Silver prices

Indeed. This is why we had the discussion. Without this information this is WHY the question as asked in context can't be answered.

 

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To me, the context was very clear as originally stated. The discussion only detracted from the clarity.

 

OK my apologies. I was only attempting to answer your question on "why" we had the conversation. Not whether it was something you liked or not.

 

My understanding was that it was the Pan Asian Gold Exchange, not the HKMEX that would accomplish this. But the PAGE got squashed. Supposedly there is a comparable replacement coming, but it's flying under the radar and I haven't heard boo about it since right after the PAGE was confirmed a no-go.

 

I suppose I am merely speculating that if the physical metal had to exchange hands in order for the transaction to occur that it would not be physically possible to move as many ounces as are traded in paper contracts. Who has capacity to move a billion oz of sliver in a day? That's 62.5 million lbs.

 

When someone buys a commodity, do you really think it physically moves that day? I can and have bought 100 trucks worth of a commodity in a single transaction, yet they did not physically move for months, sometimes changing hands once or twice more before they ever left the production facility.

I don't see how changing hands has anything to due with an item physically moving. The same silver sitting in a warehouse can be bought and sold hundreds of times, all of the while dust collects on top of the silver.

 

Yes, you are right. I was on the wrong train of thought here. Let's try again.

The reason why I initially thought that without paper traded contracts we would lose a lot of volatility was because the supply would be significantly less, to the tune of somewhere between 50 and 100 times less, and this would force the speculators out of the market. This may seem counterintuitive as a lesser supply would be more easily moved, but my reasoning is that the movers would only be those actually interested in the metal, not paper pushers.

 

You are confusing purchasing a commodity with the rules that cover how an ETF operates.

 

For the sake of argument I am assuming ETFs do not exist. That really leaves only one other option. A real exchange.

 

I would say yes and no. The one great advantage of having lots of silver contracts is that it makes it nearly impossible for someone to try to corner the market. Now, cornering may sound great if you own silver, but its very disruptive to industrial use and could very well destroy industrial demand if a market is cornerable. Like you say, if there are 10 times the contracts as there is physical silver, its not very easy to try to corner. Remove most of those contracts, and its very doable for a Soros or someone similar to attempt this.

 

In the case of SLV and GLD you are pretty close anyway.

 

I may be off the mark, but I do not feel that contracts make the market any less cornerable. What they really do is shift who has the ability corner the market away from those who own the asset to those who own proxies of the asset. I could put together a pretty good argument that we have an inversely cornered metal market today (as opposed to people buying all the supply up we have people selling supply that doesn't exist), but I don't have time to do that in detail right now. There are many wallets out there capable of buying up the entire silver market in spite of the supply bloat.. gold on the other hand, not so easy, but pretty much any multi-billionaire could corner the silver market today with prices as low as they are and available supply as low as it is.

 

But not the way its set up. You have to understand the market was created after centuries of seeing how markets are all too easily manipulated by corners. Today's market, if someone tries to corner, there are new "supplies" of paper silver that can be created to prevent such actions. You may not like it, but the market is set up I believe exactly to prevent such occurences, since it can be devastating to everyone concerned except the person profiting from the corner.

If you read the history of commodity markets, and their troubles and pitfalls, I think you would come to feel better about commodity markets today. They are efficient, resilient machines to find pricing changes without the downside of such markets, which is susceptibility to major manipulation at the whim of a deep pocket investor.

Now, you may say the market maker is making too much, or its too much in his benefit, and that would be fair. If you truly study the history of such markets, though, I would challenge you to construct a better one. I would say today's markets are much like democracy, terrible but better than any other alternative.

Just my view.

Chris

 

I agree the comment about the futures market being efficient when it comes to a "real" commodity such as potatoes. But only with "real" commodities. Potatoes will rot if not consumed, the supply changes dependant upon many uncontrollable factors, and there are substitutinons for it. So the invention of the commodities market handles this situation well. Farmers/miners share the risk of production with their buyers.

On the other hand, gold, & silver are not real commodities. They are a fixed quantity (relatively speaking), do not rot, and in the case of gold is not even consumed since used gold is recycled at close to 100%. Given that physical gold and silver's supply are relatively fixed, then the price can't be manulipulated. So to fix this, the bankers invented the gold and silver future. This lets them create unlimited supplies of the stuff (on paper) and now the manilupators can move in. It's really a perversion of the commodities market and it also fools people into believing that gold is a commodity. This is why they are often confused and bewildered, often expressed here on this forum, when the price moves exactly opposite of what has been predicted.

 

I am loosely familiar with the history of the Chicago Butter and Egg Board, why it was necessary for price stability, and how it was of benefit to people. You don't know what the price will be down the line, but you need to be able to forecast. That part makes perfect sense. However, with the advent of derivatives that usefulness has been warped, and as evidenced by MF Global it no longer serves the best interest of its customers. I do not have a perfect solution, I am merely pointing out that this function is no longer beneficial for the greater good. I really have no problem with a 1:1 ratio of physical to paper contracts. It is the leverage that I don't like. It not only skews market pricing by artificially increasing supply, but it also adds risk by order of magnitudes as banks must deleverage in order to cover their losses. If market stability is the goal then margin should be eradicated, not in the hands of a few unelected people who can change it to their advantage when they don't like where the price is going under the premise of stability when they in fact are solely responsible for the blowoffs in the silver market over the last few years. Sure creating assets out of thin air can prevent a market cornering, but it also prevents a free market. The give/take is not justifiable IMO. I dislike market cornering as much as anybody, but not as much as I dislike an unfair playing field.

 

My main reply sir would be that leverage cuts both ways, and leverage has been used forever on the buy side as well. To be fair, if you wish to remove leverage on the sell side, are you advocating eliminating margin purchases as well? If not, I believe you are basically creating an unbalanced market.

In my view both sides employ margin, and its simply wrong to eliminate one sides margin without removing the other, for risk of an unstable market. Remove both sides leverage, and we are back to an old fashioned, ultra low volume market where 1% of the commodity dictates price for the other 99% of sales. Trust me, I participate in one of these markets every day, they are so easily manipulatable its not even funny.

Btw, I am going to a conference at the CME in Chicago in a couple of weeks. I plan on trying to corner a couple of the guys and buy them a beer and discuss PM markets if I am able. If someone has a question they want asked, let me know.

Chris

 

Bring me back a CME T-shirt XL

 

Maybe they have a special PM lover's T-shirt, " I went to the CME and got fed a bunch of BS how silver is not manipulated, but at least got this T-shirt."

 

Maybe a MFGlobal T, I could sell that on ebay for more than an ounce of silver

 

That's ok, the buyers on ebay are buying those grams out of ignorance. There is no other way to look at it. I think it's the youngsters who are doing it. Some kids have too much time on their hands and maybe too much money. That's ok though, they're keeping somebody in business and sooner or later they will realize that they're losing money and they will stop.