you some music that has struck my ear in a favorably dramatic sense, including today, when I’ll share two versions of the same song, Knocking on Heaven’s Door. The first is the original by Bob Dylan, which you can listen to here…
Or, for those of you who like the harder stuff, here’s a cover by Guns & Roses, which stays true to the spirit of the song, while being a lot more spirited…
Now, it’s on with the parade…

The Wonder Rally

Yesterday I ran into a friend of mine, who is, without the slightest exaggeration, one of the most important persons in the derivatives industry. He was brought out of retirement to try to sort out the mess and works for one of the nation’s largest financial institutions, where he continues to labor despite being vilified wholesale by politicians about the compensation he receives.

We briefly discussed the stock market, and his comment was simply that he and his colleagues are stunned and surprised to their core by the extent of the July rally in both equities and bonds. Looking out from the inside, what they see are markets seeking a pin, and a significant correction coming in the near future.

Of course, the markets can stay irrational longer than your money can hold up betting against them, but with the S&P 500 having now returned to just about halfway back from its bubble highs, and with the economy still in widespread distress, it is hard not to be a little extra bearish for the stock market.

Ed Steer, who will soon have his own Casey-published daily letter, about which we’ll send you more when it is ready to go, forwarded along the following chart over the weekend that shows the projected inflation-adjusted earnings of the S&P 500 once the tally for Q2 09 is made.

Quoting its author, chartoftheday.com…
“Today’s chart illustrates how earnings are expected (38% of S&P 500 companies have reported for Q2 2009) to have declined over 98% since peaking in Q3 2007, making this by far the largest decline on record (the data goes back to 1936). In fact, real earnings have dropped to a record low and if current estimates hold, Q3 2009 will see the first 12-month period during which S&P 500 earnings are negative.”

While anecdotal, I spend a lot of time talking to merchants, real estate agents, and anyone else whom I bump into who is engaged in providing goods and services to the consuming public. Right across the board, the message is the same namely that sales stink and that they are managing to survive only by cutting expenses. Even the owner of the local hardware store tells me business has never been worse, so I guess people aren’t even bothering to fix up their homes anymore. And a close friend in the real estate sales business for over 30 years says she has never seen anything remotely close to how bad things are at this moment.

Jumping upwards to the national picture, some companies are indeed reporting better earnings than anticipated by various analysts the news of which has, of late, sent their stocks satisfactorily higher.

But it’s important to recognize that there are three things at work here. The first is that, having been caught with their proverbial knickers down by the first big leg down in this crisis, analysts dramatically revised their earnings forecasts downwards for virtually all the companies on their watch lists. Thus, given the decidedly lackluster expectations, it’s relatively easy for a company to “outperform” those expectations. And secondly, as per above on a local level, much if not all of any gains in profitability are the result of slashing overhead (read “workers”) and not a pick-up in sales. Finally, as you can see in the chart above, in no sense are the earnings being posted anywhere remotely close to prior levels.

And so the situation today is comparable to changing the grading curve for a class of students so that managing to drink water without slopping it down the front of your shirt would earn you a hearty “Well done!” and a passing grade. That several students subsequently get one or two answers out of ten answers correct is, therefore, cause for the whole school to gather together for a celebratory punch party.

While I may sound like a broken record, I and the entire Casey Research team remain convinced that what we’re experiencing here is nothing more than a beautifully set bear market trap that is allowing insiders to dump their shares as quickly as they can be dumped. Don’t buy it.

A President to Believe In…

In the history of American presidential politics, there has rarely been one like him; a man of humble origins who seemingly appeared out of nowhere, with no serious chance of actually winning the presidency, but who won nonetheless.

Perhaps his success was due to a public disillusioned by his predecessors and looking for a more intelligent, competent, and yet sympathetic leader to take the flock forward. That intelligence, competence, and sympathy echoed in his inaugural address, excerpted here…
The American dream endures. We must once again have full faith in our country and in one another. I believe America can be better. We can be even stronger than before.

Let our recent mistakes bring a resurgent commitment to the basic principles of our Nation, for we know that if we despise our own government, we have no future. We recall in special times when we have stood briefly, but magnificently, united. In those times no prize was beyond our grasp.

But we cannot dwell upon remembered glory. We cannot afford to drift. We reject the prospect of failure or mediocrity or an inferior quality of life for any person. Our Government must at the same time be both competent and compassionate.

