Erik Townsend's Guest Article Featured on iTulip

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Lemonyellowschwin's picture
Lemonyellowschwin
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Erik Townsend's Guest Article Featured on iTulip

iTulip is a great site run by Eric Janszen, a very studly guy.  So kudos to Erik T for this featured guest article:

http://itulip.com/forums/showthread.php?15267-Debunking-the-Precious-Metals-Fear-Mongering-Campaign-Erik-Townsend&p=158420

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Re: Erik Townsend's Guest Article Featured on iTulip

Erik's article also appeares here:

http://www.financialsense.com/editorials/townsend/2010/0419.html

Great job Erik!

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Re: Erik Townsend's Guest Article Featured on iTulip

Congratulations, Erik!  It looks like a clear, well-laid out article.

-pinecarr

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Rebuttle to Eric

Here is a response to Eric's article posted on financialsense.com by Chris Powell

 

A Reply to Eric Townsend:
You Contradict Yourself
by Chris Powell, Secretary/Treasurer, Gold Anti-Trust Action Committee Inc.
April 20, 2010

If one reads closely his April 19 essay, "Debunking the Post-CFTC Precious Metals Fear-Mongering Campaign," Erik Townsend seems to concur with the Gold Anti-Trust Action Committee more than he disputes it.

Townsend acknowledges, just as CPM Group founder Jeffrey Christian did at the March 25 hearing of the U.S. Commodity Futures Trading Commission, that the so-called "physical" gold market in London really isn't very physical at all but rather is largely a matter of derivatives trading. Townsend quotes Christian's testimony to the CFTC that, in calling the London market a "physical" market, the experts in that market -- Christian specifically included himself -- "don't help" public understanding. That's a polite way of saying that there is something deceptive about that market.

But then Townsend contradicts himself and Christian, writing that what Christian told the CFTC "should come as no surprise."

Well, that "physical" means "paper" and that the supposed experts really "don't help" public understanding just may surprise people who think words carry their ordinary meaning and that experts are aids to understanding.

And if Townsend really thinks that the unphysical nature of the London "physical" market is so obvious, why does he urge gold investors, as GATA does, to get real metal rather than gold paper from London Bullion Market Association or from other gold derivative dealers? Townsend's recommendation is an acknowledgement that gold investors could well be deceived by the gold paper market.

Townsend is right that derivatives have been debated for a long time. But he is wrong in suggesting that the issue is old hat. Indeed, the regulatory and legislative hearings of the last year, including the CFTC's hearing last month, have suggested that even the people whose very responsibility is to know about derivatives don't know much about them as they should.

Townsend is also wrong in suggesting that GATA has no idea about derivatives. In fact, GATA long has had a pretty good idea about how derivatives work -- ever since in 2000 we published our Gold Derivatives Banking Crisis report (see http://www.gata.org/files/GDBC_Report.pdf) and began calling attention to Federal Reserve Chairman Alan Greenspan's testimony to Congress in July 1998, where he made his famous comment that central banks were ready to lease gold in increasing quantities to suppress its price.

GATA often has noted that Greenspan's testimony was about far more than gold -- that Greenspan's main purpose was to dissuade Congress from regulating derivatives generally, derivatives generally being the mechanism of commodity price suppression and market rigging. (See http://www.gata.org/node/8052.) We construed Greenspan to be telling Congress not to worry about derivatives because central banks themselves had derivatives under control and were even using them to manipulate strategic markets. Ordinary regulation by other government agencies might have exposed this.

In regard to gold, derivatives -- from ordinary futures and options to more elaborate instruments, including the paper contract trading in the "physical" gold market that really isn't very physical at all -- have been the mechanism for creating the illusion of infinite supply of what is really finite, thus cheating ordinary investors looking for a hedge against monetary debasement. This illusion has cheated commodity-producing developing nations as well. The British economist Peter Warburton explained this in 2001 in his essay "The Debasement of World Currency -- It Is Inflation, But Not as We Know It." (See http://www.gata.org/node/8303.) But markets generally do not yet understand this. If they did, investors long ago would have fled markets so much manipulated by derivatives trading.

Instead investors are still getting fleeced there.

Townsend tries to distinguish between the paper gold and real gold markets, as if what happens in the former shouldn't bother players in the latter.

But GATA insists on showing the connection of the two markets, since the paper market is the mechanism of manipulating the market for real gold.

Many people buy paper gold under the misimpression that they are buying real gold rather than a liability of the paper gold seller.

Indeed, after insisting that everybody already really knew what Christian told the CFTC -- that the "physical" market is mostly paper -- Townsend writes that "many investors are confused about the various investment vehicles available to them, and/or don’t understand the real risks inherent to the instruments they’ve already invested through." 

As GATA has done for years, Townsend urges gold investors to get their hands on their gold and not rely on others to hold it for them. But if gold sellers, like those who operate in the London "physical" market, who purport to hold your gold for you are really so reliable, as Townsend suggests, why does he urge people to take delivery?

