manipulating precious metals without owning actual precious metals

The open interest is the volume of actual commodity. Lets say there is you, me, and Jim in the market. You and I make a contract, so there are 2 contracts and 1 open interest. I wish out, so I make an offsetting contract with Jim. Now there are 4 contracts, still only one open interest since mine net out.

Make sense? It doesn't have anything to do with physical delivery, though it means only 1 contract is physically deliverable, (potentially).

Btw yes you were right Justafarmer. I spelled it out differently for others to make the point clearer.

 

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this is a interesting thread thanks..

 

I never said ANYTHING about quality. I never said I asked CME officials how great their market is, how great it works, etc. My butcher analogy I simply said he would know where a cut of meat comes from, of course I would be leery of his opinion as to which is best knowing maybe he has two trailerloads of round steak he cannot sell.

Similarly, I would never blindly trust the CME to say their markets are perfect, but as to HOW it works, I think they are the most knowledgable people on that subject, far more than most internet opinion boards at least.

Btw, in case it matters, I do believe there can be a decoupling between the CME and physical price. It happens often enough especially near highs and lows. I am not claiming the CME is a great market to use for PM pricing, I am saying they don't care and their market is not designed to BE a physical market. Its all about financial hedging, and always will be. Physical buyers, don't like it? Don't use it. You are not a customer of the CME, so they don't care.

 

What I don't understand is that if the CME is for hedging, for people who do not want the actual commodity, and they don't care what people pay for the actual commodity because that's not the purpose of what they do, then why do they get to set the overall market price for these things? Shouldn't they be an independent marketplace, or better yet, shouldn't the free market dictate to them what the prices are? They would still be able to function just as easily, but I see no reason to give them all the power.

 

You are not getting what I'm saying. I'm saying that 100% of that corn will be delivered else it's value goes to $0. Nothing more, nothing less. Whether there are speculators or not doesn't have anything to do with this point. The fact is the last party to hold that contract is going to end up with a train car full of corn if they don't do something with it. There are also plenty of substitutes for corn so buyers can't go elsewhere. These factors force a certain discipline on these type of commodities.

This is unlike gold where the physical commodity is rarely delivered. It doesn't have a shelf life and the supply remains pretty static over time. This is the point being made. Not whether or not there are speculators.

 

I don't think you really understand how it works, or you are speaking a different language. Aside from this observation, you first said that only 1% of the contracts get delivered. Now with this sentence, you are claiming it can be 50% or 25% etc.

Your personal anecdotes aside, I will contend that a futures contract for 5000 bushels of corn means there is really 5000 bushels of corn somewhere. Whether or not it gets traded a billion times or one time has nothing to do with this fact and end the end it must be delivered. If not then someone is breaking the law.

 

It is my understanding that what speculators bring to the exchange is liquidity. If farmer Joe needs to capitolize a portion of his harvest in order to pay the high cost harvesting, he can go to a broker and create a contract for delivery in November. Speculators buy the contracts and trade it to other speculators numerious times before it winds up being bought by the "Jolly Green Gaint" and turned into dinner. If framer Joe had to deal exclusively with the "Jolly Green Gaint", then the market is very limited, which is bad for everyone, except for the Giant and his friends. Speculators add capitolization, and their constant trading acutually helps stablize prices, verses dealing with a few conglomerates.

Although gold and silver have a 10,000 plus year shelf life, there are buyers at the other end of the trading floor who do take delivery and stamp out all those little coins we so love. There is also a huge jewelry market.

 

C Jay you explained it exactly. This is how the commodities market is supposed to work. If there is a contract for a farm product then there is a farm product that will be delivered. Nothing more, nothing less.

