Nickel's worth of free advice

The subject matter of today’s article is among the most arcane on which Bagholder has ever written… Many of you will likely close the window you are reading this in before finishing the 2nd paragraph. On the surface, the topic may seem a tad mundane; however, the life lesson to be gleaned is anything but. With that now out of the way, let’s discuss today’s topic: The Nickel market and how it is a microcosm of everything wrong in today's rigged financial markets.

The London Metal Exchange (LME) has been (for decades) the biggest direct exchange for a range of metals, including copper, aluminum, lead, tin, zinc, steel, and of course, nickel - to name a few. About a month ago, nickel, like many commodities lately, started rising sharply in price. On March 8th alone, an ordinarily stable nickel price rose 250% in a 24 hour period. Usually, the exchange wouldn’t care, but one of the too big to fail banks (JP Morgan Chase) was trapped on the wrong side of the trade. At the behest of a client it is their duty to vet, JP sold something they didn’t have (went short), and when it came time to deliver what they sold, they couldn’t. Under normal circumstances, they would have to repurchase it at current prices. In this case, that would mean JP would have to book, at a minimum, an 8 billion dollar loss.

Here in the real world, if one of us plebes makes a trade, and the market moves against us, we lose our money. In sharp contrast, the JP Morgans of the world make a trade, and the market moves against them; the exchange does everything possible to help them. In a righteous world, the LME should go to JP and demand they cough up a check for the 8 Billion. Instead, they halted trading immediately, to stop JP from incurring further losses.

Before reopening the exchange, they altered the rules by deciding to raise margin requirements. They used this exact mechanism to defeat the Hunt brothers when they attempted to corner the silver market in 1980. When margin rates get raised, the longs in the market have to pony up more money to keep their position. The exchange knows full well, most of the longs can't come up with the extra money (or they wouldn't have been trading on margin in the first place). The raising of rates immediately turns many of those longs into sellers, tipping the delicate balance of buyers & sellers towards the sellers. An increase in sellers leads to a falling price, which bails out the shorts (JP in this case).

When the financial elite are caught on the wrong side of a trade, the raising of margin rates has invariably worked as intended. It is “business as usual”, for the little guy to get levered out of his position, simultaneously allowing the wealthy bankers off the hook. Like most things in life though, it works until it doesn't. On March 8th, the LME was made aware their cronies over at JP got their tit in a wringer with the rising nickel price. So the exchange does JP a solid, and jacks rates shortly before re-opening the exchange. Only this time the price didn't fall as expected, because the longs were ready with the cash. WHOA - Stop trading, again.

With no drop in price to get JP off the hook, Bagholder suspects they got on the phone with the LME and said something along the lines of: " if you still want those (blue horseshoe loves…) phone calls coming your way with the hot stock tips, you best figure a way to get us out from underneath the 8 Billion dollar loss." So what does the LME do?

After keeping the exchange closed for another week, they finally re-opened it with caps on how much price fluctuation was allowed each day. In effect, they put a collar around the price. Speculators lose interest in a market when you do that because it is difficult to make any money with limited price movement. The LME expected the price caps to induce selling by the bored speculators, causing the price to fall, and getting JP much-needed relief. However, just like the raising of margin requirements, the price caps failed. WHOA - Stop Trading, again!

Having closed the market a couple of times now and still unable to get JP off the hook, they do the unthinkable. They retroactively canceled completed trades by refunding the purchase price paid by some of the longs. Over 4 Billion dollars worth of already completed transactions were retroactively canceled. Think about that! You buy a position for a dollar, it goes to 25 dollars - and the exchange says, "yeah, we know, your position is worth 25 dollars - but you can't have the twenty-five, so we will give you your dollar back, here ya go." In the parlance of our time, WTF?

Is there any world out there where John Doe loses some scratch on a trade, and the LME rips the winnings out of JP’s account to make John Doe whole? Of course not. The hypocrisy is reprehensible. The JP’s of the world get to swim all over the financial seas unfettered, knowing the exchange has life preservers if need be; the rest of us have to swim the same waters wearing ankle weights.

Bagholder is astounded anyone would trade anything on the LME ever again. Can you imagine walking into a casino, putting a dollar down on the green zero at the roulette table, watching it hit, then having the Casino boss tell you they aren't going to pay?? Not to worry, though, as they will be gracious enough to give you your dollar back. Who in their right mind would continue to gamble there?

So Bag, who cares about the nickel market anyway? It's small potatoes. Yes, that is true, except for the fact a precedent has now been set. Thanks to the default in the nickel market, there is a tried and true mechanism in place for the exchange to deal with the imminent default in the Gold & Silver Markets. Once again, it will be JP (and some other banks) who are on the short side of the trade, this time to the tune of 100’s of billions. They will need some bailing out from the exchange and likely the government as well. Bagholder is sure they will get it, and you paper longs, if you're lucky…lol… just might get your dollar back.

With all this in mind, here is your nickel’s worth of free advice: If you hold paper gold or paper silver via the LME, CME, SLV, or GLD, these entities have shown you with the nickel market default, who they really are. You could not ask for a clearer illustration. Take heed. You have been warned - get out NOW, and turn it into physical metal. Otherwise, you better lube up, cause there is an industrial size reaming headed your way.