15 February 2013

A Commentary on the Metals Markets: Gold and Silver Price Controls

This article excerpted below by Jeff Lewis seems to capture the nature of the recent action in the metals market. And the SP stock futures market, inversely. It is fairly heavy handed stuff.

I often watch 'the tape' throughout the day, and have been doing so, off and on, for the past fifteen years, and part time much longer, since 1976 at least.  What I see is how he describes it.

I have been through these cycles in metals and stocks many times, almost too many to count. And so I am not so overly moved one way or the other.  That is the benefit of no leverage, a proper allocation, and a suitably long time horizon. 

If I am concerned, it is because this sort of thing undermines the confidence in the markets and the financial system, and ultimately the currency.  And judging from the polls, the confidence and approval is quite low.

This fakery and gimmickry is not productive, and does not contribute anything to an economic recovery.  It does not recommend hard work, and savings, and sound investment. 

Quite the opposite, it teaches the arts of the conman,  greed and corruption, by example.  It makes the people cynical and ashamed of their leaders.  And that is corrosive of society as a whole, where the ends justify the means, honor means little, and oaths of office even less.

The plutocrats who recognize no justice but their own do not want to hear it, but this is the very essence of moral hazard.

"Consider for a moment the remarkably high volume of COMEX contracts traded during the days when the spot prices for gold and/or silver were driven sharply lower.

An illusion of weakness tends to prevail in these situations because the majority of precious metal traders do not seem to understand the difference between a paper claim and the real thing, nor do they seem to realize that only paper contracts or claims are being sold when the price of the precious metals dropsnot the actual metal itself. Basically, the futures contract seller cannot be forced to deliver physical metal, and so sellers can simply settle their profit or loss on the trade in cash.

Furthermore, the fact that such price drops are typically initiated by the dumping of huge swaths of paper contracts by proprietary traders working at giant bullion banks that are too big to bail and/or fail, makes them seem more like manipulative attempts to scare the precious metals market into a selling panic.

No one is actually selling real bullion during these allegedly “not-for-profit”-led precious metal sell-offs.  Instead, the paper market is moving the metal prices as the tail seemingly wags the dog.

Perhaps this was once a civilized way to discover the fair price of a commodity, but in today's age — regardless of the obvious and highly questionable concentration of only a few sellers comprising the entire net short position of the futures market — every market trades in a high speed, momentum-based, and computer program monitored environment.

This manipulative activity is also permitted by regulators and exchanges in the equities market via dark pools that spoof and front-run millions of unsuspecting penny stock day traders who seem caught up in the race to catch the elusive Red Queen of a good trade.

Practically every notable move lower comes from concentrated short sellers intentionally destabilizing the market to force precious metal prices down, although the so-called exports never seem to see it this way. Furthermore, no matter how blatant the sudden dumping is, it is almost always painted and viewed publically as a 'longs selling' event.

If all of that were not enough, predictable sell-offs almost always occur after margin announcements. As a case in point, maintenance margins were lowered last week, thereby providing an incentive for unsuspecting momentum or technical oriented longs to enter the market.

As usual, these weak longs were quickly harvested in less than two trading sessions after the margin announcement was made...

The good news, or the flip side, is that open interest has remained high in the precious metals futures markets, despite the numerous downdrafts. This indicates that stronger hands are accumulating..."

Jeffery Lewis, The Untold Reality of Gold and Silver Price Controls