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Gold and Silver Futures: Broken Price Discovery

-- Posted Friday, 9 November 2012 | | Disqus

By Dr. Jeffrey Lewis

Most futures traders have learned to accept or pay cash in exchange for rolling their futures contracts out when delivery approaches. Just about everybody now knows that physical delivery cannot actually happen in the silver market.


Not even close to enough actual metallic silver exists to satisfy all of the outstanding futures contracts. Those who trade futures are captured by the paper market and would rather not be part of a default – so they ultimately lose.


Most Traders Stay Silent About Manipulation


Traders typically depend on profiting from a market system as it currently exists, and this explains why so many traders, even the most public and vocal among them, tend to remain silent about the unbalanced structure of the paper gold and silver futures market.


Some traders just turn a blind eye to the situation, while some of them even adamantly insist that the impact of manipulation on the silver market is negligible.


Perhaps if you are a deep pocket long trader who looks the other way and plays the chances of receiving premium over position as an incentive to roll the contract, some money could be made. There have been rumors of this happening - although unconfirmed.


Price Suppression Facilitated by Futures Market


Nevertheless, the fundamentally unbalanced process of the seller of a futures contract being able to make a cash payout in lieu of delivering physical metal simply facilitates price suppression.


Not-for-profit agencies that can print enough Dollars to pay for any trading losses they might incur can use this mechanism to keep silver and other strategic commodity prices artificially low.


As long as such agencies continue to be able to cover their trading losses with manufactured and intrinsically worthless paper or electronic cash, the legitimacy or integrity of the COMEX and the Chicago futures exchanges can be maintained a little while longer.


As GATA and others have been pointing out for years, most miners are also complicit in this price suppression process, as well as those who business it is to evaluate and recommend them.


Key Data Releases Still Shock the Market


Meanwhile, momentum traders will remain subject to what happens on almost every major data release. Consider last week's Non-Farm Payrolls release as an example. One minute before the data release all orders are pulled and trading volume is virtually non-existent in the barren pre-release market.


As the data is released, the algorithmic traders get it first, so they slam large orders into the market. A second or so later, real traders respond by adding to these orders at market and the computerized algorithms start to sweep in their profits. This drives the price as stop loss orders are triggered and slower or more cautious traders start to enter the market.


For the last NFP release, it was well known that the number would be pretty much the same as October’s result. Revisions would also not matter much, now that the U.S. election is over. Nevertheless, when the release actually happened, the gold and silver got slammed.


All of this trading occurs in parallel with the historically loose monetary policy adventure devoted to debasing the U.S. Dollar. Not only will this policy lead to further mispricing for just about everything, but its primary risk will be to awaken the beast of hyperinflation in the United States.


For more articles like this, and to stay updated on the most important economic, financial, political and market events related to silver and precious metals, visit

-- Posted Friday, 9 November 2012 | Digg This Article | Source:

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