Commodity Trade Mantra

Precious Metals Futures – Beyond the Madness

Precious Metals Futures - Beyond the Madness

Precious Metals Futures – Beyond the Madness

World silver spot prices are determined by a once sacred, but now inept, process. While the evolution of futures contract for the modern age helped facilitate the industrial revolution, it has now been completely usurped and abused. This is especially the case in gold and silver, even to the point where confidence in this market threatens to turn the world financial system upside down.

The Heart of Darkness

For now, world price discovery for precious metals resides at the COMEX, owned by the for-profit Chicago Mercantile Exchange (CME).

It is here where the spot price is determined and the heart of technical analysis is controlled.

No other exchange currently holds as much power as the CME. While it is possible that this power could change, the owners- the CME and the giant speculators (hedge funds dressed up to look like banks) are too big to fail. Additionally, loose regulation is free to profit here, which makes change unlikely.

Silver in a Futures Contract

The futures contract is a potentially beautiful thing – a really good idea. Unfortunately, trading of these contracts has become infiltrated by players with no business belonging there to begin with.

Practically anyone can take out a contract for future delivery. For every new buyer, there is a seller who takes the other side.

The spot, or current price, is calculated somewhat obscurely and is rather like a net asset value – similar to what the Sprott Physical funds have.

Originally, the futures were set up to level the playing field and smooth out price volatility by allowing producers and users to come together and hedge production or lock in prices.

The exchanges or platforms are now for-profit entities. They make money by allowing whoever wants to participate – including giant multinational quasi banks/investment and hedge funds, aka hot money flows.

These big players play the momentum and rarely close out positions. They simply roll them into the future. Very little metal is delivered relative to the amount of paper (largely unbacked) positions outstanding. If shorts (sellers) were forced to go out and buy the silver needed for delivery, the system would break.

The delivery mechanism itself is a reflection of the good intentions of a contract to begin with; it is quite controlled and well structured.

Physical Demand Profile

Silver has a strong demand profile. Industrial demand is ongoing in spite of severe economic downturn.

Physical investment demand rises on falling price (the opposite occurs in just about everything else), a fact that is relatively unknown. Analysts are vaguely aware of investment demand and industrial use – but never acknowledge competition for physical.

The assumption is that it is easy to acquire and then take delivery of a futures contract if needed. In other words, because price and price performance underlie commentary, silver must be plentiful.

In reality, while the logic makes sense, the relationships are totally distorted.

The Future of Gold and Silver Futures

A wide ratio exists between the amount of paper represented by the mostly unbacked futures contracts and the actual physical metal available anywhere for delivery. As such, these futures markets are an accident waiting to happen.

The potential triggers are numerous, ranging from the mild shift away from COMEX toward more physically oriented to outright default or failure to deliver.

Somewhere in between, investment for physical could drive up premiums on the street. Otherwise, an industrial may begin stockpiling in reaction to a delivery delay. Each could put more pressure on alternative delivery mechanisms and the physical market would break free of its paper shackles.

Price discovery on the largest precious metals futures trading system goes on protected by a financial system and legal system desperate to protect its importance. It is fraudulent. The only positive is that manipulation cannot go on forever and there is still time to act accordingly.

Precious Metals and the Lost Generation

“There are a thousand hacking at the branches of evil, to one who is striking at the roots.” – Henry David Thoreau, 1846

Institutional trust and confidence continues to unravel as less and less participation, combined with isolation, threatens the middle class. As in all major crises throughout Anglo American history, the weight will be carried on the shoulders of the pragmatic caught in the middle.

The Hidden Crisis

It is unprecedented that 50 million people in the United States rely on food assistance. Or that nearly 50% of all Americans receive some form of assistance from the government.

Jobs and Production

Labor participation has fallen to levels not seen in over three decades.

October 2013 saw, in the midst of a quasi-government shutdown, a sad reality.

Two events surrounding the Electronic Benefit Transfer (EBT) of food assistance stood out. The first was the programs shut down for one day, causing shoppers to abandon grocery carts while in checkout lines. The second was the following week, when card limits were temporarily removed.

The first case was a demonstration of fear, the second one of greed and panic.

The degree of poverty among children is equally astounding. If it were not for electronic transmission of benefits, the psychological profile of the nation would be much more aligned with depression. This scenario is in comparison to the giddy celebration of equity all-time highs or the so-called housing recovery.

Stealth Inflation

The return of rational exuberance to equities is an artificially induced phenomenon. Every day, intervention via primary open market operations occurs to paint perception.

Housing has “returned” by means of the invasion of private equity and hedge fund managed, all-cash, purchases. The result has been not only a pricing out of the middle class, but the creation of a rent bubble and landlord disaster, creating even more of the disenfranchised.

Equally bizarre is the obvious rise in real inflation. Estimates of 6-7% annually are likely conservative.

CPI is a total disaster outside of ivory towers. The unevenness of asset price inflation is not lost on those who eat, use energy, or borrow for education. Health care is about to be another eye opener for those who have not had the need to know the real cost behind the broken system.

The Painful Collapse

Indeed, the middle class is becoming more and more disenfranchised by the current system. Those with retirement assets are most likely the next to be marginalized.

Pensions, 401K’s, money market accounts, and savings all represent the lowest hanging fruit for a soon to be even more desperate (and cornered) monetary complex.

Disengaged, get a glimpse of the system’s fragility.

Social Unrest and Economic Collapse

Much has been noted about the preparations underway (under the guidance of FEMA) to contain the potential mobility of the masses in case of disaster.

The fact that FEMA has been stockpiling ammunition is not lost on observers.

While hyperinflation or a currency crisis can take months to develop, it will ultimately catch most by surprise. Of course, those who are prepared will not be welcomed.

Hoarders will be blamed. Metals could be banned and/or taxed and, eventually, re-priced far from the futures exchanges.

The return of precious metals to monetary status will not be welcomed by those who stand to lose the most. With or without official sanction or acceptance, precious metals will serve their role once again as the reverse wealth effect kicks into high gear on the unsuspecting, and soon to be scorned, masses.

Courtesy: Dr. Jeffrey Lewis

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