Silver Prices and The Fed Meetings
Commodities / Gold and Silver 2015 Nov 14, 2015 - 06:58 PM GMTBy: Dr_Jeff_Lewis
Hey guys it's Jeff here, stay right there, we are live, I'm really excited once again for two reasons: Number 1, I get to use this unique technology. When it works, it gives us the ability to create an immediate live replay or an encore replay, a transcript and also an audio version of this. The second reason why I'm excited is that we are continuing, this is our 7th episode in the series where we're covering what really determines the price of silver, the electronic price discovery versus the fundamental reality and during this time we've actually seen a complete turn of this cycle, this pattern, or this trading relationship between the big commercial banks and the managed money traders.
Again, we've been talking about the reality of price discovery, and Mike says yes they are important, I appreciate that Mike. We've gone through a whole series, I want you to have a stack of information, a stack of assets in a way that you can look at immediately when you see price volatility, when you see price action, you can have some peace of mind in knowing that there is a true pattern, there is a relationship, there is a mechanism that is behind or responsible for the price that we see, and it's completely detached from fundamental reality.
We spent the first episode just talking about all the factors, and the second episode we went deeper and narrow. We started off at discussing the relationship between commercial traders and the managed money traders.
One way to think about this relationship, and I wrote it out here on this slide, is that there are basically these hedge funds, these managed money traders, their asset managers that are basically investing outside capital, based solely on price momentum, and we cover that in the subsequent episodes, but their direct relationship is with the large banks that serve as a counter party toward these technically oriented traders.
That's really the heart of it, and we talked about the relationship between these two entities, and how algorithm trading and HFT or High Frequency Trading causes or stirs up that relationship, or causes us to move through these cycles.
That was our first episode, we covered HFT and algo-trading. Then, we talked about algorithms and we also discussed HFT and high frequency trading. We then moved on in the next episode to discuss the technical analysis or silver prices & technical analysis, and technical analysis basically is what these entities are using to determine or to determine the price momentum, they're using this as a basis for the decisions that are made between these two entities. We discussed how that leads to an overall general trading standard of care, so that the entire complex of traders follows this format, kind of covering their butt, so they don't get in trouble, so they conform to this technically based trading, again that's tied directly to this relationship between these big traders and the managed money funds.
What happens with this standard of care is that you have this complete ignoring of fundamental analysis focused solely on technical analysis, and then that leaves the markets open to behavioral economics or management of perception economics, and we will cover management of perception economics or MOPE a little bit later. That causes this collective blindness, the information that is being used to make these decisions to come up to this formulating or price discovery, is really based on a false premise. In the next episode we began discussing the events or data releases that influence the price. There are a series of events in data releases, that depending on where we are in that cycle, will have an impact in the price, will cause a move that will impact where we are technically, will change the momentum, and cause the price to move in one direction or another. Again, completely detached from fundamental reality.
A couple of the important data points, I think the most important are based on the forward guidance tool used by the FED, unemployment and CPI are the main ones, the main data releases that occur at the beginning of the month, we just had them, and actually tomorrow is another big one. Then, last week we discussed the influence of this event called Options Expiration.. Generally when options expire, we see a lot of volatility, and if we are in this point in the cycle where we were last week for example, then there's a very high likelihood that we're going to move down because there's a major incentive for those options to expire out of the money, they're written by the commercial banks who are profiting from this pattern, this manipulative pattern really.
Today I want to discuss another factor in all of this, and this one is a big one, it's Silver Prices and the FOMC or the Fed Meetings, the Meeting Complex, and before we get into that, I want to double check and make sure, are you guys hearing me okay? Just let me know if you're still there. George is here from Beverly Hills, hi George, hi Arc from New Jersey, George can hear me, great. Paul is here from Texas, I don't know if I said hello yet, Paul, thank you for being here. Good. Chris is here from Orinda. Thanks Chris. Michael you got me, okay, good.
There were two events that occurred last week in the markets, there was an options expiration and the federal open market committee had its two day meeting, its press release on Wednesday, right at 2pm when that press release came out, there was a huge volume in the market, the price of silver, and many other commodities also, but especially silver tanked, it went right below its 200 day moving average, that was the momentum that caused the volume that followed, the managed money traders, the hedge fund traders piling on selling on to this market, and I wanted to back up for a second, as most of you know, the FOMC really means the Federal Open Market Committee, and it's basically a meeting, it's a closed door meeting with essentially 12 people there, 7 governors and 5 presidents. The governors are board governors, they are appointed by the President, approved by the Senate, and there are 5 presidents, these are regional bank presidents, there are 9 all together, there are 5 that show up for these meetings, 4 that are on the side lines.
One other thing to garner from this is that these people, these entities are out there, they are the fed heads, they're out there on the speaking circuit all the time, reinforcing, I think playing with market perception, there are 3 or 4 different speeches this week, when Janet Yellen speaks that's one for sure. Of those 7, 2 are selected by the President to be the Vice-Chairman and the Chairman, Janet Yellen obviously is the Chairman, but these guys, these are the rock stars, these are the fed heads that everyone is paying attention to, trying to get some idea of what they're going to do with rates, that's what it really boils down to.
There are about 8 meetings each year, a big one coming up in December, we just had one last week, now the minutes will be released a week from now, and the interpretation from the last meeting was that the fed now is taking more of a hawkish stand which means they're going to raise interest rates and the market uncertain on how to process all of that. It must be very hard for the general commentator to gain a sense of what reality is, when there's so much evidence that organically the market is falling apart and deteriorating over time, and yet the data that is used in these open market meetings, these closed door meetings is the same data that clearly any of us can look at and say "Well this is a complete farce, it has nothing to do with reality."
