Gold and Silver Futures:
Broken Price Discovery
By Dr. Jeffrey Lewis
Gold and Silver Futures: Broken Price
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
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.
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
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.
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