The Inherent Unfairness of The Comex

114
Mon, Oct 19, 2015 - 7:55am

Once again, paper metal prices on the Comex are being set up for a smash. The Cartel Banks, acting as de facto "market makers" are issuing huge amounts of new paper contracts in order to sop up speculator demand and squash momentum.

Please take a moment to understand how a "normal" market works. Let's take an individual equity as an example.

Company XYZ has a outstanding float of shares that totals 1,000,000. On any given day, news flows and other events motivate the holders of XYZ to either buy, hold or sell their shares. In this example, let's say that something fundamentally positive occurs for XYZ. As investor scramble to buy XYZ shares, price rises. Why? Because there is a set amount of 1,000,000 shares on the market, price must rise to a point where existing shareholders are willing to sell, at which point a new price equilibrium is reached. The same is true when price falls. There are more sellers than buyers and price must fall to the point where buyers emerge and a new price equilibrium is found. The key in both situations is the finite amount of shares available. Yes, a company can do secondary offering and issue more shares but these things take weeks to organize with legal and underwriting concerns. Therefore, on any given day, the float and available "stock" to buy or sell static and finite.

OK. Sounds good. Are you with me so far?

However, sometimes things can get disorderly. Back in the old days, the NYSE has people called "Specialists". At their own risk (and profit), these folks were responsible for maintaining their own large block of an equity for the purpose of "making a market" should there ever be a complete absence of buyers or sellers. These Specialists were charged with being the buyers or sellers of last resort and thus "making a market" and keeping things orderly. The key though was that these specialists were only dealing with existing shares that they already owned. They did not and could not simply issue new shares in response to investor/speculator demand. As noted above, the float was finite on any given day and the "market" simply had to respond by moving price up or down in response to demand.

Now, compare and contrast this with how the CME Group allows the Bullion Banks to manage the Comex metals "markets". Many system apologists claim that The Banks, in managing the Comex paper derivative markets, are only acting in this same, benevolent "market maker" role. These folks claim that these altruistic Banks simply seek to provide an orderly and fair market filling the same role as the NYSE Specialists of days gone by. But here's the critical difference:

Instead of dealing with a finite supply of paper metal contracts, the Cartel Banks are able to simply issue brand new paper contracts whenever they'd like. If demand for Comex paper surges due to fundamental or technical reasons, price does NOT have to rise to a new equilibrium where existing holders are willing to sell. Instead, The Banks simply create new contacts...increase the float...in order to meet the demand. Price rises are muted and momentum is contained. Price never breaks out and rises significantly in a single day like an equity might. An individual stock might rise 10% or 20% in single day due to news and information. But when was the last time you ever saw gold or silver do that? And why is this? Because of The Banks' ability to meet demand through the issuance of brand new paper contracts anytime they wish.

Now some folks will say that this is all perfectly fair and that The Banks are only hedging or selling what they currently have. If that's the case, then how do you explain the action of just Wednesday and Thursday or last week?

Up until Wednesday, gold had struggled to move through its 200-day moving average, which is a key technical indicator for speculators large and small. Early on Wednesday, price finally surged through the 200-day and this set off a surge of demand for paper gold contracts as technical trading and hedge funds looked to capitalize on this positive momentum. However, unlike the "fair" markets described above where prices rise to the point where sellers of existing shares (contracts) emerge, this speculator demand was met with a rush of freshly printed new contracts from The Banks. How many? On Wednesday, the total open interest for Comex gold rose by 15,774 contracts. This means that in order to meet demand, the "market making" Banks stepped in and simply created new supply. Ask yourself this...How much farther would prices have risen on Wednesday if The Banks hadn't added this fresh supply of 15,774 contracts? Another $10? Maybe another $20? Unfortunately we'll never know.

On Thursday, with price still comfortably above the 200-day, speculator demand for paper gold continued unabated. As price churned another $8 higher, The Banks added another 6,698 contracts of open interest. Again, how much higher would price have risen if it were forced to simply find an equilibrium where buyers finally found willing sellers of existing contracts? Another $10? Maybe another $20? Unfortunately, we'll never know.

