Paper, Rock, Silver Margins

May 25, 2014

Two separate stories have painted an interesting picture for the silver market. There is a definite figure/ground relationship. The figure is what most of us see immediately: paper price and its discovery. The other is natural background, ignored by most: the developing physical market reality that will ultimately extinguish this false figure of price. 

CME Paper Tiger and the Loud Sucking Sound

Just a week ago we reported on the financial mainstream picking up on low silver volatility as a sign that a large move was eminent - one way or another. 

Volatility is relatively low because that's the way banks are positioning to make a profit. These banks don't lose; they go months and months without a losing trading day. Is it any wonder that they are worshipped by the media? 

Volatility in any form is manufactured. 

CME is for profit. They earn a profit based on the sheer volume of trade. 

The largest banks make the largest percentage of profits. HFT aids and abets this process, enabling for potentially larger volume and, therefore, easy revenue. 

Low volatility results in lower margin requirements, potentially alluring more speculative weak hands traders into the markets and serving up new unsuspecting longs to feed the largest client. 

The result was more disorder, forcing more specs to sell, which created a feedback loop - effectively rescuing JPM from the impending panicked short covering. 

Regulation is inept and under funded, simply a benign or sometimes useful political tool. The entire 5 years of the latest silver investigation occurred as the price was egregiously rigged over and over. 

The CME is enmeshed with the big banks; JPM is a member bank of the Federal Reserve system, a primary dealer - much larger as a result of the bailout. QE continues as ZIRP emergency measures continue. 

WHAT happens if silver suddenly goes exponential?

Suddenly everyone sees it. Fundamentals would become clear. It would never happen in a vacuum. Other markets would be breaking simultaneously. Some outside nefarious agent would be named and blamed - a Chinese or Russian hacker, for example.  

Panicked short covering will create a bidless market. 

Any action against ownership or rule changes quickly ignites a grass fire of demand. Intervention draws more attention. Default and force make headlines, further flames for the fire. 

Shutting down the CME and closing contracts with cash will spill over all over the commodity sector. 

Poles and wave motion move our world of energy. Figure always has a ground industrial production and will always have investment demand. And paper representation must always lead to physical.

For precious metals, somewhere lays the true ratio of paper to metal. It is hidden. The concept is largely ridiculed.  

Yes, the absurdity seems to be lost on those who warn about other financial derivatives (that number close to the quadrillions) and yet scoff at the possibility that the very same weapons of mass financial destruction exist for the metals as well. 

A paper to metal ratio of anything greater than one will naturally result in a move toward equilibrium. The further out that ratio is abused, the faster and farther it will overshoot on its return. 


For more articles like this, including thoughtful precious metals analysis beyond the mainstream propaganda and basically everything you need to know about silver, short of outlandish fiat price predictions, check out

Peru became the world’s largest producer of silver in 2012.

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