We have already found a high degree of personal liberty, and we are now struggling to enhance equality of opportunity. Our commitment to human rights must be absolute, our laws fair, our natural beauty preserved; the powerful must not persecute the weak, and human dignity must be enhanced.

We have learned that “more” is not necessarily “better,” that even our great Nation has its recognized limits, and that we can neither answer all questions nor solve all problems. We cannot afford to do everything, nor can we afford to lack boldness as we meet the future. So, together, in a spirit of individual sacrifice for the common good, we must simply do our best.

To be true to ourselves, we must be true to others. We will not behave in foreign places so as to violate our rules and standards here at home, for we know that the trust which our Nation earns is essential to our strength.

We will fight our wars against poverty, ignorance and injustice, for those are the enemies against which our forces can be honorably marshaled.
No question about it a man with a passion for humanity and a mighty wielder of the sword of justice. A man you can trust. A man with a plan and a fresh perspective to change the world for the better.

Unfortunately, Jimmy Carter’s words ended up as so much dust in his mouth, as the pretty dreams and visions he conjured blew up in his face and ended his presidency in ignominy after a single term.

Yet, according to the job approval ratings, as poorly as Jimmy Carter fared as president, at this same point in his presidency, President Obama is doing worse, with a 58% approval versus Jimmy Carter’s 62%.

To be clear, approval ratings are no statistically valid predictor of Obama’s presidential fortunes; at this point in their respective presidencies, the first Bush was rated at 66% but lost after one term… and Bush the Second was rated at 57% approval, and he went on to win a second term.

But there are, I believe, some important observations that could be made. Starting with the Bushes. It is fair to argue that if 9/11 had not happened, then Bush Junior’s ratings might have continued to roll downhill, as it is equally fair to ponder what might have happened if George Sr. had not made the devastating misstep of publicly violating his most vocal campaign pledge “Read my lips, no new taxes.”

Or, put another way, in the first instance, Bush Junior’s presidency was saved by the sort of martial crisis that has proven so effective at driving the herd together in the past, while Bush Sr. lost by a glaringly public reversal of his number one election pledge.
Likewise, in the context of the Deus Ex Machina, President Obama’s success from this point forward could be determined by an unforeseeable “event” or by an avoidable yet massive political misstep for example, if he were to pass a VAT tax and the regressive nature of that tax were made to be widely known by the disloyal opposition therefore publicly breaking his pledge not to raise taxes on the middle class.

Yet, neither of those conditions could occur and still Mr. Obama could follow in the disappointing steps of the Georgia peanut farmer, if he fails to heed the distinct lesson offered by the Carter administration, a lesson summed up nicely here in the National Journal…
A self-imposed May 1 deadline for filing welfare reform legislation proved too ambitious, and only a statement of principles was released by that date. But perhaps the most extreme example of overreach was the Administration’s effort to enact a comprehensive energy program in the 90 days following the President’s now-infamous Feb. 2 fireside chat. During that talk to the nation, a cardigan-clad Carter declared a national energy crisis, citing the growing dependence on foreign oil. The resultant legislative package developed with few contributions from Congress, the Cabinet, or interest groups later had to be scaled back and took six months to pass, not three. “We completely overburdened the congressional circuits with too many initiatives,” admitted Deputy Treasury Secretary Stuart Eizenstat, who was Carter’s chief domestic policy adviser.

… The internal party divisions that Carter faced made matters worse, because these divisions diluted the advantages of Democratic control of Capitol Hill. Carter’s New Democrat beliefs clashed with the expectations of congressional liberals, who longed for the return of the free-spending, big-government policies of the Lyndon B. Johnson era. “There was always ideological tension,” said Wexler, who now runs a lobbying shop, “and it lasted for the whole four years he was in office.”
As noted, even Jimmy Carter’s party majority in Congress wasn’t enough to protect him from the political collapse resulting from his early legislative overreaching and stentorian management style. It’s far too early to say whether or not Barack Obama will go down in history as a “Jimmy” Obama, generally ridiculed and chased from office as ineffectual. But for those of you who wince at his every fresh announcement of this new government program or that bit of legislative sleight of hand, may I suggest that you instead encourage him in his many efforts, as that will be the surest way to bring his octopus-like regime to a quick end.