Those meetings consist of presentations by their staff that are using these same data points, and so in a way the fed is kind of blind, they suffer from the same collective blindness that most of the trading community suffers from, if they are conforming to this standard of care, this formalized way of trying to keep trading objective or market analysis objective.
These governors, these presidents, they are making speeches, they are having meetings, there are minutes that are being released and there are also testimony by law, the fed chairman has to give testimony to Congress twice a year, so any of these events typically will cause some type of volatility, and especially so with silver, but most importantly, depending on where we are in the cycle will determine which way the market will move, and the cycle again is this relationship between the big banks and the managed money category, which we can see.
We can see the inner relationship, we can watch the change in that relationship, and the data that is released by the CFTC and the commitment of traders report that comes out every Friday. It's data for the previous week, the cutoff date is Tuesday, and essentially the price direction and volatility are a function of that commitment of traders report. I think if you stay right there with the commitment of traders report, you can, and again the purpose of all this is to give you as much fuel, as much information that you can use. You could forecast what's going to happen in the next couple of weeks just based on that positioning, and of those factors that I've been mentioning.
I'm not doing this primarily as a forecasting mechanism, mainly so that you have at least some piece of mind as we move through these cycles of volatility, which again are really, it's important to know that they're detached from any kind of fundamental reality, and basically you can characterize it like this: If there is a high commercial net short position and a low managed money short position, there's a high probability that we're going to move down in price. If there is consequently a low commercial net short position and a high managed money short position, then there's a probability that prices are going to go up or they're going to stay neutral, depending on where we are.
Here's another illustration of that same concept.
A large commercial net short position, which is what we had going into the fed, to options exploration plus the FOMC meeting last week, and a very small managed money short position or a consequently very long managed money long position or big managed money long position, and the price went down, just as we had predicted or forecast.
And the reverse can be true again, if the commercial net short position is relatively low, if the big banks are out of the market and the managed money position has grown short, which it's probably doing right now, then we maybe have bottomed, and we could move up. I want to show you a couple things in some slides, but one thing that I wanted to point out before I move through the slides is that Wall Street knows about what's going to happen with the FMOC meeting first. I discovered a really interesting study that was put together by Nanex and I'm sure many of you have heard of them. They are a company that is run by Eric Hunsader, he's become a very active opponent of HFT and sort of a cheerleader for ending or trying to educate the public about it. I know he could do a better job about it, but I'm not in his position.
Basically, his company is really a software company that specializes in technology that can follow the markets at the millisecond level, and give information that's happening at that sort of sub-second or millisecond level. He put together a study on a press release that came out during a fed meeting a couple years ago when the issue was whether they would taper or not taper, it was in 2013 I believe a September meeting. He noticed that really interesting phenomenon, and this kind of feeds back into high frequency trading and just the absurdity of speed in these markets, and the movement of information. He pointed out that that press release comes out in Washington, and then the information needs to travel to New York but also to Chicago, so therefore, the reaction of the market ought to be in New York first, in like 5 milliseconds to get to New York and then literally, 5 milliseconds to get to Chicago, you should be able to see a difference in how the markets react, based on that difference, if the future is basically located in Chicago and the rest of the equity complex is in New York.
He noticed that the markets reacted at the same time and what that means is either, before that fed release is made public, either someone who works for the press, there is a lock down on the information before it goes out for a few minutes, so it's released to the press, but they promise not to write about it until 2pm, which is how the Wall Street Journal, I forget his name but he always has a story prepared, it's amazing how quickly his whole 700 word article comes out minutes after that release, but they get the data first. Either someone on the inside is selling it to Wall Street first or what I believe, and what Eric Hunsader pointed out as well, is that probably the fed is leaking this data first to Wall Street, it gives them the ability to move or position themselves before the information is released, or position themselves to buy or sell, depending on what they already know, before the information is made public.
I'm going to move over to some slides right now, if you have questions, you can ask them at any point in time. Let me know, before I move over to the slide area, let me know if you can hear me okay, I want to make sure that we're still in sync. I still see all of you here, but I'm just going to check really quickly. Good, okay. Great. While I'm waiting for the chat to catch up in real time, we're going to move over to the slides. Rick, yes, thank you, thanks for that, I appreciate it. Here we are with ... Arc says he can see me, Michael says he's got it, Paul says loud and clear, thank you guys.
This was actually the Eric Hunsader's, his conclusion about this event that he was describing, the fed news was leaked to or known by a large Wall Street firm who made the decision to pre-program their trading machines in both New York and Chicago, and then wait until approximately 2pm when they could buy everything available. It somewhat fascinating they tried to be "honest" by waiting until 2pm, but not a thousandth of a second any longer. That was Eric's conclusion about this, and I tend to agree, it kind of falls in line with the fed's mandate, really the unspoken, the surreptitious mandate of releasing information that will have some behavioral influence on the markets. I think we're on the slippery slope, we'll probably follow in Japan's, in the footsteps or in the ... Japan has been a trailblazer in all of this, and it wouldn't surprise me if we were directly intervening in markets at some point, to keep everything alive and moving.
Dr. Jeff Lewis, is the Publisher and editor of silver-coin-investor.com and our their sister site, 47forum.com. He also runs the Lewis Mariani Silver letters, a private subscription service. To see all of these episodes and more visit youtube.com/silvercoininvestor.
By Dr. Jeff Lewis
Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com
Copyright © 2015 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.
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