And here's where it gets completely unfair and traders everywhere should question the legality of the process. By adding 22,472 new paper gold contracts over just two days, The Banks created brand new paper obligations for 2,247,200 ounces of gold as each contract represents an obligation to deliver 100 troy ounces. However, no gold was added to the Comex vaulting system over these two days. All The Banks did was create new paper obligations on fully 1/3 of ALL THE GOLD in the Comex vaults. As of Tuesday October 13, the entire Comex vault system held just 6,704,069 ounces. On Thursday October 15, though the total Comex gold open interest had risen by 22,274 contracts, the vaults still held just 6,704,069 ounces. See below:

So, again, in order to meet demand, squash momentum and contain price, The Banks on the Comex were allowed to create new paper obligation representing more than 1/3 of all the gold held on deposit in the Comex vaulting system. Again, how is this fair? How is this even legal?

And lest you think this is the first time this has ever happened, I urge you to click the link below:

https://www.tfmetalsreport.com/blog/6566/inherent-unfairness

That post was written on January 27 of this year after a similar travesty. As price broke the gate and rallied nearly 10% in January, The Banks responded by issuing a whopping 82,910 new contracts between January 2 and January 26, almost all of them soaked up by eager speculators looking to buy paper derivative exposure to gold. This essentially meant that The Banks sold over 8,000,000 ounces of paper gold to meet speculator demand and contain the new year price breakout to just a little over 0. IF the supply of contracts had been held constant and IF price had been forced to find an equilibrium between buyers and sellers of existing contracts, how much higher would have gold surged? To 00? To 00? Maybe even farther? And how might this have changed the narrative for 2015? Instead, price was contained and momentum was slowed. Once price was finally maneuvered back lower and below the 200-day moving average following the January employment report of February 6, the bottom dropped out. All of the speculators which bought in January were quick to sell in February. The Banks bought back nearly all of the paper contracts they had issued in January and total open interest was back to early January levels by February 13. Price, which began the year at 84 and then rose to high of 08 on January 22, fell back as well. By February 13, it was back to 26 on its way to a March 17 low of 48.

What's the takeaway of all of this? Well, besides the fact that The Comex is inherently and structurally unfair, you must be aware that price is going to be smashed again soon, just as it was in January. The Banks do not have the ability to deliver on their obligations so they'll need to cover them all back up just as they did last February. They'll want to do so at a profit so you must expect to see paper price rigged lower again, down and through the same 200-day moving average. Once this happens, the brainless and computer-controlled speculators will rush to the exits and sell back to The Banks the very same contracts the Banks sold to them last week. Price will fall sharply and all of these recent price gains will have been for naught.

Of course, there's always the possibility that something dramatic will happen and that prices will rise, instead. However, far more likely is the possibility that The Banks will soon raid price in order to drive it back under the 200-day moving average. Therefore, be on the lookout for lower prices ahead. Traders should use this foreknowledge to position themselves for the move and stackers should be on the lookout for the next "sale".

Remain optimistic but realistic and prepare accordingly.

TF

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  114 Comments

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gonewest
Oct 20, 2015 - 9:57am

Andrewbyrd

Look at the refugees coming out of Syria with nothing but their lives, or the many dead and then tell us how hard you have it.

I to AM down 50% on my 401k because it's all in a commodities fund while everybody else is dancing in the streets with the Dow up so much, but I have lost nothing until I sell, and I buy more shares at a lower price every month. The thing about retirement savings is that it never ends, you can be on top of the world today but what are you going to invest in next year. I have just enough physical to Mabey last a year if there is a collapse but that will hopefully be time well spent to move on to whatever follows.

And as far as Costco, those shelves could empty in a matter of days if everybody in your city decides they are in trouble.

$300.000 is a lot but any investment has risks and you knew that going in as did I, but the way I have seen it since 2008 is that all pensions are doomed in the long run. I turn 59 1/2 in a year and can draw money out without penalty and can do something then if there is anything left and they don't change the laws.