For those of you who support him, you may want to email him with my personal mantra for a satisfactory life, namely “Everything in moderation, including your excesses.”

Upcoming Events

Casey Research Energy & Special Situations Summit, Sept 18-20, 2009. The schedule has now been posted for this first-ever event, being held at Denver’s beautiful Westin Tabor Center. View the schedule and learn more by clicking here.

As you’ll read, this is a working session. While there will be abundant opportunities to rub elbows with the blue-ribbon faculty and share notes with like-minded people, the summit is being designed from the ground up to provide you with a serious download of virtually everything important you need to know about the most exciting investment opportunities in the large and vibrant energy sector.

Not to put too fine a point on it, the Energy & Special Situations Summit will be a one-of-a-kind “intensive” designed to put you in the know on where the real upside potential is in energy going forward. Given the importance of the energy sector, this is not an event to be missed. Click here to register.


The More Things Stay the Same… Here’s a CBS 60 Minutes video from the 1970s about swine flu that you may find interesting from an historical context. While there is no question that the current variations of the flu are pretty virulent, by keeping an eye on the Southern Hemisphere, which is still in its flu season, you can get a good sense of what’s headed to the Northern Hemisphere this fall and winter. So far, the death toll is still well within seasonal norms which is to say not even a blip compared to the catastrophic death tolls that accompanied the flu that swept the earth in the early 1900s.
And that, dear readers, is it for today. Before signing off, I would like to clarify one point about some of the changes that are going on here at Casey Research.

Based on several emails and phone calls, it appears we failed to properly communicate to current International Speculator subscribers that the subscription price they now pay will be “grandfathered” for two full years, so they will not have to pay the significantly higher new subscriber fee that goes into effect on August 31.

(As for non-subscribers, don’t miss out on this opportunity to lock in the same low price for two years by subscribing before the August 31, 2009 price change goes into effect. Click here to learn more.)
Ditto, for those of you who consider joining the rapidly growing membership of our Casey’s Club submit your application prior to August 31, and you’ll lock in the lowest rate we’ll ever offer for this lifetime subscription to all Casey Research services. Learn more here.

It’s too early in the day to comment on the stock market action, but later this week, we’ll be taking a close look at the unprecedentedly large Treasury auctions now underway… especially as we get toward the end of the week when the longer-duration paper is being offered. Should be exiting.

Until tomorrow, thanks for reading and for being a Casey Research subscriber!

David Galland
Managing Director
Casey Research, LLC.

The GLD and SLV: Legitimate Investment Vehicles or Not?

by JS Kim
The Underground Investor
July 15th, 2009

First, let me preface this article by stating that this article contains my opinions and speculation based upon no concrete evidence, but primarily upon information contained within the SLV and GLD prospectuses, and secondarily upon instincts cultivated over a decade of research into gold and silver markets. While there is no smoking gun regarding some of the issues I raise in this article, there is plenty of smoke.

Ever since the launch of the US gold ETF, GLD, in November, 2004 and the launch of the US silver ETF, SLV, April 2006, a debate has raged in analyst circles regarding the legitimacy of these two investment vehicles as a proxy for physical gold and physical silver. Though all evidence against investing in these two trusts has been entirely circumstantial, plenty of red flags exist in both the GLD and SLV prospectuses that should steer any logical, rational human being that wishes to own gold and silver away from these two investment vehicles.

Conflicts of Interest

Let’s begin with the obvious. Is it not a huge conflict of interest that JP Morgan, a bank that perpetually ranks among the largest short positions against silver on the COMEX, is the custodian for the iShares Silver Trust (SLV)? According to silver analyst Ted Butler, JP Morgan is consistently among the one or two U.S. banks that hold more than 80% to 90% of the entire commercial net short position in COMEX silver futures. If you have positioned yourself to make huge profits from drops in the price of silver, is it reasonable for you to simultaneously desire investors to buy more physical silver (if indeed the SLV holds the amount of physical silver it claims)?

Is it also not a conflict of interest that HSBC bank, a bank that allegedly holds some of the largest short positions against gold on the COMEX, is the custodian for the SPDR Gold Trust (GLD)? If these banks profit when gold and silver drop, and they manage the largest ETFs in the US regarding these respective metals, is it unreasonable to state that these two banks should be barred from acting as custodians of the GLD and SLV? In fact how is this situation any different than Goldman Sachs’s actions in the past when they originated CDOs and then made a fortune by shorting them, actions that back then, were apparently unknown even to the firm’s own traders? On the surface, it certainly appears to be another classic case of the fox guarding the henhouse.