 

I will agree though that the market is subject to manipulation. Since we're on the subject of corn, there is one clear example from I think 2007. Oil was heading up to a point where gas was approaching 5.00 per gallon and serious money was being put into E85 and ethonal production. OPEC dumped over a billion dollars into corn futures with the intent of drive prices up. At the same time they hired a marketing/PR firm to started a "your burning food in the gas tank" campaign. The public bought into the "down side" of E85 and corn prices had sky rocketed with the blame being placed of the E85 folks. Once OPEC felt that there position was secure they backed out of corn futures and prices returned to normal levels. If I remember correctly, corn production that year was at an all time high and E85 production had little to no impact on the supply. It was about oil, not corn that drove the market.

I hear a lot of theories about manipulation in the gold market, but I don't see it. Gold and silver respond to economic uncertainty nore than anything. The only clear example was the Hunt brothers and that took place in a time of economic uncertainty (rampid inflation and a run on the dollar).

 

Why would farmer Joe even consider opening a corn futures contract that gets bounced around from speculator to speculator that could finally end up in the hands of the Jolly Green Giant when Martha White has a mill located in his hometown?

 

That is a good question. Since I am not a farmer, and have to rely on second hand information from sources like documentaries and such. How does farmer Joe do it in the real world. You have peaked my curiousity. Are there regional brokers for CME that deal with co-ops and the like? Is it the contract beween Farmer Joe and Martha White that is being bounced around the floor between now and delivery? Your first hand knowledge and insight would be greatly appreciated.

 

I grew up on a farm in the 70's and 80's. Here is what he did then. In the spring he went to the PCA and borrowed money to pay for seed, fertilizer, pesticides, herbicides and fuel. He then worked his fields, planted them and later on sprayed them. If he was old school he might even cultivate the weeds. At the end of the season he harvested the crop, put it in a drying bin, and dryed it properly, then sold it to the local or regional elevator.

Now, if the govt decided there was too much of something, they'd pay Mr Farmer to not plant certain items with some guidelines.

Those same things probably apply today, but there are many more loopholes and angles that I'm told about from family members that are still farming. In fact, if you do it really well, you can get the govt, typically state and fed, to build you livestock housing to clean up water systems, pay you to plant nothing and if all goes really well, rehabilitate some of your land and even buy some of that land for over market value.

 

FROM A WALL STREET PERSPECTIVE BY QSILVER007.

Yes it is true that many investors trade the precious metals, many more than in previous years. There are also a lot more of algos(computer driven machines) that trade very quick and have no opinion except to make money. These machines all make the same bets, and as one shi psinks so do many. Rewind to last summer Bonds 140, Gold 1900, Silver 44. All were viewed as a safe investment.

My how quickly times have changed, Gold is iffy, some days machines buy some days they sell. As for Silver, it is currently being used as the short leg in the PM space. Many machines are long gold short silver, long gold short platinum, long platinum short silver.

It is well know that if every person who owned a COMEX future tried to take delivery, it would not be available. But, in the futures world less than 2.5% of futures are actually delivered.

It is very similar to the banking sysytem as all of our major and local banks keep only a tiny part of the reserves in cash.

Another problem is with The ETF's. You have PLSV which is a true bullion fund owned by Eric Sprott of Canada, He DOES OWN the bullion. That is why his funds always trade at a premium to the silver market.

The etf problem is SLV, double long and short and triple long and short ETF'S. We as Silver and coin investors may believe it is manipulation, but it is simply trading and the way the world works. Trading and investing are about making money. Being early to a trade or investment simply means you are wrong.

Will SIlver ever go above 30.00 again in our lifetime? ABSOLUTELY.

But, it could go to 24.00 first. That is not my personal belief, but time will tell.

With Futures, you do not need to locate a short future, so the selling can be amplified as it has been recently.

At least with the ETF's one must locate the underelying, and if you choose to short it you have to pay to do so. This is telling us that there are excessive shorts in the market as the Shorts are paying more to be short SLV than the longs are to own it.

I posted a blog a week ago and said I would work on my spelling, and grammar. I hope this has made those happier. The blog was regarding Europe and the metals.

The metals are driven by emotion right now. Most traders do not know why they are long or short.

Aftert the FED announcment of no QE PM's took it on the chin. Option volatilities rose dramatically. Technically funds will bea or are short Silver as we are near the year low of 26ish.

The WS crowd is waiting for the US to announce QE. It will never happen as the funds have done the heavy lifting and put govt paper at or near all time low yields. There is not much upside left in 2s, 5s, 10s, or 30s. Metals will have there day sooner rather than later.

Gold continues to form a solid base above the 1530-1550 level.

Silver made a year low in the cash market and did close up on the day. Although it was only a few cents that is a bullish sign.

Options: Large call buyer contiue to come in to Gold adn SIlver. Gold in DEC 2012-AP 2013. SILVER there was a massive call purchase of 80,000 SLV lots of the JAN 2013 36.00 call. As long as Silver can continue to base above 26.00 it may be scary, but it sahll be very rewarding.

Disclosure: I am a Wall streeter, and I am simply sharing some info that some of you may or may not know. I hope this message is imformative for my fellow coin collectors.
Sincerely,
Qsilver007

 

Notwithstanding any specific commodity, how exactly is it not manipulation if the market price setting mechanism is capable of expanding the "supply" (paper contracts representing real commodities) by 4000%? If only 2.5% is delivered then the real supply would have to grow by 4000% to meet 100% delivery. This would require speculators to also increase demand by 4000% to equalize the supply/demand dynamic, and to say that leaves some wiggleroom is a gross understatement. A contract may change hands multiple times before delivery or being closed out, but that still initiates buy and sell orders that impact the price in the process. While this does provide the benefit of price stability, it is at the expense of fair value.

In the case of gold and silver these contracts also usurp demand from the physical market as investors use the paper contracts instead of the real thing, which actually hurts those investors because if they all bought physical the price would have to be a lot higher.

I've heard before that every buy has a corresponding sell, so they cancel out (in a world where naked shorting does not exist), but if everything cancels out then the movement of these contracts in between initial creation and close out should have no impact on the price. Maybe this is the case and I just don't understand it well enough.

Regardless, there can still be upwards of 100 ounces of paper bought or sold for every physical ounce that exists. Using that metric, the real supply only impacts 1% of the price. Again, how is this not manipulation?

 

It is obvious manipulation. But so is the funds buying up govt bonds so the yileds are zero. Unfortuantely the trading world has become so digital, the Paper silver and Gold do set the price. In March of 2011, many traders tried to put a stop to the manipulation, by taking delivery of Silver. The March future went over the July, first time in many years. Prior to that it was when SLV was invented, as they needed to buy SIlver.

The only way it stops is in a small market like silver if every indivual takes delivery. Then COMEX inventories drop.. Right now they are near historic highs at 175 million ounces. Yes you are right, SIlver is the only future, where someone or entity can hold a short position which is almost as great as 1 year of world silver production. Not sure if this helps you, btu its just the way it is. Im a metal bug at heart and it is frustrating to see people pile into govt paper and ito APPLE and PRICLEINE, and out of Silver but thats how it is now.

One thing Ive learned in trading, is when it feels so bad to be a buyer, it usally is the right idea. In my professional opinion the manipulation will end when n one expects it, the short commercials will cover near the lows as all the specs get out. For what its worth, Large govt's continue to buy gold, and are not buying US paper. Silver will eventually tag along, and if I am going to make a mistake with Gold at 1575, Id prefer to own Silver at 26.90

goode evening/morning..............QS007

 

I'm not sure what the problem is for the farmer. His contract is for a certain price for a delivery of corn on a certain date. Why would he be worried about who bought it, how many times it traded hands or where it ended up since his only concern is getting the money for his corn?

Of course he is free to sell his corn to his hometown mill, but without a futures contract for a guaranteed price, the farmer then takes on 100% of the risk that he might get a lot less for his corn. Likewise the local mill, who chooses to buy direct, runs the risk that no farmers might show up and the mill has to close.

