Almost 45 years ago, I was hired by Merrill Lynch as a commodity broker. That started a lifelong interest in the futures market. Over this period I have watched while futures trading became a more powerful force than supply and demand in establishing the price of many commodities. I spotted this in COMEX silver nearly three decades ago and have seen it creep into most other markets. In the “old days” (30 to 40 years ago) it was strictly supply and demand that determined price, now it’s derivatives.
The control of this influential derivatives trading has been assumed by mega financial institutions whose interests are not aligned with actual producers and consumers of commodities. On the one hand we have the big banks, typified by JPMorgan, who have recently admitted to manipulation and control of markets. Opposite them are massive but mindless computerized trading programs that establish or liquidate giant positions in a flash. That’s why I conclude that oil and every other commodity have caught the silver disease where the price has nothing to do with supply and demand.
Oddly enough, the regulators are finding that the big banks have manipulated every market except silver (and gold). I know firsthand that the regulators (including the CFTC and CME Group) have been made aware of the silver manipulation for decades. They have investigated at least three times on a formal basis, primarily because I instigated each investigation. How does the CFTC or CME admit something is amiss in silver now after openly certifying it found nothing wrong on three previous occasions? They can’t without admitting they failed at their most important mission – preventing manipulation. Another reason is that damage to outsiders would be too easy to prove. A flood of private lawsuits would occur should the CFTC find what most everyone knows already (that silver and gold are manipulated). This would swamp the banks and the CME can’t have that.
Since there won’t be a regulatory resolution to the silver manipulation, there can only be a market resolution. Actual supply and demand will win out in the end as the final price determinant, despite these periods of derivatives mispricing. Today’s shockingly low price of silver is the best catalyst for change. The earnings of the primary silver miners are heading lower. Unless silver prices rise sharply and soon, earnings (losses) for the fourth quarter will be severe. I don’t recall a time when the prospects for the primary silver miners were worse. At current prices, these miners will have to cut production or go out of business. A significant loss of primary mine production of 250 million ounces is almost incomprehensible; yet that prospect is unavoidable at current silver prices. Please remember how thin and fragile are the supply lines in silver in normal times, to say nothing of what’s to come when current low prices cause the supply lines to tighten further.
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