|
Dear
Mr. Butler:
I read
your article about silver
manipulation at 24hgold.com.
I am
responding as someone who wants free markets. I want to make one thing clear
before I proceed. We have no free markets anywhere today. Without constant government
intrusions into the markets, the paper currencies would have collapsed
already, and there would not be a "price" of money (i.e. gold and
silver) quoted in terms of dollars. In this sense, all markets are
manipulated by the central banks and their regime of falling interest rates.
I am
compelled to respond to your allegation of "manipulation", because
I believe you mean it as the naked selling of silver futures (and others also
include gold futures in the same scheme). This is not occurring, and I have
data to prove it.
You
express the central issue as follows:
"None
of this makes much sense, as who would buy or hold such a giant physical
position and super aggressively short it in a concentrated manner?"
Why
indeed? Why would someone buy a bar of silver and then sell a future against
it? I reframed the question in this way, to make it clear why someone would
do it.
To
make a profit.
To
"carry" a commodity means to buy the physical good and simultaneously
sell a future against it. The market is offering a profit to the
warehouseman. It is giving him a signal in the form of a positive spread
between the spot market and a futures contract. It is saying "please
hold this good for a while, so consumption is even throughout the year."
This
is part of what I referred to earlier, when I said the whole system is
manipulated. In a free market, there would be no such thing as a futures
market in money itself. The high stocks to flows ratios (inventories divided
by annual mine production) means there is no value added by a futures market
in the monetary metals.
In any
case, let's look at this spread mechanically. To carry a good, one buys it in
the physical, or spot, market. One must pay the ask. Simultaneously, one
sells the futures contract, on the bid. This is the basis.
Basis
= Future(bid) - Spot(ask)
If the
basis is positive, then that means the market is offering an incentive to
carry the good.
This
is how the financial world operates today, whether we like it or not. So long
as the basis is greater than one's cost of capital, one would put on this
position in very large size. I assume JP Morgan can borrow at near-zero
interest rate.
Now,
let's get back to the basis. There is a simple mechanic here that will help
us understand if the allegation is true, that JP Morgan is selling naked
futures. To sell a future, one must sell on the bid. This will, of course,
press down the bid. And this is indeed the whole point, according to the
manipulation theory. They are trying to push down the price.
What
happens to the basis if the bid on the future is pushed down? The basis
falls. If they sold massive quantities of futures, the basis would go
negative. To oversimplify slightly, this is called "backwardation".
Gold
has had no major backwardation, other than temporary backwardation of each
expiring contract (http://keithweiner.posterous.com/temporary-ba...th-forward-from).
However,
silver did have it. All long-dated futures were backwardated for a period of
time. It was when the silver price rose from around $18 to over $40. This is
the opposite of what the manipulation theory would predict, but it is what
basis analysis predicted. Backwardation was not caused by naked selling of
futures, which is supposed to drive down the prices. It was caused by
scarcity of the good in the physical market, which relentlessly drove up the
ask on spot.
Since
then, backwardation in silver has been receding and it is all but gone today.
The price fell sharply in April 2011, and since then it has moved down and
sideways (and is now up recently around the QE3 announcement).
I
watch the gold and silver basis constantly. I can assure you that there are
no sharp backwardations to coincide with the many calls that a big player has
just shorted futures that. It simply is not in the data. I reiterate that it
would be impossible to sell enough futures to move the price down without
forcing a large and growing backwardation.
I
predict that backwardation is coming target="_blank"(http://keithweiner.posterous.com/when-gold...comes-permanent),
but not due to futures market activity by banks. This will be the end of the
regime of irredeemable paper money.
I will
close with a now-infamous quote from President Bush during the depth of the
financial crisis in 2008. "I abandoned free market principles to save
the free market system."
I
think we both want the same thing: a free market in gold, silver, and credit.
But we will not move forward to it by calling for more government regulators,
more rules, and more picking winners and losers by government coercion. We
can only move forward by revoking the legal privilege given to the "too
big to fail" banks.
Mr.
Butler, can we agree on repealing the legal tender laws that force all
creditors to accept the government's paper scrip for all debts? I think this
would be a good start.
|
