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NICKEL PLATED DOMINOS

On August 16th, Nickel had its biggest price gain since January 2004, prompting the London Metal Exchange to impose restrictions on trading to ease a shortage of the metal.

What exactly is the significance of all this anyway?

First, this schematic shows the many varied uses of nickel:

Most of us encounter or interact with “nickel” every day because it’s a key component of stainless steel. To most in the western world, this might mean little more than the proverbial “kitchen sink.” But stainless applications go much further than this. Stainless steel systems [tubing, vats] are absolutely required in the manufacture of pharmaceuticals, most foodstuffs and virtually all of the beverage industry.

What some might fail to realize is that nickel has other applications ranging from building and construction to widespread use in electronics, and particularly batteries that power a wide range of mobile devices, including laptop computers.

Why this is all so important is not so much the ACTUAL PRICE RISE as revealed last Wednesday, when the Financial Times reported;

Nickel spikes on panic short covering
By Chris Flood
Published: August 16 2006 11:19 | Last updated: August 16 2006 17:54

Nickel continued to dominate action in commodities on Wednesday as the cash price of the metal spiked to $35,000 a tonne.

Dealers reported panic short covering - the third Wednesday of the month and the most important day for open interest. The ‘TOM/next’ premium allowing short positions to roll over one day surged to $1,000 a tonne from about $100 just weeks ago...

What is significant is the ‘TOM/next’ premium cited above. It represents the cost of financing a short position for those who have sold metal they do not own. THE LBMA HAS CAPPED THESE CHARGES AT 300 A TONNE PER DAY and, in effect, interfered with or eased the financial pain that the shorts would otherwise be subject to. This is the antithesis of free markets, folks.

The important development was the LBMA’s response – the price capping; let me explain:

• The largest short position on London Metals Exchange [LME] nickel accounted for as much as 39 percent of open interest in nickel futures for the contracts expiring Oct. 10, according to LME data on Aug. 10.

• For the same expiry date, there are four other short positions accounting for as much as 46 percent of open interest. Open interest is the total number of option or futures contracts that have not been closed, liquidated or delivered.

As the U.K. Times On Line points out,

“The “shorts”, investors who sell metal they don’t own in the expectation that the price will fall, are in dire straits — they cannot deliver the metal they owe. The price has soared to almost three times the long-term benchmark of just over $9,000 a tonne and people are talking darkly about a squeeze, about hidden stockpiles.

Without stocks, the LME’s forward nickel contracts would have no underpinning and the exchange would have to suspend trading…..”

Interestingly, the reason that the “shorts” either cannot or have not covered their positions is that the London Bullion Market regulators have [negligently?] allowed this LARGE, CONCENTRATED SHORT position to develop, maintain itself and grow even while physical stockpiles of deliverable metal in LBMA warehouses were dwindling to critical levels:

Existing stockpiles of nickel have been drawn down to the point where less than one day’s global demand is now on hand.

So the real question is, how is rewarding folks that have sold-something-that-does-not-exist going to help this situation?

The answer to this question is quite simple – market rigging, categorically, will not alleviate the problems now facing “out of control, derivative laden [rigged] metals exchanges.”

As my metals pundit friend Rhody explained in a private e-mail to me,

“Here's the latest little fiasco on the paper derivative scene.

Apparently, some entity(s) have been naked shorting nickel to the point where they are now trapped. (Naked shorting is selling futures contracts for delivery of something you do not have. It is a form of fraudulent selling) Naked shorting in a market with a physical deficit of supply makes no sense, unless the object is price suppression for political reasons. The only other possibility is stupidity and greed. It looks like the powers that be are moving to assist these naked shorts.

I might add that there has never been a case on a futures market for the PTB to come to the assist of a speculator with a naked long position (a buyer who bought too much and couldn't come up with the rest of the cash when delivery was due). All this supports my contention that futures markets generally are derivative systems designed to suppress the prices of all commodities. Imagine what the price of nickel would be if there had been NO naked shorting to augment supply in paper form. Hence the nick name CRIMEX for COMEX.

Why the price suppression? If the financial sector can rig the prices of real things in the economy, they can hide a great deal of the real inflation that the fractional reserve fiat money system creates. The trouble is, this has been going on for 60 years now, and the cumulative inflation is now so high that producers of real goods are opting out of the game.

Hence, the forests are returning to Eastern North America as farmers stop growing crops at less than their costs of operation and lumber jacks stop cutting trees that are worth less than the effort to cut them (an old growth pine tree is worth only $100 on the market these days), and Africa starves because their commodity exports aren't worth exporting. There is a shortage of most metals now because mining companies stopped looking for ore deposits to replace reserves in a futures driven metal market that made them eat low prices for their output but let their costs soar.

I know most of you don't care for this stuff because it doesn't seem to affect your day to day lives, and as first worlders, you tend to benefit from the low derived prices. Your well being depends on low consumer prices, because your incomes are derived from a services dominated economy. Get real. That economy is false. If the derivative systems and the hold of the G8 on the world economy ever falters, you will watch your fiat prosperity disappear in a hyperinflationary explosion...”

I’d like to share a few more sage words of my friend Rhody – words I’ve shared with you all before but they’re worth repeating again and again,

“I say, wait until COMEX [or LBMA] stockpiles are gone, and there is a default on COMEX [or LBMA] that eliminates the futures price discovery system and we should see a fair market price fairly quickly, and I do mean "FAIR" market price. A price actually determined by true supply and demand fundamentals.” [RK emphasis]

That day is fast approaching; not only for nickel but nickel may end up serving as the first domino – that seals the same fate for copper, then toppling silver and then gold and ultimately topples U.S. Dollar [fiat] hegemony.

Today’s Market

Overseas equities began the week on a sour note with Japan’s Nikkei Index losing 136 points to close at 15,969. North American markets had troubles of their own with the DOW giving up 36.42 to 11,345.05, the NASDAQ dropping 16.20 to 2,147.80 and the S & P losing 4.80 to 1,297.50. NYMEX crude oil futures gained 1.31 to end the day at 72.51 per barrel.

In foreign exchange, the U.S. Dollar Index fell .45 to 84.53.

Interest rates were 1 – 2 basis points lower across the curve with the benchmark 2-year government bond ending the day at 4.86%, the 5-year bond at 4.77% and the 10-year bond ending at 4.82%.

Precious metals rallied with COMEX gold futures ending the day up 13.70 to 626.60 per ounce while COMEX silver futures were ahead by .30 to 12.32. The XAU Index added 6.90 to 147.62 and the HUI gained 17.58 to close at 344.71.

Wishing you all a pleasant August evening and an enjoyable evening!

Rob Kirby

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