Just an Ordinary Crash: No Conspiracy to Manipulate the Silver or Gold Markets

Source: kitco.com

It amazes me how many of the same people who clearly saw the manifestation of the credit bubble in stocks and real estate are incapable of conceiving that the same cocktail of easy money and bull-market sentiment found its way into their own favorite markets. Many hold it as a matter of faith that the precious metals bull market will end in a manic top of 1980 proportions ($2500 gold, $150 silver in today’s dollars), and are therefore blinded to the possibility that we have had our top for now. Maybe we should be grateful for a pretty darn good run, with gains of 425% for silver and 300% for gold, topping out with a spike and 98% bullishness.

With deflation setting in, the foundations of this market are being shaken, and it is a different game now – - it’s not over, but the rules have changed. Those small-timers doubling down on physical right now could be in for a world of hurt in a few months or years and decide to bail at exactly the wrong time (according to the principal of maximum pain for the maximum number).

I get tired of seeing the rants of precious metals newsletter writers about the dark forces behind every downtick in the markets. I am extremely skeptical of the feasibility of any successful long-term market manipulation, whether it is in the stock, currency or futures markets. The dollar volumes of these markets are so large that even governmental bodies find it futile to try to influence price trends by strategic buying or selling.

If such forces were able to move a market in the desired direction, that would create a golden arbitrage opportunity for sharp-eyed speculators, inducing them to step in and buy or sell at the “artificial” price and thereby push the clearing price back to its proper level. To hold a market at an “artificial” level indefinitely would require infinite resources, which not even governmental bodies posess. And according to the natural laws of markets, if one venue (such as the COMEX) became so hopelessly encumbered, participants would figure out another way to contract with one another (such as Dubai).

But this is a moot point, because manipulation just doesn’t work. As Mish points out (click for his graphic), in 2003 and 2004, the Japanese tried overtly to suppress the Yen as it rose from the low 80s to almost 100 per dollar, with a massive series of interventions totaling over $300 billion. Their efforts failed, and the Yen later just fell as the psychology of traders changed according to their own whims, as in every market.

As to why there is a shortage of retail physical gold and silver right now, I have heard from a couple of dealers that it is not an uncommon phenomenon when there is a rapid drop in prices, as it brings out demand. I am in agreement with Mish that this demand by small-timers is likely a contrary indicator. Where were the hordes of new gold bugs when gold was under $300?

I am not usually in agreement with regulatory bodies, but it is good to see that at least one of them employs someone with a grasp of how markets work. The CFTC published an excellent letter to address the conspiracy crowd as far as silver is concerned. Here’s an excerpt.:

During the past 20 to 25 years, the Commodity Futures Trading Commission (CFTC or Commission) has received numerous letters, e-mails and phone calls from silver investors alleging that the price of silver futures on NYMEX has been manipulated downward.

In 2004, Dr. Michael Gorham, Director of the Division of Market Oversight (Division) addressed silver investors’ concerns in an open letter (2004 Silver Letter) that considered the plausibility of a long-term short-side manipulation of the silver futures market and provided an analysis of activity in the silver futures market. That letter concluded that the existence of a long-term manipulation was not plausible and that an analysis of activity in the silver futures market did not support the conclusion that the market was being manipulated.

Recently, silver commentators and a group of investors that rely upon them have reasserted their allegations that the silver futures market is being manipulated downward by a small group of traders on the short side of the market. As a result, DMO staff decided to revisit this issue by taking a fresh look at activity in the silver futures market.

The analysis draws the following conclusions:

• There is no evidence of manipulation in the silver futures market.
• Silver cash and futures prices have risen dramatically between 2005 and 2007, with silver outperforming the gold, platinum and palladium markets, suggesting that silver futures prices are not depressed relative to other metals prices.
• NYMEX silver futures prices tend to track closely the price of physical silver.
• Concentration levels for the top four short futures traders in the silver futures market are comparable to those observed in the gold and copper futures markets, and generally are lower than the levels seen in the platinum and palladium futures markets.
• The composition of the traders comprising the top four short futures traders, in terms of net positions, changes over time. These traders represent a diverse group, and their futures positions are driven by an even more diverse group of customers.
• There is no observable relationship between short-futures-trader concentration levels and silver prices.
• There is a slightly positive relationship between the total net position of the large short futures traders and silver prices; this suggests that larger short futures positions are associated with higher, not lower prices.

Advocates of the short-side manipulation argument contend that silver futures prices have been manipulated downward for close to 25 years. What these advocates fail to indicate, however, is where prices should be, except to argue that prices should be higher than they have been currently or in the recent past.

With respect to the claims of silver commentators that prices are being suppressed, it should be noted that these commentators have never articulated a credible explanation as to why, for more than 25 years, buyers have not entered the market to purchase silver (at the supposedly depressed prices), thereby driving up prices to a level that these commentators believe is reasonable. In this regard, no barrier to entry has been identified that would prevent individuals or firms from buying cash silver or entering into long silver futures positions.

Given the similarities between price movements in these four metals, it appears that general market forces that have contributed to an increase in gold, platinum and palladium prices have also supported an increase in the price of silver. Moreover, the fact that the price of silver outperformed the prices of the other metals during the period, while not definitively answering the question of whether silver prices have been manipulated, calls into question the contention that silver futures prices have been manipulated downward. In short, there is nothing obvious in the silver price series between 2005 and 2007, when compared to other metals’ prices, to suggest that silver prices have been manipulated downward.

Gold and silver bugs believe that central bankers and bureaucrats care as much about precious metals as they do. To government types, the metals are just barbarous relics of ancient monetary history, and I doubt they spend much time worrying about their prices.

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4 thoughts on “Just an Ordinary Crash: No Conspiracy to Manipulate the Silver or Gold Markets

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