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Commodities Soar as Investment Banks Shutter Prop Desks

-- Posted Monday, 13 September 2010 | | Source:

By: Dr. Jeffrey Lewis


News that JP Morgan, along with other investment banks, would shut down their proprietary trading desks hardly earned a mention in the press, despite their enormous impact on pricing in the commodities market.  Now, about a week after 20 commodity traders were laid off, commodity prices have been edging higher than ever, lending credence to claims that gold and silver prices were depressed by international banking institutions.


The Shining Truth


JP Morgan expects the move will be completed in less than two months and has already notified its traders that they'll have to seek new jobs at a different firm.  Other companies, including Citi and Bank of America, are moving their prop trading desks to a different branch of the company.  In those institutions, previous prop traders will work to trade for the bank's clients, not the bank itself, distancing themselves from the goals of the global banking system.  Rather than work to suppress prices on the macro level, prop traders will have to work at the micro level, where their objectives switch to generating market-beating returns.


Since the story broke on August 30, both silver and gold have been on a tear towards new records.  Silver rose more than 5% to just a shade under $20 per ounce, while gold continues to fiddle with the psychologically important $1250 price tag.


Should downward resistance continue to evaporate going forward, gold and silver should push through the usually strong fall season to reach into recent record territory and form solid support above $20 for silver and $1250 for gold.  At that point, it is anyone's best guess as to how high each will climb, especially with the international banking interests getting out of the way of what is a naturally occurring market phenomenon: the move to hard assets.


How the Market Moves Forward


Suppression in the metals markets should be evident by the growing disconnect between premiums on physical metals and the price of spot metals market.  Whereas investment banks can easily collude to move prices at spot, the network of largely disconnected dealers around the world cannot be so easily influenced.  For this reason, higher premiums account for a difference in willing buyers and sellers at current spot prices, which indicates that the spot markets are trading at a price in which there is equilibrium in buying and selling interest, while buying interest remains markedly higher at the retail level.


As commodity prop traders lose their jobs, and are subsequently moved to more benign positions within the investment banking community, spot prices should rise to reflect the considerably higher prices paid at the retail level.  Such a move would push both silver and gold above and beyond important dollar figures like $20 and $1250, where they can then move freely with little visible resistance. 


All said, the jumps in price since August 30 will come to be insignificant, while the future lays out a very well defined trend toward higher and higher prices.  The markets have been freed.


Dr. Jeffrey Lewis

-- Posted Monday, 13 September 2010 | Digg This Article | Source:


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