Oct 26, 2007
Last month I mentioned how the drop in interest rates would help the economy in one way but would also have some negative side effects--such as a drop in the value of the dollar. With the dollar worth less and less, this means that the price of world commodities, such as oil and metals, would go higher. Inflation of commodity prices means that the dollar is deflating in value.
Today we are seeing some record high prices for gold and silver. Gold is selling at $785/oz and silver at $14.28/oz. Oil has hit $92/barrel and is expected to go over $100 soon.
Silver analyst, Ted Butler wrote on October 23 about a class action law suit against Morgan Stanley over a very common practice which, if you and I did it, would result in a lot of prison time. Many people buy metals but have no safe place for storage. So they call up companies like Morgan Stanley and arrange to purchase and store, let's say, 500 pounds of silver. Morgan Stanley is delighted, and gives them a certificate stating that their silver is safe and sound in their warehouse.
The problem is . . . they don't purchase any actual silver, nor do they actually store any silver bars on their behalf.
This does two things: first, those who buy metals are presuming that if enough people purchase the same metal, the demand will push up the prices. After all, that is the purpose of an investment like this. But if Morgan Stanley purchases NOTHING, it makes no difference to the marketplace how much demand there is. No metal is taken out of the marketplace, so it is as if no new demand has taken place with such purchases. Thousands of people make such purchases, but it makes no difference upon the market supply of the metal. So the price is kept low artificially.
The second result of this is that the financial institutions treat the money that is given for the purchase of metals much like a bank deposit. They then use that money to make more money. The difference is that instead of paying people interest on their money (like a bank would do), the institution often CHARGES people storage and insurance fees. Charging for what service? There is no metal to store or insure. It's just another way to make money by pretending to provide a service.
That is called FRAUD. The only way, Butler says, to ensure that you are not being ripped off is to demand a warehouse receipt showing the actual serial number of the bars in their warehouse. Some years ago, when Butler warned the public about this fraud that was taking place, thousands of people sent letters making such demands, and they were given the runaround. So they finally sued. Morgan Stanley finally settled out of court without admitting any wrong-doing. Read the full story at the site below:
This appears to be common practice in the business, and it probably accounts for the low price of commodities, particularly silver. Silver is actually scarcer than gold today, because while gold is accumulated, silver is used in industry. Some day the guacamole will hit the fan, and industry will not be able to buy enough silver to satisfy its ever-increasing demands. But meanwhile, there has been much price manipulation going on behind the scenes, including this latest one with Morgan Stanley.
If news of this fraud receives enough publicity, it will force the government overseers to stop looking the other way. In fact, I wonder how much this Morgan Stanley case may be affecting the market right now. Are these companies getting nervous? Are they actually starting to purchase metals to store in their warehouses before people wake up? This may be one reason why the price of gold and silver has risen to record levels in recent days.