Alice in Wonderland Prospectuses

I have maintained for a long time now, ever since I carefully read the GLD and SLV prospectuses, that any investor that buys the GLD and the SLV and believes that these two investment vehicles are as risk-free and as sound as purchasing physical gold and physical silver is highly delusional. I call the prospectuses of the GLD and the SLV “Alice in Wonderland prospectuses” because it is literally impossible to ascertain what information contained within them is fact or fiction. Of course, investment advisers that sell their clients the SLV and GLD depend upon their customers not reading the prospectuses, or perhaps even reading them, but not understanding them. Some may say that the word delusional is a harsh term, but a mere glance of the GLD and SLV prospectuses explains my use of this term. Both the GLD and the SLV prospectus contain the following two statements:

“Neither the Securities and Exchange Commission (SEC) nor any state securities commission has approved or disapproved of the securities offered in this prospectus, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense” (emphasis mine); and

“The trust is not an investment company registered under the Investment Company Act of 1940. The trust is not a commodity pool for purposes of the Commodity Exchange Act, and its sponsor is not subject to regulation by the Commodity Futures Trading Commission as a commodity pool operator, or a commodity trading advisor.

Furthermore, the SLV prospectus additionally states, “As an owner of iShares, you will not have the protections normally associated with ownership of shares in an investment company (emphasis mine) registered under the Investment Company Act of 1940, or the protections afforded by the Commodity Exchange Act of 1936.”

Does not anyone else besides me find it ludicrous that both the SEC and the CFTC have not examined either the GLD or SLV prospectus to determine if it is truthful or complete, and that in fact, any claims that the prospectus is truthful and complete is a “criminal offense”? So with nothing in the marketing materials of how these trusts operate or what exactly they buy on behalf of shareholders vetted by an independent third party, how is it that both of these respective trusts are still allowed to cumulatively sell tens of billions of dollars worth of shares to shareholders based upon a prospectus that could possibly be a complete fabrication?

Would you buy a house if you were handed a report that stated the house was structurally sound, there were no harmful gases leaking from the ground, the water source was safe, and no murders were committed inside or on the house grounds within the past year, but were then subsequently handed a disclaimer that stated: “No one has determined whether the information contained in these reports is truthful or complete. Any representation to the contrary is a criminal offense”? If you answered no to this question, then there is absolutely no way that you should believe that buying the gold ETF and the silver ETF is the same as buying physical gold and silver, or even a proxy for buying physical gold or silver.

Multiple Claims on the Physical Gold and Physical Silver Held on Behalf of GLD and SLV Shareholders?

The appointed custodians of the SLV and the GLD, responsible for safekeeping the silver and gold bars owned by the trusts, respectively are JP Morgan and HSBC Bank USA. The GLD prospectus states, “Gold held in the Trust’s unallocated gold account and any Authorized Participant’s unallocated gold account will not be segregated from the Custodian’s assets.” Only Authorized Participants, and no shareholders, have the right to redeem shares for actual gold.

In my opinion, there are several potential huge problems with this arrangement. Physical gold held by the GLD should be held in allocated accounts specifically for the trust. The fact that physical gold held for the GLD may be held in unallocated gold accounts where gold is not segregated from the Custodian’s assets may mean that multiple entities have claims on the same gold bars. In theory, the gold held in the Custodian’s vaults may be used for delivery against shorts they hold in the futures markets while if necessary even though GLD shareholders have a claim on this gold.

A mechanism to apply the fractional reserve banking system to physical gold, an action that many thought impossible to execute with physical gold, may actually be occurring through the gold ETFs. While the prospectus states that “Authorized Participants Unallocated Accounts may only be used for transactions within the trust”, it does not specify how the custodian may use this gold.

In analyzing the SLV prospectus, the following statement can be found: “The trust does not trade in silver futures contracts on COMEX or on any other futures exchange. The trust takes delivery of physical silver that complies with the LBMA silver delivery rules. Because the trust does not trade in silver futures contracts on any futures exchange, the trust is not regulated by the CFTC under the Commodity Exchange Act as a ‘commodity pool’, and is not operated by a CFTC-regulated commodity pool operator.”

