The Silver Market Has Gone Mad, But Sanity Will Return [SPDR Gold Trust (ETF), iShares Silver Trust (ETF)]

silver demandThe Silver Bug: Going into the Halloween weekend, silver investors felt like they had a fist shoved in their stomachs, silver took a massive hit and fell towards the $15.00 mark. A far cry from the once hailed $50.00 level.

Since then, silver has rallied slightly, retaking the $16.00 level. The fact that it has not rocketed higher, has baffled many investors, as the additional QE announcement from Japan is being credited as the reason for the sudden collapse in silver prices. Obviously, this news should of sent prices higher. Unless something more nefarious is at work, keeping prices artificially lower.

This has to be the case, or the market has gone completely insane. One precious metals expert who agrees with this assessment is Ted Butler. Well known for his silver analysis and for exposing the manipulation in the silver market. In a recent interview with Peak Prosperity, Ted Butler had the following to say:

You have to sit back and try and drill down to the cause of what’s going on. Now, the actions by the Bank of Japan and the actions of our own Central Bank have basically been to inflate all investment assets such as bonds, stocks, real estate. And the ironic thing is that in the past whenever we’ve gone through this asset inflation mode ,gold and silver and a variety of commodities have always participated. It stands out this time that, contrary to the movement and all other assets, that gold and silver have been particularly weak.

The only explanation for why this is so is that we’ve developed, not just in gold and silver but in all the COMEX and NYMEX metals — copper, platinum, palladium, gold and silver, even items like crude oil and even into the grains — we’ve developed a mechanism that’s so distorted it’s like we’re allowing the inmates to run the asylum. In other words, if you’re looking for the specific cause for why gold and silver have been particularly weak over the last couple of days or any other time period, you can trace it directly to the derivatives market. Specifically the COMEX. There’s such a large volume and it’s not just trading volume, it’s positioning. The positioning is so extreme in these markets and at such a large scale that it actually becomes the tail that wags the dog.

We should remember that derivatives (which futures contracts on gold and silver traded on theCOMEX are classified as) are supposed to be derived from the real supply/demand fundamentals of any commodity. And that’s supposed to kind of follow what developments there are in the real world of supply and demand. That’s been distorted. That’s not longer the case.

It’s now possible to have a 25% plunge in the price of oil in a few months or the equivalent 25% or greater decline in silver or any other commodity in a very short period of time. Things in the real supply/demand don’t change that fast. It’s a glacial-like change when you’re talking about the production and consumption of copper and oil and silver. And same thing hold’s true on the consumption side. What’s precipitating this whole thing is that the derivatives market has become so large, and there are certain specific traders that have figured out how to game the system, that the derivatives market is always the cause for why we have these sharp moves. The crazy thing about it, is that it’s quantifiable. We have governed reports that come out every week in the form of the Commitment Of Traders report from the Commodities and Futures Trading Commission. And it shows clearly and unequivocally that certain large traders are distorting the market. And this is so against commodity law and the principle of free markets and the law of supply and demand that it’s become unattainable. And I think it’s good. It’s gotten so extreme now that I think we may be in a position of a snap-back to where we don’t allow this anymore. 

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