Silver corrects

2011-MAY-07

Over the last two weeks silver has fallen from just under $50 to under $40, following a meteoric rise. Much of the fall has been engineered by the big commercial dealers triggering stop-losses, giving them easy profits. They have been extremely effective in achieving this objective, picking times when mainstream markets were shut for public holidays. The result is that bullish speculators are now full of doubt having learned an expensive lesson about price manipulation.

Of course, powerful groups conspire to manipulate prices. It is usually profitable to do so, and incidentally, conspiring with powerful financial agents is the way government routinely conducts its business. The speculators have been further disadvantaged by escalating margin calls. Yet again, these are factors other than bullion’s fundamentals that determine who wins and who loses. Business in the futures markets is almost entirely speculative in nature, the real business being in the physical; and over time, speculative business has grown to be far larger than the cash market. The futures markets are little more than casinos.

The establishment has had two basic reasons to manipulate precious metals markets: to remove all monetary credibility from precious metals, and to protect the short positions of the central and bullion banks, both of which run large fractional reserve systems with their customers’ metal. But instead of hedging these liabilities as logic dictates, the financial establishment increases them by short-selling futures and options.

This dangerous strategy can only be managed so long as there are no price shocks to the upside. After all, the price of gold has increased fairly consistently over the last eleven years without any noticeable market failure. The reason for this is that the bullion banks and commercials in the futures markets naturally run short positions, making their money in bull markets by selling dear and buying cheaply. They have the best market intelligence and with the deepest pockets they control the rise in prices, and the mug-punters are an easy, profitable target.

Now that the futures business is considerably larger than the physical, the futures market is the tail that wags the dog. Anecdotal evidence tells us there are severe shortages of physical metal, which suggests that both gold and silver are significantly under-priced as a result of futures manipulation. But so long as the adjustment to higher prices is gradual, there is no reason why they cannot rise to a more realistic level without market dislocation. The pace of adjustment must allow the commercials and LBMA members to trade profitably, to allow them to offset losses on their short positions with trading profits.

This status quo was upset when silver rose rapidly to nearly $50 recently, and this is why the commercials had to get the price back down. Among the speculators, the talk is now of backing red, because that is the new lucky colour, so their new price targets are all lower. But for those who have good reason to be frightened of fiat money, what an opportunity it all presents!