Elsewhere in the SLV prospectus, the following claim is also made: “Accordingly, the bulk of the trust’s silver holdings (emphasis mine) is represented by physical silver.” If the bulk of the trust’s silver holdings is represented by physical silver, what constitutes the “remainder”? Clearly, the SLV prospectus states that there is a “remainder”. If you read this statement carefully, the statement clearly refers to the “trust’s silver holdings.” Thus, this statement implies that some of the SLV’s funds are allocated to something else other than physical silver. So what is the rest of the trust’s silver holdings? Paper silver future contracts, air, or something else?

But even were the bulk of the SLV’s holdings physical silver, remember that this claim could be false and still contained in the prospectus due to their qualifying statement at the beginning of the prospectus that:

“Neither the Securities and Exchange Commission (SEC) nor any state securities commission has approved or disapproved of the securities offered in this prospectus, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.”

Perhaps this is the reason why the prospectus warns: “Investors in the trust do not receive the regulatory protections afforded to investors in regulated commodity pools, nor may COMEX or any futures exchange enforce its rules with respect to the trust’s activities. In addition, investors in the trust does not benefit from the protections afforded to investors in silver futures contracts on regulated futures exchanges.”

The very structure of the GLD and SLV ETFs has always bothered me as the structures of these trusts are reminiscent of Vatican City, a completely sovereign entity subject only to its own laws and rules that operates in relative secrecy. I have always believed that the opacity of the operations of the GLD and the SLV would allow the custodians of these trusts, if they so desired, to execute manipulative schemes harmful to the trusts’ shareholders in much the manner that Goldman Sachs shorted subprime mortgages at the same time it was selling CDOs backed by subprime mortgages to its clients.

Where is the Gold?

Furthermore, more suspicion should be raised by the prospectus description of where the gold that is purchased on behalf of GLD shareholders is held. The prospectus states that “the Custodian has agreed that it will hold all of the Trust’s gold bars in its own London vault premises except when the gold bars have been allocated in a vault other than the Custodian’s London vault premises” (emphasis mine). This stuff is too good even for a skeptic like myself to make up. The prospectus then goes on to explain that other vaults allowed may reside at the Bank of England, Brinks Ltd., Via Mat International, and LBMA (London Bullion Market Association) market making members, and that in turn, these subcustodians may appoint further subcustodians to hold the trust’s gold if they so desire.

In regard to ensuring that the gold actually exists, the prospectus then states that “the Trustee may have no right to visit the premises of any subcustodian for the purposes of examining the Trust’s gold bars or any records maintained by the subcustodian, and no subcustodian will be obligated to cooperate in any review the Trustee may wish to conduct of the facilities, procedures, records or creditworthiness of such subcustodian.” In other words, the gold reputedly held by the GLD on behalf of shareholders may be held on the moon and no one would have a right to know this but the custodian.
In fact, given the entirely suspicious elements of these prospectuses, were every investor to liquidate their positions in the GLD and SLV and take their cash and buy physical gold and silver instead, I would speculate that the price of gold and silver would rise substantially, though according to the prospectuses, this is an event that should not happen under any circumstance. Now, according to a GATA report by Adrian Douglas, it appears that there may actually be grounds for my past speculations regarding the fact that the GLD and SLV funds may actually be used to help suppress the price of gold and silver on the futures markets.

Alchemy: Turning Physical Gold into Paper

According to a July 11, 2009 article titled “The Alchemists”, Douglas states: “delivery notices at the COMEX cannot be reconciled with movements of metals from and into the warehouse. Clearly these are not going to match on a daily basis, just as orders into a factory will not match shipments out on any given day, as there is a time lag. But when averaged over a month, the “flow” of metal inventory should be comparable to the delivery notices issued. This is just basic accounting. But I have observed that reconciliation is almost impossible with the COMEX data. The only explanation I could think of is that settlement of contracts must be bypassing the warehouse. But how could this be possible, as I thought all contracts had to be delivered via a COMEX registered warehouse?”

In an attempt to reconcile this discrepancy, Douglas asks the all important question of what qualifies as “physical gold” according to COMEX guidelines. Douglas believes he has found a loophole in Exchange Rule 104.36, which governs exchange of futures for physicals (‘EFP’) transactions on the COMEX Division. Exchange Rule 104.36 “refers to a ‘physical commodity’ as one of the required components of an EFP transaction but also indicates that the physical commodity need only be substantially the economic equivalent of the futures contract being exchanged.”

