The financial backdrop to the current prices of precious metals like silver and gold is that trillions of dollars and other currencies have been created in order to reflate stock markets and attempt to create a recovery in the property market, which will only serve to re-inflate real estate prices back to their former unsustainable levels once again. This seems so utterly obvious, and yet it is rarely discussed.
Furthermore, far too many investors continue to rely on and even hope for the continuance of the status quo, despite the fact that their futile wishes for the financial alchemy to prevail — so that the “free lunch” creation of money from nothing but paper and ink will lead to more jobs and economic growth — have been increasingly frustrated.
Trading Volume Speaks Volumes
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 drops — not 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.
Regulators and Exchanges Permit Manipulation
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.
In the meantime, the bullish fundamentals for higher silver and gold prices are slowly but surely forcing their way into the psyches of the few market participants whose minds remain open to that possibility.
On the surface, the alleged ‘not for profit’ seller(s) has created the illusion of a bear market — fanned by a slew of market experts who fall right into line by describing a hundred reasons why the selling might have occurred — without ever getting close to stating the real reasons that the crash happened.
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. Traders operating on margin face considerable pressure to put up more money or exit their positions — typically ultimately dumping their positions at a loss. This is exactly why this harvesting goes on month after month.
Open Interest Offers Better News
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.
Uncharacteristically, dips have been bought aggressively — often intra-session — which seems especially unusual for silver.
Furthermore, awareness is growing among futures traders about retail and wholesale shortages developing in the physical market — combined with the widespread acceptance that central banks of the developing world are accumulating gold at a feverish pace.
This ongoing process is leading more and more investors to wonder why they are not also accumulating silver and gold for their own portfolios.
By Dr Jeffrey Lewis