Legitimate Price Discovery vs. Fraudulent Price Determination

by Rob Kirby, Kirby Analytics. December 28, 2009

Year’s end is a time when folks customarily take stock of things and analyze or review what has transpired over the past 12 months. With that in mind, let us stop and consider what has transpired in the global silver market for the ‘front half’ of the preceding 12 months:

Source: Bank for International Settlements [BIS]

This data was highlighted in Silver Market Updates by Jason Hommel. Everyone should understand that THE VAST MAJORITY of the 100 billion increase in silver derivatives [futures and options] depicted above was principally done by TWO financial institutions. From the data set above, we can clearly see how silver derivatives were employed – ramping up from 103 billion at Dec. 2007 to 190 billion at June 2008 to produce the water-fall price effect in price illustrated below:

We can see how silver futures were subsequently used to “blunt” the price rise in silver which began in late 2008. The reason why the latest round of “futures selling” of silver is not having the same demonstrable effect: PHYSICAL SHORTAGES OF METAL are becoming commonplace, trumping the manipulative effect of futures selling. Folks are paying-up for physical silver bars:

chart compliments of Michael Zielinski

We have seen this manifest itself through the de-coupling of the price of physical metal and the futures price and regular suspensions of silver coin production:

US Mint Suspends Sales of Gold and Silver Eagle Coins
By Michael Zielinski on November 25th, 2009
The United States Mint has suspended sales of their popular one ounce American Gold Eagle and one ounce American Silver Eagle bullion coins. The suspension was announced in a memo sent to the US Mint's authorized bullion purchasers….

Remember folks, futures markets were originally conceived as means to aid in efficient Price Discovery:

Price discovery is the general process used in determining spot prices. These prices are dependent upon market condition affecting supply and demand. For example, if the demand for a particular commodity is higher than its supply, the price will typically increase (and vice versa).

Clearly, in the case of silver, futures [derivatives] are no longer being used to “discover” price – they are being used to fraudulently DETERMINE or MANDATE PRICE.

Today’s Market

Overseas equity markets began the last week of the year on a positive note with Japan’s Nikkei Index adding 139 points to 10,634. North American markets ended the day in positive territory too, with the DOW up 27 points to 10,547.10, the NASDAQ up 5.39 to 2,291.08, and the S & P adding 1.30 to 1,129.80. NYMEX crude oil futures gained .65 to finish at 78.70 per barrel.

On foreign exchange markets the US Dollar Index fell .03 to 77.61.

Benchmark interest rates – the 5 yr. government bond ended the day at 2.60 % while the 10 yr. bond finished at 3.84 %.

In the precious metals complex ended the day mixed with COMEX gold futures closing at 1,107.50, up 1.30 per ounce while COMEX silver futures added .02 to 17.53 per ounce. The XAU Index dropped 1.47 to 170.54 while the HUI Index dropped 3.29 to 435.08.

On tap for tomorrow, at 9:00 a.m. Oct. CaseShiller 20 City Index data is due – expected -7.60 % vs. prior -9.36 %. At 10:00 a.m. Dec. Consumer Confidence data is due – expected 54.5 vs. prior 49.5.

Wishing you all a pleasant evening and a happy new year!

Rob Kirby

Contact Information

Rob Kirby | Proprietor, Kirby Analytics Newsletter - Proprietary Macroeconomic Research
Toronto, Ontario, Canada | Observations | FSU Editorials | E-mail