Exchange Rule 104.36 further states, “The purpose of this Notice is to confirm that the Exchange would accept gold-backed exchange-traded funds (‘ETF’) shares as the physical commodity component for an EFP transaction involving COMEX gold futures contracts, provided that all elements of a bona fide EFP pursuant to Exchange Rule 104.36 are satisfied.”
An EFP transaction is an Exchange of Futures for Physicals (EFP) whereby the buyer or seller may exchange a futures position for a physical position of equal quantity. EFPs may be used to either initiate or liquidate a futures position. Thus, quite incredulously, Douglas has discovered that COMEX allows for paper ETF gold shares to pass as “physical gold” in EFP transactions that are allowed to close out futures positions.

Again, if I understand Douglas’s assertion correctly, this could conceivably allow a firm like JP Morgan to open up massive shorts against gold in the COMEX markets and to close out their own short positions by delivering shares of a gold ETF in an EFP transaction. If this has indeed occurred in the past, then this loophole would easily explain why, in the past, gold ETF inventories have curiously risen or remained virtually steady during periods when the price of gold futures contracts on the COMEX was plummeting. As Douglas stated in his paper, this would indeed by the ultimate alchemy of regulating gold prices by turning physical gold into paper. Instead of purchasing a long futures contract to cancel out a short futures contract, gold ETF shares could be purchased to achieve the same effect.

The CFTC Should Investigate the GLD and the SLV, Audit their Holdings, and Report Their Findings to the Public

Thus, if the new CFTC Chairman Gary Gensler is truly sincere in his public comments about increasing transparency in the commodity markets, I suggest he begin with an investigation of the unregulated SLV and GLD ETFs to

(1) Determine the exact composition of the holdings within these trusts; and

(2) Determine if the custodians of these ETFs are engaging in activities outside of those stated in their prospectuses to unduly influence and/or manipulate the price of gold and silver markets.

It is entirely ludicrous to allow the custodians of these two ETFs to operate with zero outside regulatory oversight given the numerous troubling statements in both of their prospectuses, the tip of which I’ve explored within the realm of this article. If these trusts are operating according to the statements made within their respective prospectuses, then they should have nothing to hide and therefore should welcome an independent audit of their vaults to dispel all naysayers. Of course, since there is a complex web of custodians, subcustodians, and subcustodians of the subcustodians, perhaps it would be impossible to conduct such an audit.

The latest data reported on July 8, 2009 by the SPDR Gold Trust, the GLD, states that 1,109.81 metric tons of gold are being held on behalf of GLD shareholders. In some manner, an independent auditor should be allowed to confirm that the custodian of the GLD holds 1,109.81 metric tons of gold that have no claims on it other than the GLD shareholders. If this happens, then all speculation regarding the GLD ETF will disappear into the sunset.

Until then recall this 2005 story about silver custodian Morgan Stanley:

NEW YORK, June 12 (Reuters) Morgan Stanley plans to settle a class-action lawsuit, brought by clients over the purchase and storage of precious metals, in a deal worth $4.4 million, according to a court filing. The proposed settlement, which still needs to be approved by the federal court in Manhattan, includes a cash component of $1.5 million and economic and remedial benefits valued at about $2.9 million, according to the filing on Monday.

The lawsuit, filed in August 2005, alleged that Morgan Stanley had told clients it was selling them precious metals that they would own in full and that the company would store. But Morgan Stanley was actually making either no investment specifically on behalf of those clients or making an entirely different investment of lesser value and security, according to the complaint (emphasis mine).

Morgan Stanley was not immediately available for comment. But it has argued that there were no violations of law and no default or failure to perform or deliver precious metals, according to the filing. The suit was filed by Selwyn Silberblatt, on behalf of himself and others, who bought precious metals — gold, silver, platinum and palladium in bullion bar or coins — from Morgan Stanley DW Inc. and its predecessors and paid fees for their storage, according to the filing.
The suit covers investors who did so between Feb. 19, 1986, through Jan. 10, 2007. Silberblatt, a resident of Maine at the time of the complaint, bought silver bars from Morgan Stanley during the period.

