By Soren K Group
The always interesting and analytical SRSrocco Report breaks down the Silver market leverage and how it compares and even dwarfs Gold. First some comments on leverage as it and market structure entice and reward manipulation. This is a topic dear to our hearts and has been for several years. The game is rigged. Here is how the notional derivative leverage and other factors interplay to depress prices.
LEVERAGE, MARKET STRUCTURE, AND MANIPULATION INTERPLAY
We've touched on this and are not convinced that the multiples of contracts out there are a reason to expect a multiple claim related short squeeze ever in the metals. This is just a fact of life in all futures. Simply put, you do not have to have physical in your possession to sell a commodity short.
IT IS BAKED IN THE MARKET STRUCTURE TO SHORT, LEVERAGE THOSE SHORTS, AND THEN CHEAT.
This does make it easier to 'place shortside bets' on non existing metal. Further we have long believed and said as much that market structure such as described below is a major contributor to depression in Gold. This is also true in Silver but to a lesser extent.
LEVERAGE COMES IN MANY FORMS
And while we see the baked in risks of FractIonal Reserve Banking in metals market structure as a huge advantage to short players, sadly we do not think it will be addressed. The market cannot fix it either, because its structure is a hindrance to free market behavior. The market is NOT a market in his sense. Further, we don't think the markets will ever be allowed to shake out big leveraged, non physical owning shorters. Witness the Hunt brothers, and even Warren Buffet. Even when they win, they must bow down to higher powers.
At least Warren was paid! Buffet was 'asked' in 1997 to not take delivery. The US Government on behalf of the Silver industry essentially told him to roll it out. Not to cry for Warren, as he netted a 40% ROR on loaning producers their own silver, but to emphasize this:
- YOU MUST HAVE STOCK IN YOUR POSSESSION TO SHORT IT.
- YOU DO NOT NEED HAVE PHYSICAL IN ANY FUTURES CONTRACT TO BE ALLOWED TO SHORT IT.
Simpler terms: Stock market structure is rigged to go up. Futures market structure is rigged to go down. This is the reality of market structure. Other factors are supposed to balance these things out, and they do mitigate the market structure for short periods.
But in the marathon that is trading, market structure is king of all macro influencers. And for this reason, the market is just not incentivized to be long Silver and Gold and for that matter any future for long term investment.
CROWDED SHORT TRADES DO GET PUNISHED IN SILVER, BUT CANNOT HAPPEN IN GOLD
But the market does have shorter term plays in which the shorts just get too comfortable leaning on market structure. It is during these times that producers hedge metal they do not have. It is when longs decide to 'take delivery' even if only as a bluff. That is when you see shorter term factors counter market structure. It happens infrequently in silver. And it will likely NEVER happen in Gold due to Central Bank vested interests.
But this is why the metals markets are incentivized to do whatever it takes to protect short positions. They are allowed to via pot odds, a government that has an interest in keeping inflationary barometers low, a bullion industry that has borrowed Gold from the Fed to short it and do carry trades (we're looking at then GS exec Rubin and Greenspan's Bullion lending deal in 1993-1995).
STOP TRADING GOLD
The Fed that will lend more Gold to these Banks to make sure they do not blow up. And if they do not have that gold, say because Germany wanted it back, they will lend them cash at the Discount window at 1%. How can you, the guy borrowing on his Capital One credit card at 20% compete?
And finally, corporate pay structure that is designed punish clients like miners who are naturally long and must continuously sell. HOW DO YOU HAVE A SHORT SQUEEZE ON A PRODUCT THAT IS NOT CONSUMED? You can't. Fact is, this is what keeps Gold's price lower, but keeps its value stable. Gold simply should not be traded. It should not be an investment. It should be OWNED. That is all.