I used to get very depressed in the early 2000's but now don't even look at my statements anymore. (I did this week to make sure they didn't change funds on me again.

Hope this helps and not hurts.

SilveryBlue
Oct 20, 2015 - 7:55am

Andrewbyrd

You are a young man. You should not be having health problems over stress. At the very least start investing in another area. All eggs in one basket is not good strategy.

Have a think about what you would do with your pm investment if you could liquidate at no loss. What would you do with it - assuming this is long term investment & not short term profit making?

I have moved from the "oh crap" moment when I realised that my savings were not safe in a bank (I work for one) and started looking around for other vehicles. I found PM and approved it as a long term insurance policy/rainy day fund. Besides - they are pretty & I am a girl LOL.

I personally reached saturation point about May of this year when I stopped buying. I have exceeded what I initially thought was my target by a wide margin & I am surprised that I got into buy mode as long as I did. I have no solid rationale for this. I am still looking and have some dry powder ready. Never interfere with a woman shopping for specials.

I am too far away to offer to purchase what you may be selling, but I would second the thought of another poster - advertise on TFMR for sale items. It has been done before & seems to have worked out well.

braincramps
Oct 20, 2015 - 7:42am

Uncle Ted's views on the record high Silver Short Position

The WRAP

For all intents and purposes, the concentrated commercial net short position of 80,834 contracts may be a record in the history of the silver market. Let me keep this as simple as I can – 8 traders, either U.S. or foreign banks and financial organizations (not a one them a miner or producer of actual metal), are net short more than 400 million oz of silver, or 50% of world annual production. That comes out to an average short holding of 50 million oz for each of these 8 traders. That’s more per trader than the largest silver mine in the world can produce in a year.

Sharp-eyed readers might point out that the concentrated short position of the 8 largest traders was more than 80,834 contracts for a few weeks into mid-July, but that was when one or more managed money traders entered into the ranks of the big 8 on the short side. What I’m referring to is the all-commercial concentrated short position which only grows to cap rising silver prices, the single most manipulative action in the silver market.

At $16 silver, 8 crooked commercials, led by JPMorgan, have sold short the equivalent of 50% of the world’s annual mine production of silver, the most these crooked commercials have ever sold short. Any discussion about the price of silver – where is it, where it’s been, or where it’s going that leaves out this critical and verifiable fact is a clown’s discussion. Silver analyst Ted Butler: 17 October 2015

James CrightonPatriot Family
Oct 19, 2015 - 10:20pm

@Patriot Family - "the solution"

Patriot, the solution is Putin (and China).

jc

AlienEyes
Oct 19, 2015 - 10:01pm

I have thunk it all to hell....

1) Where is my money? In gold and silver.

2) Where is gold and silver? In the porcelan punchbowl.

3) How did it get there? Rat bastards. (whoops! I mean iligimate rodents)

4) What can be done about it? I checked out "Burn-a-banker".com, Mortify-a-mo-fo.net, marinate-a-monkey.org....all were illegal because they involve the torture of dirty Rat bastards, banksters and federal officials. Go figure.

5) I contacted my attorney. He said I am a "screwee" and that I could become an aggreved party in a class action suit.

6) I told my arsehole lawyer that if I didn't get my money back, mucho pronto, there was a high probability that he would suffer a dislocated head in the near future. He said he would call the cops if I cut off his head. I said, fine. (My attorney is not real bright.)

More later.

AE

JackPutter
Oct 19, 2015 - 9:24pm

Electric "chipped" credit and debit cards.

While being slightly off topic from PMs, security is one of the things we (I am) are here for. Mis-information is one of those things I feel that we can all use a heads up on. I ended up on this site after my searches;

It's a very short and biased answer and the first line says;

"From a consumer, card issuer or merchant point of view, there are no technology risks to switching to EMV cards, only benefits. EMV technology is standardized and proven."

https://www.justaskgemalto.com/us/buying/tips/what-are-risks-switching-e...

