From there, away it (and silver) went to the upside. But about half an hour before the Comex open, both metals traded sideways until Globex trading closed at 5:15 p.m. in New York.

With options expiry and first day notice out of the way, I must admit that I’m expecting the bullion banks to back off. Not that there are a lot of contracts left to be liquidated by the longs anyway. There are (as Ted Butler says) only a finite number of longs that can be liquidated. The rest just aren’t going to budge, and the bullion banks know that. It appears that we’ve had a full clean-out to the downside in both gold and silver. It’s not possible to know how successful ‘da boyz’ were, because all of the pertinent data won’t be out until the COT next Friday.

Changes in open interest in both gold and silver for Thursday are as follows. Gold open interest fell 7,095 contracts and silver open interest dropped 492 contracts.

In the Commitment of Traders report issued yesterday for positions held at the end of trading on Tuesday, May 27th…virtually none of this past week’s hammering of the gold and silver price shows up in this report. As I’ve mentioned in the past, the cartel can manage this report to a certain extent by holding back information that should normally be included. This past week was a case in point, as it doesn’t appear that any data from Tuesday is in this report. As I’ve said before, we will have to wait until next Friday’s COT before we have any indication.

As far as concentration goes…the ‘8 or less’ traders in gold currently hold 81.6% of the entire short position on the Comex. In silver it’s 78.2%. Both numbers are up slightly from last week. In terms of ounces of gold, the ‘8 or less’ bullion banks are short a whopping 24.5 million ounces…and the ‘4 or less’ are short 20.1 million ounces. These are all-time record numbers. But without a doubt, all of these numbers will be down significantly now that the blood bath is over. Al Korelin of the Korelin Economics Report interviewed me about the goings-on in the gold and silver markets last week…and if you’d like to listen to it, the link is here.

Without question, I think the most important story out of Wall Street yesterday was this Bloomberg piece about Wall Street firms receiving permanent access to money from the Federal Reserve. Just last week, Wall Street and the banking system were saying that ‘everything was fine.’ Obviously everything isn’t fine. The most disturbing part of this article is a comment that Vice Chairman Donald Kohn made when he said, in response to an audience question, that the Fed’s shortage of Treasury securities for them to lend out is “not one of the things I’m worried about.” If he’s not worried about that…then what is he worried about? I think we already know…the collapse of the entire economic, financial and monetary system. The story is linked here.

You may remember that the Bank for International Settlements (BIS) released their semi-annual derivatives report last week…for the period ending December 31, 2007. GATA consultant, Reg Howe, wades into this fray with his most excellent commentary…which in turn is accompanied by some equally excellent graphs. The report is entitled “Gold Derivatives: Moving Up Again” and is linked here.

I’ve had a perfectly wonderful evening. But this wasn’t it. – Groucho Marx

Today’s fun video is another trip down memory lane to the mid-1970s. The album was a multi-million seller…and I still have my copy, but bought the CD version as soon as it was available. The youtube.com video is linked here.

I see in a yahoo.com story, that CNN correspondent Jessica Yellin made mention of the fact that “the press corps was under enormous pressure from corporate executives to make sure the (Iraq) war was presented in a way that was consistent with patriotic fever in the nation and the president’s high approval ratings.” You mean…spin and lie…be a paid shill? The American press wouldn’t do that and mislead the American people, would they? It was ever thus.

Enjoy the rest of your weekend, and I’ll see you on Tuesday.

Source: And Then There’s This…Saturday, May 31, 2008 

One such figure came up yesterday. The total ‘value’ of global derivatives – financial instruments which are priced on the back of the underlying assets that they track – has now reached a breathtaking $596 trillion, after a mammoth rise over the previous twelve months.

That started the warning lights flashing…

So what, apart from containing more noughts than a normal human being can cope with, is this titanic number all about?