HOW THE SHORTS LOSE, AT LEAST FOR A LITTLE WHILE
The only thing that will change it is if more physical is truly taken off the markets. And, as traders who took delivery in Silver using leverage, that won't work. It is the Chinese demand that is largely unlevered that will force the slow ( not meteoric) rise of Gold and Silver. Slow because they are not playing a short term trade. They are buying and taking delivery on dips. The Far East does not look at Gold and Silver as Giffen goods to be bought because they went up. The Far East buys value and invests, at least so far. This slow drain on above ground physical will cause the outstanding amount of derivatives to shrink overtime. But that will not stop the cycle. China will not chase the market for Gold up. And the dealers cannot entice the PBOC to do so. Why would they? The western market structure is biased to keep the futures market lower. But the price of Gold is not the value of gold. And China knows this. It will be the defacto backer of their Yuan, and when it does, the petrodollar will collapse.
Once the Gold and Silver have been basically moved from one side of the world's vaults to the other sides vaults, the shorting game will likely begin again. Once the physical buying stops, the banks begin selling and punishing the levered players again. It is the same game that has been going on for years. Prices rise to a level where physical buyers do not play. Hedgers start to sell, leveraged momentum players buy. Then when they are done, Dealers gun for stops testing long resiliency. This is where the spoofing and other games come in. This is where manipulation plays its stronger hand.
Right now, we are seeing the longer term version of this play out. The physical buyers accumulate. The dealing banks entice clients to 'hedge their metal'. There are profits to be made from spoofing or shaking out weak longs at the top. Just look at the Silver market when it failed to get through producer hedging between $18.00 and $18.50 just last month. Players and dealers smell blood and its time to dive bomb the markets.
A SILVER SAP IS BORN EVERY MINUTE
MOMO buyers are saps. Sadly the new generation of MOMO buyers is being grown right now in Chinese retail. And that is where the manipulation will move. That is why we are now being permitted to 'catch" the LBMA and Comex criminals. The veil is being peeled back on western fraud as we speak. The Banks and institutions that enabled the behavior that depressed prices for years have moved on to the Far East. They are now price gouging new buyers with no risk of capture. This opens up the west to expose past sheep shearing behaviour in Gold and Silver now. Why? Because they've already moved on. But this is an opportunity to expose fraud.
TAKE HEART: MORE FRAUD WILL BE EXPOSED
We must take the opportunity before it passes. The banks are so preoccupied with even bigger scams like DB was, that they will fold on Metals fraud now. The challenge is getting defrauded Gold and Silver investors to shake off their defeatist attitudes and step up. The chance for justice is happening now. And it is going to explode on a case and monetary reward basis when people wake up.
Recently we were contacted on a new case that is being put together to participate as experts in forensic trade analysis. It is a global class action suit. We hope to talk more about it here in column as permitted. Just know this. The lawsuits against the manipulators of metals are going to grow as time moves forward. We haven't even gotten to the derivatives cooking that was done. Frankly, any market that has a 5 minute window of'fixing' that determines the price of a portfolio for 24 hours is a license to manipulate. For 5 minutes, if you can control the market, you benefit for the rest of the day. That is another form of leverage. Leveraged manipulation
Here is the leverage analysis on Silver.
The Amazing Amount Of Leverage In The Silver Market
6-7 minute read time
via the SRSrocco Report.
While many precious metals investors realize the massive amount of paper trading leverage taking place in the gold market, they should see what is going on in the silver market. In a previous article, I provided data showing that an amazing $9.8 trillion of notional gold paper trading took place on the world’s exchanges in 2016 versus $42 billion in actual physical gold investment. This was a paper to physical ratio of 233 to 1.
However, the amount of paper trading leverage in the silver market is much higher than that.
