As strange and implausible as it may seem, J. P. Morgan and other financial firms trading on the COMEX have colluded despite the watchful eye of the U.S. Commodity Futures Trading Commission (CFTC) to make big profits in silver. Though collusion is illegal, the problem in the silver futures market has continued unabated.
The Short End of the Stick
Tech funds have futures portfolios that are diversified to alleviate risk, holding equal weightings of many different commodities, like silver or gold. The funds' managers have devised technical formulas to determine how much of each commodity should be purchased and also when to buy or sell. The funds are basically on auto-pilot, allowing computers to buy and sell their holdings when predetermined conditions occur, like prices.
The buy and sell formulas are pre-set according to the manager's investment guidelines, like cutting losses short or to continue with what the system has decided, even if there is a short-term loss. A sell command will be triggered during a trading day if a commodity's price lowers to the designated, pre-set number.
Silver Prices and Shorting Silver
To the detriment of the owners of these tech funds and hapless small investors, it is easy for short sellers to anticipate their moves and then take advantage. According to Ted Butler, silver analyst and independent consultant, the eight financial firms watch the moving averages and are aware of the specific numbers that will trigger traders' computers to send "sell" commands.
They privately confer about their puts, and agree to sell large numbers of futures contracts of silver at the same time. The sheer volume of their coordinated put orders sends the price of silver downward. The descending price of silver then triggers the tech funds' pre-set "cut the losses short" price and their computers automatically sell their silver.
Then the short sellers collude again, holding back from buying the thousands of silver contracts they have hoodwinked the tech funds to sell unless the price is even less. Of course, the lower bid price is one that all the short sellers have agreed upon, and the tech funds can't sell their silver unless they meet it, thus taking a loss. In early August 2010, J. P. Morgan and friends were able to cover 25 to 30 million ounces of silver they had shorted.
The short sellers have gotten away with this strategy for many years because silver is but one small part of a tech fund's whole portfolio, so the risk has been spread and is not as keenly felt. Many funds have taken the silver losses in stride.
Butler said, "No free market explanation can describe the commercials' behavior other than it being collusive and patently illegal." The silver futures trading is not discovering the true price, as commodity law requires, but is setting a price and making the silver futures market unfair for investors. However, buying silver metal, as in coins or bars, still has the potential to reward the patient investor, especially if simple rules for buying silver are followed.
Sources:
www.butlerresearch.com
www.investmentrarities.com
Join the Conversation