16 October 2008

Spreads Between the Central Commodity Markets and Market Prices Continue to Widen

One of the hallmarks of the centrally-planned economy is a discrepancy between prices on paper, and prices in the marketplace. The examples of this are all too familiar to students of the economy of the former Soviet Union.

For whatever reasons, the US is beginning to go down that path, and perhaps shockingly so. We think a great deal of this is a temporary market dislocation overall as funds unwind positions under duress.

However, in the case of silver, the huge short positions by three banks suggest this is central planning and price fixing, not price discovery tied to market demand.

Silver: Gap Between Paper and Physical Prices Widening Daily

The logical question is "why don't these large dealers simply purchase contracts on the COMEX and stand for delivery?"

One factor is the incremental cost of fabricating the large bars from COMEX into forms more palatable to the retail market, ie. 100 oz, 10 oz bar and 1 oz rounds.

Another could be the anecdotal stories of COMEX reluctance to settle in delivery, and pressuring traders to accept 'cash.'

A potentially explosive situation worth keeping an eye on, for sure.

We wonder in what other markets this condition might repeat. Gold looks likely. Oil? Housing?

Where does statism end once it becomes comfortable with setting market prices, as in the Wage and Price Controls of the 1970's which so many have forgotten about today.

Are the large commodity producing nations allowing the bank cartel to set the prices at which they can sell their goods? Strange, and shame on them if they do.

Its a Brave New World, with many vestiges of the all too familiar.