But, before I get into the specifics of the paper silver market trading leverage, let’s take a look at the pathetic amount of physical silver investment versus Central Bank asset purchases. According to the data in the recently released 2017 World Silver Survey, total physical silver investment for 2016 came in at a whopping $4.4 billion:
That’s correct. When we add up all the global silver investment demand last year, it adds up to a measly $4.4 billion. It was nearly ten times less than all physical gold investment in 2016. The analysts who wrote 2017 World Silver Survey, arrived at the $4.4 billion figure by using the following data:
Global Silver Investment 2016 (in million oz – Moz):
Physical Bar Investment = 83.6 Moz
Official Coins & Medals = 123.2 Moz
ETP (ETF) Inventory Build = 47 Moz
Grand Total Silver Investment = 253.8 Moz
By adding up total Physical Bar investment of 83.6 Moz, Official Coins & Medals of 123.2 Moz and ETP (ETF) Inventory Build of 47 Moz and then multiplying it by the average silver spot price of $17.14, it totaled $4.4 billion.
Even when the silver price reached a high of $49 in 2011, total global silver investment was only $6.6 billion. Looking over the market in the past six years, the total $32 billion of silver investment from 2011 to 2016 is nothing when we compare it to the staggering amount of Central Bank asset purchases. According to a recent Zerohedge article, Why “Nothing Matters”: Central Banks Have Bought A Record $1 Trillion In Assets In 2017:
A quick, if familiar, observation to start the day courtesy of Bank of America which in the latest overnight note from Michael Hartnett notes that central banks (ECB & BoJ) have bought $1 trillion of financial assets just in the first four months of 2017, which amounts to $3.6 trillion annualized, “the largest CB buying on record.”
Now, if we look at the chart above, Central Banks purchased $7 trillion (that was made public, could be higher) from 2011 to 2016. If the Central Banks purchased $1 trillion in just the first foru months of 2017 versus the $7 trillion from 2011-2016, something seriously wrong must be going on in the markets.
Regardless, $7 trillion is a lot of money when we compare it to the pathetic $32 billion invested in silver over the same period. If we just took $100 billion of that $7 trillion and placed it in silver, it would have quadrupled the amount of global silver investment from $32 billion to $132 during that 2011-2016 time period. A quadrupling of silver investment demand, would have pushed the price of silver, WAY ABOVE the peak $50 price.
By the Central Banks propping up the STOCK, BOND and REAL ESTATE markets, the value of silver (or gold) is being severely depressed. And of course, to keep investors from finding out about SILVER’S HIGH QUALITY STORE OF VALUE, the price continues to be capped by the massive amount of paper trading leverage.
So, how much paper trading leverage is in the Silver Market? Let’s look at the following chart:
Again, according to the data put out by the 2017 World Silver Survey, total paper trading silver volume on the world’s exchanges was 159,000 Moz, or 159 billion oz in 2016. Thus, the exchanges traded 180 times more paper silver in 2016 than the global mine supply of 886 Moz.
If we look at the ratio of global notional paper silver traded last year compared to actual silver investment, it was more than double that of gold:
By multiplying the 159 billion ounces of paper silver traded in 2016 by the average spot price of $17.14, we arrive at a staggering $2.27 trillion of notional paper silver traded versus $4.4 billion actual silver investment. Thus, the paper notional silver trading ratio to physical silver investment was a whopping 517 to 1… double the 233/1 for gold.
Now, this 517/1 notional paper trading ratio to physical silver investment in 2016 does not take into account any of the huge OTC market where a lot of silver is traded and there are no quantifiable statistics to the amount or degree.
Currently, the crypto-currencies are experiencing huge gains over the past several months. It doesn’t matter if an individual agrees with owning Bitcoin or one of the many crypto-currencies, the important thing to understand is that the tremendous price increases in many crypto-currencies are likely due to concern to the massive amount of Central Bank $1 trillion in asset purchases in the first four months of the year.
Furthermore, crypto-currencies are a likely a GOOD INDICATOR of what will take place in the gold and silver market when investors realize most STOCKS, BONDS and REAL ESTATE values will continue to implode as the U.S. and Global Oil Industries disintegrate.
The gold and silver prices are being capped because paper contracts can be added as more funds move in. However, crpyto-currencies do not have this problem because the amount of Bitcoins, as an example, are limited.
Read more by Soren K.Group