Let’s start by putting it into context. We can do this by checking out what the world actually made last year. The overall value of goods and services produced is measured by Gross Domestic Product (GDP). And for 2007, GDP for planet earth was reckoned by the International Monetary Fund to be just shy of $65 trillion. No less an organization than the CIA has come up with a similar estimate, at £65.8 trillion, so it must be about right.

So when the Bank for International Settlements (BIS) tells us that last year the total derivatives market grew by 44%, its fastest pace since the Basel-based bank started keeping records just over ten years ago, up go the antennae straightaway. And when that figure of $596 trillion crosses the radar screen, equivalent to more than nine times world GDP, the numbers are looking quite scary.

The money at risk is equivalent to a quarter of world output

Of course, the $596 trillion is a ‘notional’ amount. It’s the nominal value of all the underlying assets against which bets have been placed. But the actual amount of ‘real’ money at risk is still a massive $15 trillion, equal to almost a quarter of world output.

And within the individual areas there’s one even more eye-catching statistic. The value of contracts in credit default swaps (CDS) – a form of market insurance that investors can buy to protect themselves against corporate bond defaults – more than quadrupled last year to $2 trillion, covering a notional $58 trillion of loan debt.

The very size of all these numbers is just about enough to give the jitters to anyone, on the basis that when things can go wrong, they probably will.

When I wrote on this subject before, one respondent claimed that the topline numbers aren’t important because derivative markets are beautifully balanced. His theory was that if every derivatives position were hedging a risk relating to a specific transaction or asset, then derivatives would actually stabilise the world economy. All those noughts would be good news.

Sounds a bit too good to be true. And there are three reasons to be sceptical about this optimistic line of thinking.

Three reasons to be worried

Firstly, what we can call knowledge risk. That’s when derivatives players don’t know what they’re getting into.

A story on Bloomberg at the end of April summed this up pretty well. The chief finance officer of an Indian company was persuaded by his bank to start dabbling in the currency derivatives market. Although the CFO explained to the bankers that he didn’t understand how these products work, apparently they chauffeured him round and bombarded him with charts showing how his company could make a profit with a zero investment.

Too good to be true? Clearly it was. Three months later, two of the contracts had turned sour, incurring losses of $1.5 million and prompting the bank to issue a bankruptcy notice to recover the cash. Meanwhile, our poor CFO had no idea that these derivative bets could go so wrong. But he’s not alone. Indian companies could lose up to $4bn on derivatives, according to Hong Kong-based brokerage CLSA Ltd. Naïvety? Maybe. But we’re all good at repenting at leisure.

Which brings us onto the next potential problem, counterparty risk. That’s when the deal you’ve just done comes unstuck because the people on the other side of the trade can’t settle their side of the deal. A bit like backing the Derby winner, then finding the bookie can’t pay up because he’s run out of money.

Indian banks may lose up to $400m if they can’t enforce derivatives contracts they’ve set up with smaller companies, says CLSA. This is because 10% of these smaller companies may renege on their agreements because they haven’t the cash to settle the deals.

And this is just one country. BNP Paribas analyst Andera Cicione believes that total world CDS losses could hit $150bn. As the CDS market is unregulated, there are no public records showing whether sellers have the assets to pay out if a bond defaults. George Soros himself has warned this week that CDS counterparty risk is “a Damoclean sword waiting to fall.”

What’s worse – and here we come to the third problem – some buyers have now found out that the derivatives they’ve bought haven’t matched up to “what it said on the tin”.

The ratings agency Moody’s has just admitted awarding incorrect ratings to $4bn worth of debt instruments because of a bug in its computer models. Some ultra-complex derivative products, known as “constant proportion debt obligations” and thought up at the height of the credit bubble, incorrectly received over-optimistic triple A – i.e. top notch – ratings. And it took Moody’s nearly a year to find the problem.

As the derivatives market gets bigger and bigger, stories like these only make us ask: do the people who play around in it really know what they’re doing?

Turning to the wider markets: