Some say that everything you need to know you
learned in kindergarten. I suppose that's true to some extent. However,
to fully understand the forces at play in Comex Digital Metal, it might
be good to review some of the basic economics that are often taught in
introductory Econ classes at your local college or university.
Let's start with a chart. It doesn't really
matter which one and, in fact, I just chose this one at random. Below is
a one-week chart of the stock of Coca-Cola. Note that KO had some ups
and downs last week but was mostly sideways in a price range.
And why was the price of KO shares moving sideways? At the most basic
level, there were equal amounts of buyers and sellers in a period of
fixed supply. Therefore, an equilibrium was reached and price was stable
around $42.45/share. In your standard college economics class, it looks
like this. Price is discovered where supply meets demand:
But you see that's not how it works on the Comex. There is never
a period of fixed supply of futures contracts as The Banks issue and
retire open interest on a daily basis. Complicating matters is the
completely untethered nature of contract creation. Banks never have to
deposit physical metal as collateral in order to sell paper metal short
so they have the nearly unlimited ability to create as many contracts as
they feel necessary.
What this leaves is a "market" where both the
supply of the product (the Comex silver futures contract) and the demand
for the product fluctuate on a daily basis. And with The Banks
limitless ability to create new contracts, they're able to issue new
contracts to meet demand whenever there is a spike in buying interest
from speculators.
So now let's look at another stock from last
week. Below is a chart of Amazon. Note the price rally over just five
days. And why did price rise? Frankly, I have no idea of the fundamental
cause of the rally. What I do know is this, however. Given that the
amount of shares in the market for Amazon didn't change last week
(supply), another chart from Econ 101 above explains the price rally.
Increased demand for shares while the quantity of shares is held
constant means that price has to rise to the point where current holders
of shares were willing to part with them.
OK, are we all on the same page so far? Good. Let's continue.
Below is a chart of Comex Digital Silver that
shows the price changes over the past week. Note that it looks a lot
like the chart of Coca-Cola. Price appears to be stable and centered
around the $18.20 level. At first glance, you might assume that
therefore we have equal amounts of buyers and sellers. In a sense we
do...but with one critical difference:
And what is that "critical difference"? For the answer, we turn back to Econ 101 and what we learned about supply and demand. Recall that when supply is held constant, changes to demand are reflected in a higher or lower price. However, in the case of Comex Digital Silver,
the supply is not held constant. Instead and as noted above, the "market-making" Bullion Banks have the >nearly unlimited ability to create additional supply of Comex contracts on a daily basis. The chart below again shows the price changes of Comex Digital Silver for last week. However, be sure to note the additional information provided. If increased demand is met with an equal increase in supply, price remains the same.
So we're left with the question: How much higher
would price have risen just last week if the supply of contracts had
been held constant? Would the chart for Comex Digital Silver look more
like the chart of Amazon rather than the chart of Coca-Cola?
(It's important to note, too, that this is
where the fraud comes in and this is why we maintain that Comex pricing
is a completely illegitimate process for discovering the price of
physical silver (or gold). The sellers of the new contracts (The Banks)
are "selling" silver that they don't have and making a promise to
deliver metal to a buyer (the Speculator) who has no intention of taking
physical delivery. So what we have here is simply have a parlor game
and a battle of liquidity where the winner is determined by who has
deeper pockets and is thus capable of withstanding price fluctuations
and margin calls.)
In creating and selling to Specs those 23,713
contracts last week, The Banks essentially minted new obligations to
deliver 118,565,000 ounces of silver to the Spec buyers of these
contracts.
That's about 14% of the silver that the entire world will produce in 2017.
Was any silver placed on deposit with the exchange as collateral for
these new obligations or did The Banks simply create them from whole
cloth through cash and leverage? Below are the CME Silver Stocks reports
from Monday and Friday of last week. Note that the amount of silver
held in the vaults actually
declined over the week from 191.5MM ounces to 190.2MM ounces.
It's at about this point in the conversation
where The Cartel Shills and Apologists jump in and claim that all of
this new open interest is only being provided by benevolent and
altruistic Bullion Banks, which simply provide necessary hedging
services for their mining company customers. The Banks make no
directional bets:
https://www.benzinga.com/media/cnbc/12/04/247...ulates-precious
But there are a few, common sense holes in this defense theory:
- The total size of the silver producer hedge book is historically
low, as you'd expect with prices barely above the all-in, break even
cost of production for most miners.