However there are other's who disagree;

FBI rewrote its PSA on credit card fraud after banks complained. Why?

https://fortune.com/2015/10/16/fbi-credit-card-fraud-psa/

You may resume your regularly scheduled PMs discussion.

golden needleandrewbyrd
Oct 19, 2015 - 8:24pm

It's all good@andrewbyrd

Andrew, Many on this site feel as you do. The most important thing is to keep it all in perspective. I'm sure I'm not alone in recognizing that we are all going through one of the greatest paradigm shifts in human history and it's very exciting. I am enjoying watching the movie unfold. I know the Chinese curse, 'May you live in interesting times', however I for one feel blessed to be living through this particular time in human history. No one can know how things will turn out so why not prep first, and then sit back, grab a beer and enjoy the show. Hakuna Matata.

The problem with prepping is that no one can know how wide or how deep the paradigm shift will be (I don't particularly like the word 'collapse'). Is it possible to be too prepared? I don't think so but we do the best we can.

The only advice I give to those around me is to be as diversified as possible and then go out and enjoy life. I mostly have tangible assets, a small piece of land, some PM's, food, water, water filters, solar panels, etc. As far as buying PM's go, I would never go all in but scale in over time, cost averaging down or up. I also invest in my education and learning new skills. You can't lose those under any circumstances (unless you get a lobotomy ;-)) Losing everything to Madoff's ponzi scheme 7 years ago taught me an important lesson in not putting all my eggs in one basket.

Most important of all is not to buy into the fear.

As I said in my last post, "There are those that make things happen, there are those that watch things happen, and there are those that ask 'what happened?'...

Just don't be the one who asks 'what happened?'

Golden needle (formerly hollersquealer)

JackPutter
Oct 19, 2015 - 7:19pm

@NWView - thanks for that - Real estate Seattle area

The last time I was downtown Seattle I counted 14 cranes from the Mercer street exit area. There's a build it and they will come attitude going on in the rent-seeking investment arena. There is a problem with the commercial vacancies in the North end of Seattle. Location, Location, Location! There is also a problem in the commercial brokerage and fees contracts that are coming out. Is this more of the big boys muscling out the mom and pop operations? Possibly

In the late 60s Southland Corp. went all around the USA (other counties too) and bought a property down the street or across the intersection from every family grocery store and put in a 7-11. Whole families were devastated and the money that supported those families got shipped to Dallas and the distributors owned by Southland. I just have the feeling that it may be the same thing happening in the real estate market.

I get onto Zillow from time to time just to see what's listed and how many listings are on the map. (The family home arena)
It's by no means scientific, but I feel it's a clue. The blue auction dots comes in waves, and prices can show quite a variance for what's being sold.

I do know that cash-flow real estate and PMs were the better assets to hold through the depression.

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Longstreetkenmasters675
Oct 19, 2015 - 7:18pm
Patriot Familymatt_
Oct 19, 2015 - 7:16pm

Matt_ - excellent comment

This was spot on:

"2) Despite all the manipulation, the price you pay today for a coin or bar is a market price. There are plenty of dealers competing for your dollars and willing to give you metal in exchange right now. Some people around here will argue with me I'm sure, but the shelves aren't all empty at the precious metal dealers. I used to think miners wouldn't be able to sell below the cost of production. I was wrong. I also didn't fully appreciate how mining costs were artificially high based on poor decisions by mining companies after the last gold price run. The markets will stabilize on a price, though, one way or another."

What the market is charging for physical (on average, after knocking out the price gougers) is THE price.

On the topic of preparing for something a little more vicious in the markets and our economy, living in fear and being a pack rat is not the goal (well said on your part). There is a certain comfort and confidence knowing you have prepared well for most realistic scenarios. Whether that's PMs to shore up finances, extra food to rotate into the pantry, whatever - I like knowing that my family has some resources and solutions in the event of a major crisis.

Proverbs 27:12

“A prudent person foresees the danger ahead and takes precautions. The simpleton goes blindly on and suffers the consequences.”

It's our individual definition of danger that dictates how we prepare. Sometimes I forget this.

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