The official documentation of Western central bank interest and policy in suppressing the gold price is so overwhelming -- see http://www.gata.org/taxonomy/term/21 -- that it should prompt a little more curiosity in those who, like Townsend, seem to think that a paper market that misleadingly calls itself "physical" is just fine and couldn't possibly have other misleading purposes.

story end
© 2010 Chris Powell

Chris Powell is secretary/treasurer of the Gold Anti-Trust Action Committee Inc.

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Re: Erik Townsend's Guest Article Featured on iTulip

I just spent over a half hour reading Erik's article. Well written Erik! But what I still don't understand(and I apologize if it's been discussed on the site already) is why there is a paper market for physical goods? Like oil, and gold, and silver, and pork bellies of all things! Shouldn't it be if you want something, you buy something? Isn't that markets are for - bring sellers and buyers together?  It's almost like you go to a supermarket with a friend, and instead of buying say tuna, you bet your friend what the price of tuna will be in 3 months. I just don't get, but I'm willing to listen...

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Re: Erik Townsend's Guest Article Featured on iTulip

Erik must have done something right to get a response from (what looks to be) a big player in GATA already. Thats awesome......I always love seeing when a regular guy can get a big group to come out and debate....good stuff

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Re: Erik Townsend's Guest Article Featured on iTulip

Unfortunately, the webmaster at FinancialSense goofed. The correct (final) version of the article that is posted on this site was posted there for a while, and for some unknown reason the copy on FinancialSense has now reverted to an early draft that is full of error.

Please don't forward the FS link around until it's fixed. It's middle of the night in California now so this won't get fixed till morning, unfortunately.

FinancialSense asked me to write up a reply to Powell's rebuttal, which I'm working on. But I for one don't think that me arguing with Powell solves the real problem. I'm working on brokering a GATA-Christian debate on FSN but nothing definitive yet. Stay tuned...

Thanks for the kudos, guys!

Erik

 

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Re: Erik Townsend's Guest Article Featured on iTulip
Erik T. wrote:

Unfortunately, the webmaster at FinancialSense goofed. The correct (final) version of the article that is posted on this site was posted there for a while, and for some unknown reason the copy on FinancialSense has now reverted to an early draft that is full of error.

Please don't forward the FS link around until it's fixed. It's middle of the night in California now so this won't get fixed till morning, unfortunately.

FinancialSense asked me to write up a reply to Powell's rebuttal, which I'm working on. But I for one don't think that me arguing with Powell solves the real problem. I'm working on brokering a GATA-Christian debate on FSN but nothing definitive yet. Stay tuned...

Thanks for the kudos, guys!

Erik

 

A debate on FSN would be super. Your article was a great read. My take is that there is manipulation with all things paper, that a LOT of folks who think they are in gold aren't in gold - so the GATA sh*t stink though off isn't a bad thing since it raised awareness and helped those who thought they were in realize they are in a paper ponzi scheme.

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Re: Erik Townsend's Guest Article Featured on iTulip

Joemac,

The better question is why shouldn't there be a paper market for physical goods.

If there are people who want to bet that a commodity will rise, and people who want to bet that a commodity will fall, then there is reason for a paper market.  A paper market allows the bets to be placed.  These folks are not interested in owning the physical goods.  They are interested in making money by placing bets about whether a commodity will rise or fall.

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Re: Erik Townsend's Guest Article Featured on iTulip
joemanc wrote:

I just spent over a half hour reading Erik's article. Well written Erik! But what I still don't understand(and I apologize if it's been discussed on the site already) is why there is a paper market for physical goods? Like oil, and gold, and silver, and pork bellies of all things! Shouldn't it be if you want something, you buy something? Isn't that markets are for - bring sellers and buyers together?  It's almost like you go to a supermarket with a friend, and instead of buying say tuna, you bet your friend what the price of tuna will be in 3 months. I just don't get, but I'm willing to listen...

How about an example of a farmer on the west coast.  He might choose to lock in a price by selling futures at the CBOT against his coming harvest early in the growing season.  Once his crops are near harvest, he can buy back his futures.  By doing this he can stay hedged during the lifecycle of the crop and also avoid having to make a distant delivery of his crops.  He can do this as long as he knows the local price for his good is approximately equal to the official market price.

On the other side of this trade might be a food processing company on the east coast.  They could choose to buy futures today to lock in their costs several months in advance under the assumption that they will sell their futures when it is time to buy the goods locally.  They are only using futures contracts to limit their sensitivity to price movements.

The real question is do the paper and physical markets need to be mixed?  I believe one of the main arguments for this is would be that for two parties to agree on physical settlement beforehand would greatly limit the liquidity pool and drastically increase the bid/ask spread.  This market would then work more like the opaque OTC market.

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