- And we're supposed to believe that, en masse, the global silver
producers combined to hedge 14% of global mine supply in just the past
five days?
- And what about gold? With the April17 contract coming off the board last week, total open interest in Comex Digital Gold fell
by nearly 10% or 45,471 contracts and is back near 2017 lows. Are we
supposed to believe that ONLY silver miners are now actively hedging and
selling forward their future production?
Obviously, this idea that The Banks simply "make
markets" and "perform services" for their clients is utterly bunk and
requires no additional discussion.
What does require one final bit of discussion is
the notion of price change over time. While a handful of fundamental
factors do play a small role in determining price over time, the notion
that physical supply and demand somehow effect price change on an
intraday or daily basis is simply outdated and naive. Two great articles
were recently posted which detail how it's the paper derivative markets
which set price in the 21st century and not the physical markets.
Though both articles deal with gold, the same notions apply to silver
and, in fact, the leverage in the supply of silver derivatives exceeds
gold, making the situation even worse.
Turning back to Econ 101 allows us an
explanation of how price is managed lower over time through the
limitless creation (supply) of these paper derivative contracts.
Let's pick some random dates back in the spring
of 2011. Back then, price was screaming higher as demand for the Comex
silver derivative was soaring. What was the total open interest of Comex
silver in that period? See below:
January 18, 2011 ---- Total Comex Silver open interest 135,675 contracts
February 22, 2011 --- 145,070 contracts
March 15, 2011 ---134,914 contracts
April 26, 2011 --- 143,341 contracts
You may recall that, over the same time period,
the price of Comex Digital Silver rose from $28 to $48. And note that
the supply of the Comex derivative contract was mostly constant. Again,
see this chart:
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Let's compare this to the available supply of Comex silver derivatives
in 2017. With a total open interest of 216,372 contracts, you're
supposed to believe that this supply increase of over 50% is somehow
related to increased hedging by mining companies and others who wish to
sell forward their future production.
Really? A more logical
explanation is that manipulative Bullion Banks are greatly increasing
the amount of derivative supply in an effort to contain price at these
lower levels. How does that work? One more chart from Econ 101. As you
can see, if you can increase supply faster than the increase in demand,
price falls. And again, where are we in 2017? The paper derivative price
is down 60% from the 2011 highs while supply of the derivative is up
50% over the same time period.
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So finally, the conclusions that you should draw from all of this:
- Obviously, The Banks are still active in managing price through
the issuance of paper metal contracts. They sell these obligations to
speculators in enough supply as to dampen the upward price pressure that
would have resulted from supply being held constant.
- Contrary to popular belief, it is most definitely not the supply and
demand of physical metals which determines "price". Instead, the
trading and daily supply/demand of the paper derivative contract is what
determines the physical price. The physical market is then contorted by
The Bullion Banks, which manage the wholesale flow of physical metal in
order to legitimize this digitally-derived price.
- It's not impossible for the paper price to rise...it's just that
certain conditions must be met. Either of two things must happen: a)
Speculator demand for the paper derivative must exceed The Banks
willingness/ability to supply new derivative contracts OR b) Banks must
be forced to maintain a limited supply of paper contracts in the market.
Perhaps the ability of The Banks to create new contracts must be
tethered to a proven and readily-available amount of silver on deposit
at the exchange?
I hope this helps you to understand the forces
that are aligned against you as a silver investor. However, do not
despair. No fraud can last indefinitely and no institution built upon a
foundation of lies and deceit can stand the test of time. Instead, the
day is coming where true physical price discovery will again prevail in
the precious metals. What will that price be? I have no idea but I'm
quite certain that it won't be $125o/oz for gold and/or $18.25/oz for
silver. Therefore and as always...
Prepare accordingly.
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Our Ask The Expert interviewer Craig Hemke began his career in financial services in 1990 but retired in 2008 to focus on family and entrepreneurial opportunities. Since 2010, he has been the editor and publisher of the TF Metals Report fo target="_blank"und at TFMetalsReport.com, an online community for precious metal investors.
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The views and opinions expressed in this material are those of the author as of the publication date, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