Owning the GLD and SLV is Not the Same as Owning Physical Gold and Physical Silver

In the end, as long as the GLD and SLV prospectuses are allowed to contain misinformation if it so desires according to the words contained within their own prospectuses, then GLD and SLV shareholders may find themselves holding nothing but a bag of hot air just like Selwyn Silverblatt. Furthermore, as long as the issues I broached in this article remain unresolved I imagine that the debate will continue onward about the legitimacy of the GLD and SLV ETFs. Undoubtedly, given the opinions I presented in this article, I would be highly curious to see the outcome and effect upon gold and silver prices were every shareholder of the GLD and SLV to exchange their shares for physical gold and physical silver instead.

There will always be vast amounts of paper gold and paper silver available to be sold, but only a limited amount of physical gold and physical silver. Perhaps this is why the real thing is becoming increasingly difficult to come by these days.

Yesterday, the US Mint once again reported that it has temporarily suspended minting of nearly all its gold uncirculated and proof coins and nearly all of its silver uncirculated coins due to very limited availability of blanks. As the saying goes, with gold and silver, “Get it while you can!” Just ensure that the gold and silver you buy clanks, not floats, when you drop it.

The Goldman Sachs Conspiracy: The Real Dark Pool – July 10, 2009

The Goldman Sachs Conspiracy: The Real Dark Pool
By Martin A. Armstrong (c) July 10, 2009
Former Chairman of Princeton Economics Intl

ArmstrongEconomics -(at)- gmail.com
OR send email to k58 -(at)- gmx.com for a faster reply.
(c) May 22, 2009 All rights Reserved

Questions can be directed by postal mail to: (because he has very limited internet access)

Martin A. Armstrong
FCI Fort Dix Camp
PO Box 2000
Fort Dix, NJ 08640
[COLOR=#000000 ! important] el , la , los , las , lo [The][/COLOR]

Charts: Ten Thousand Commandments

July 09, 2009

The Federal Register is a daily publication of all the proposed and final rules and regulations of the U.S. government. The size of the register is often used to gauge the scope of regulation, and it’s been on steroids for decades.

According to the Washington, DC-based Competitive Enterprise Institute’s 2009 edition of “Ten Thousand Commandments” by Clyde Crews, the cost of abiding federal regulations is estimated at $1.172 trillion in 2008 8% of the year’s GDP. This “regulation without representation,” says Crews, enables the funding of new federal initiatives through the compliance costs of expanded regulations, rather than hiking taxes or expanding the deficit.

Investors that keep a watchful eye on Washington can recognize tomorrow’s opportunities from today’s wasteful government interference disguised as “solutions.”

Find out how you can unmask the profits in the growing trend of massive government intervention by clicking here.

LGMR: Gold “Nearing Break-Out” as Obama Stimulus Judged “Too Small”

London Gold Market Report from Adrian Ash
08:55 EST, Tues 7 July

Gold “Nearing Break-Out” as Obama Stimulus Judged “Too Small”, CFTC Looks to Curb Crude Oil Trading

THE PRICE OF GOLD gained more than 1.0% for both US and UK investors on Tuesday morning in London, unwinding yesterday’s losses as European stocks rose but volatility hit the currency markets.

As the price of Gold rose to $931.40 an ounce, government debt prices ticked lower and bond dealers reported “very little trading”, pushing the yield on 10-year US Treasuries up to 3.55%.

The Euro bounced sharply towards $1.34, pushing the Gold Price for Eurozone buyers back down to €661, while crude oil bounced higher from a 6-week low of $64 per barrel.

“We believe the Dollar’s status as reserve currency will be confirmed [at the G8 summit in Italy] on Thursday,” writes Walter de Wet at Standard Bank today.

“Suggestions and comments by non-G8 member countries might un-nerve the market, but we see Dollar weakness on the back of such statements as an opportunity to sell gold.”

“The market cannot be deemed bearish just yet,” counters MKS Finance in Geneva. “The market will remain dull and range bound unless either the 920 or the 950 level is breached.”

“The back and forth price action reflects some indecision,” agrees Scotia Mocatta, the London market-maker today, “and cautions that a break-out is approaching.”

Longer-term, however, “Any correction in the Gold Price [will be] short-lived given our belief that a tightening in the US monetary remains a distant prospect,” says a new report from Deutsche Bank analysts Michael Lewis and Xiao Fu, who maintain their “mildly bullish outlook for gold into the second half of the year.”