 

A problem with any producer/farmer hedging in the futures markets:
Back in the 1800's when the CBOT was started, the Farmer (as the CBOT started as grains only) could put up hi physical supply as collateral and get 100% margin.

Fast forward 100 and some years. Dodd-Frank, and many other new finacial legislation pieces havecome out to try and cubr "speculation", but they only are concerned about this in the COMMODITY MARKETS.

Why? Because if APPLE, the DOW, the SP, or some equity goes up, it is looked at a friendly to the general public.

Currently, in the grain markets, unless you have a receipt at a valid delivery point, you can look at the CBOT/CME website, it does not matter if you have 1 billion bushels of corn on your farm. If you sell futures and the market rises, the farmer ho sold will get squeezed via margin call and will end up having to buy back his hedge. Many rural banks used to do some of the hedging thru bigger brokers ie Cargill/ADM, but after 2008 they did a lot less, and many stopped alltogether. Also in Grain Markets, the futures curves are not like the metals curves, in recent years as there has been less grain around than expected, the front months (month before the farmer can deliver his crop) trade at a premium. The harvest month generally trades at the lowest future price of that calenedar year.

Now to the PM's. The futures markets as well as physical have a natural carry involved, in silver it is currently 2-3 cents per month and gold is 1.5-2.0 er month. This makes sense as 1 million or billion of PM takes up a lot of space and must be secured, insured etc.

Precious miners hedged heavily from the mid 1990's til about 2011. The parabolic rise in metals, last yer was in part due to fear, Greece, SP downgrade, etc, but it was also some of the bigger Gold and SIlver miners lifting there hedges, because emotions got the best of them and they felt 1900 and 45 were too low. They were also under seve margin pressure from there banks, as the have the physical, but unless it is in bar form, number and registered thru one of the acceptable refiners it does them no good. SO believe it or not, it was many of the largest Gold and Silver mineres that were buying back short calls and futures hedges last year.

Also I saw someone mention WTI Crude. Crude futures are down this year, but gasoline futures are still up slightly. The parabolic move in Crude in 2008 was again, end users and producers lifting there hedges as they did not have there Oil in Cushing, Oklahoma where the contract is elivered.

Conclusion: Futures markets and Paper markets will contunue to dominate and set prices for every major commodity. Governments will continue to craft ways to but "speculators" in Bull makrets, but as prices go down, they have achieved there goal.

The US does not have too much ammo in its so called "Money Bazooka" anymore, so all they can do is instill fear in funds, funds sell there commodities, buy bonds and voila, inflation is curbed and the funds have done QE 3, QE 4 etc for the US. These are facts, and some of my opinions I hope this helps clarify some things for those unfamiliar with the futures markets

 

Let's just look at this from the simple approach and even it can be somewhat confusing. As for the question of how the CME futures set the cash price for commodities the simple answer is because the futures market is where the cash buyers and sellers hedges are created.

For a farmer to lock the cash price for their crop they have to set 2 things - price and basis. A farmer sets their price for a crop using the futures market and set their basis with the entity of which they are going to make physical delivery of their crop. Price is determined from the futures market and basis is the spread (discount or premium) off price a specific buyer is offering for the crop delivered at a specific point in time. A farmer can set price with a hedge by selling futures on the CME but this only generally sets their cash price as it does not set basis. The farmer sets their basis with a different contract (basis contract) ussually with a buyer (grain elevator, mill or such) that is more locally located. At the time of delivery to the enitity which the farmer has their basis contract they close their hedge by buying futures. The point is a farmer makes delivery to the entity with which they have created the basis contract which is seperate from the CME.

 

Justafarmer, you have just described one of the huge reasons why gold and to a lesser extent silver, are not the same as real commodities. (as much as people like to think) With PM trades, there is essentially no basis portion.

 

When you ( same as the farmer) sell your silver/gold to the coin shop (the local elevator) do you receive a price equal to the current futures price? Or do they pay you a price computed as a discount/premium of current futures (basis)?