“We believe the macroeconomic environment remains broadly supportive for gold, namely negative US real interest rates when deflated by core CPI, skittish global equity markets, and a relatively weak US Dollar.”

Overnight the State of California’s debt rating was slashed to triple B by Fitch Ratings – just two notches above “junk” – after several major US banks said they will stop accepting its I.O.U. promissory notes in lieu of cash this coming Friday.

Facing a $24 billion budget shortfall for 2009, California plans to issue over $3bn of I.O.U.s to pay its creditors in July.

“Global investors and officials are concerned about the credibility and the sustainability of our fiscal policies. So am I,” writes Richard Berner, managing director and chief US economist at Morgan Stanley.

“They fear that we will adopt policies that will undermine the Dollar and the domestic value of dollar-denominated assets through a combination of risk premiums and inflation…Interest rates may have to rise significantly to compensate investors, including reserve portfolio managers and sovereign wealth funds.”

Investors looking to defend against inflation with crude oil or commodity-index positions may find their speculation capped by new restrictions, US regulator the Commodity Futures Trading Commission said today.

CFTC chairman Gary Gensler announced hearings to decide whether “federal speculative limits should be set to all commodities of finite supply, in particular energy commodities, such as crude oil, heating oil, natural gas, gasoline and other energy products.

“This will include a careful review of the appropriateness of exemptions from these limits for various types of market participants.”

Today US advisor Laura Tyson joined vice-president Joe Biden in calling the Obama government’s $787 billion stimulus package “a bit too small”.

Latest CFTC data showed Monday night that the outstanding number of US Gold Futures and options ticked higher as the Dollar Gold Price added 1.5% in the week to last Tuesday.

The net long position held by speculative traders fell to a 7-week low, but the “smart money” of commercial industry players raised its bearish betting faster than its bullish position in gold, pointing to caution amongst refiners, wholesalers and bullion banks as the seasonal summer lull in Buying Gold wore on.

“At the moment, the safe haven money is more directed into bonds and the Dollar because of the low inflation level,” reckons James Steel, head of commodities analysis at HSBC in New York.

Noting that Gold Prices were left unmoved by weekend news of rioting in China and fresh ballistic missile tests by North Korea, “Such indifference by gold to ostensibly bullish events may be an indication of underlying weakness,” he believes.

Meantime in India, the traditional summer lull in gold and silver demand has been compounded by yesterday’s doubling of precious-metal import duties, LiveMint reports from Mumbai.

“The duty hike is holding traders back now,” says IndusInd Bank’s Pinakin Vyas. “We will not be able to achieve targeted imports due to this duty.”

“The weak Rupee following the [new Indian] budget also dented demand,” another bank dealer tells the website.

“Evidence from other key gold markets around the world [says] higher taxation regimes can lead to the trading of gold along non-official channels,” warns World Gold Council director Dharmesh Sodah, quoted by Bloomberg.

Over in Vietnam – where the lifting of gold-export restrictions flattered the Jan-July trade balance by US$2.6 billion – gold demand is rising “in dribs and drabs” as local prices tick down, says VietNamNet Bridge, cutting the 2.5% premium to world prices seen late last month.

The Solidarity trade union in South Africa, formerly the world’s No.1 Gold Mining producer, warned yesterday against calls by militant politicians to nationalize the nation’s mineral assets.

“The statements that are now being made and the [ruling party] ANC’s current support for debate are an ominous sign,” said Solidarity spokesman Jaco Kleynhans. “The statements could not have come at a worse time.

“Commodity prices have dropped sharply and nearly 35,000 employees in the industry have already lost their jobs this year. Mining companies hate uncertainty and serious investors will not invest in South African mining.”

South Africa’s annual gold output has more than halved in the last decade.

Last week the government began temporarily closing selected operations in a bid to stem fatalities in the industry, already running at 277 over the last 12 months.

Adrian Ash

Gold price chart, no delay | Gold in 2009

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

South Africa’s annual gold output has more than halved in the last decade.

Last week the government began temporarily closing selected operations in a bid to stem fatalities in the industry, already running at 277 over the last 12 months.

Adrian Ash

Gold price chart, no delay | Gold in 2009

Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is the editor of Gold News and head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 – where you can Buy Gold Today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2009