Silver Price Illusion Versus Reality - A Little Help Keeping Your Head About You
Commodities / Gold and Silver 2015 Sep 21, 2015 - 12:47 PM GMTBy: Dr_Jeff_Lewis
Hey, stay right there. I'm really happy to be here. If you know me or if you're brand new to this, I'm excited because number 1, I get to talk about what silver prices look like in the current reality versus the inevitable reality. Also this is the first time that I've been able to present in this format, so I look forward to seeing how it goes. If you don’t know me…
The title of today's; I know you like my slides, but the title of today's program is Silver Price Illusion Versus Reality and we'll talk about the convergence factors that I think are going to tip the balance from the current price illusion or reality that we live in right now and where we're headed. Before we get started, I want to hear from you. I want to connect with you. Please if you could, type your name into the chat box either to your right or below, depending on how you're watching this, so I can know your first name and where you are. I'm Jeff Lewis. I'm in San Francisco, California and I want to acknowledge that where you are and what your name is.As you do that, what I'd like to do is just start off with a bit of a disclaimer or perhaps a warning. Number 1, what I'm going to present today may give you the impression or it may inspire you to think of probability versus prediction. I want to point out that probability is not equal prediction. I'm going to go over a few factors that influence current price discovery, but I don’t mean them to be a predictive mechanism. We can talk more about that. The other thing is that I want to stay shallow and wide with this and later we can go deeper and narrow. I'm going to present some of these factors and all of them deserve episodes of their own. For today we'll stay shallow and wide on this and get the main factors out there and then go deeper and narrow later on.
The purpose of all this is what I'd like for you to walk away with is to have some seeds planted so that the next time you wake up in the morning, it's something that I do. I wake up. I check the price and immediately whether the price is up 5 percent, down 6 percent or whatever in between I try formulating or looking at correlations, like what did the Dow do, like where is the dollar. Then I go if the price is down and I'm showing crappy about I'll go often to the inter-webs and look for some news items, something that points to a new reality I haven't thought of.
The purpose today is that I want to arm you with some factors that you should be thinking of first and foremost before you go back into this exercise that we're all capable of. The problem is the risk is that it creates a slippery slope when you feel bad about the price. Then ultimately people begin to feel weaker about their conviction and it becomes harder to hold on for the long haul and so that’s what I want to get out of this today.
I'm going to just check right here and acknowledge a few of you. Dawn, hi. Dawn is in Grass Valley, California; Jay Daniel in Alabama, hi; Joseph in Niceville, Florida; John in Houston; Diana, Arizona, thank you for being here; Rick in Los Gatos, California. Hey, Rick; Chris is Orinda; Mark in Arcadia. There we go. Ross in New Jersey; Roger in Edmonton. Cool, cool. Jared in Bar Harbor. Thanks guys, thanks.
I'll stop in a little bit and go through here. It's nice to here our names being called out; Dennis from Florida; Sam in Pine Springs, Minnesota. Thank you all for being here. We talked about what not to get from this and let's just jump into this. We'll also talk about the FOMC announcement. I know that I didn’t time that web that way. We could have been talking about; in positive or negative, I think it's interesting to discuss but we'll get there.
One thing that comes up is that unfortunately mot people observed the price as the key to or giving rise to an understanding about supply and demand and it just isn't the case. Our price has nothing to do with supply and demand. Price comes from or the reality of the price that we see now is a formulation of 2 factors I call MOPE and then the price discovery mechanisms. We'll go through that, but what I want to first talk about is we're will end up back towards, which everyone expects. Most of us who come into this market see these factors that’s playing is the main reason why we're here and so the ultimate silver price reality.
I'm reading out the sites because many of you will be watching the replay of this and also have an audio. There will be a transcript as well, so we'll get a few different formats up on the replay. The ultimate price reality comes from real supply, real demand, the economy and then the dollar underlying all of these. You can see why I want to stay shallow and wide with this and we can go deeper and narrow in subsequent episodes because each of these factors is an episode of course in and of itself.
The reality of price right now depends on just the main ones. There are 6 main factors that I want to go through, so futures; TA stands for technical analysis; 3 is the standard of care and then I'll show you what … 4 is data releases; 5, option expiration; and 6, FOMC which today is FOMC day. Let's go back through this. As most of you know, the futures market represents the center of world price discovery. I'm talking about the COMEX in New York. It's owned by the CME or Chicago Mercantile Exchange; the CME is a for-profit exchange by the way.
What was once an organic place where a fair price could be discovered from real producers and users has evolved into an electronic mechanism where the main players are commercial banks and hedge funds. There are other categories but those are the 2 main ones. We can see what they’ve done each week when the Commitment of Traders report that comes out and shows us the details of what the positioning was like between these 2 main categories. They're the main, the ultimate mechanism behind price.
The commercial banks, the JP Morgans of the world have access to high-frequency trading. Their counterparts, the managed-money funds, the funds that manage other people's money are using algorithms or computer trading and so they respond to what the commercial banks use in term of HFT. We actually are seeing it right now as we speak. Technical analysis is what the managed-money funds are married to and the same with commercial banks. In fact this is the sad reality of trading today is that the standard of care is to watch technical analysis as if it's an objective mechanism for trading.
If you come in to my eye clinic and you have a red eye and I know that there's a medicine that I've been using that it's off labeled, but it works really well. It doesn’t have side effects that I've seen. I've been using it in my clinic and I can choose to do that or use that medicine off label, but suddenly it doesn’t work for you. It all goes south and you lose your eye and it's a big mess. It will be very hard for me to defend myself in court by saying, "I used this because I thought it would work." It makes sense. It's reality.
Really is it should have been better for them, but the reality is that it doesn’t conform to the standard care and so I would be liable. I think that most traders, the futures market, they look at technical analysis as an attempt to objectify trading in order to protect liability to conform to a standard of care that’s absolutely nothing to do with supply and demand or the underlying economy.
Then 4, 5 and 6 here, data releases. These 3 usually create volatility around the price, most of the time it's downside volatility, so data releases. The second Friday of every month is a non-farm payroll. Typically, there's a lot of downward pressure on the price around that. Next week is options expiration. You'll see next week most likely 2 days before or 2 days after significant volatility around that where options expire in the futures market.
The last one of course is the FOMC and we have that today. I wasn’t sure what was going to happen. No one did. We're all waiting for the Feds to finally after the 54th time I think opportunity to raise rates. They didn’t do it. We see the price. I don’t know if any of you are watching, I was. At exactly 11:00, before actually the tweet started happening, the price had already surged by a 2 or 3 percent and no it looks capped. That’s actually a characteristic or a pattern that we'll talk about next.
This next category I put under the MOPE category, so I mentioned it before. MOPE stands for management of perception economics. Jim Sinclair made this I think famous in our sector. It basically is an extension of this idea of behavioral economics that if I can make you feel good about your situation then it might influence your behavior. You may invest in stocks or you may buy more stuff or you feel richer you're going to perform or do certain things. The way that it manifests I think in the commodities markets or in silver and gold markets are via news and events, headlines and then in trading patterns, which we'll talk more about.
News and events could be things like the fiscal cliff or Greece facing its big deadline, events or news that, or it could even be a natural disaster and things that would otherwise be more conducive to a safe haven type of movement or trade. Typically, we'll do the contrary of that. They will work in the opposite direction. Then in trading patterns one interesting one that many of you are familiar with if you know Bill Murphy, one of the GATA guys from LeMetropole Cafe, they’ve been documenting this for the last 4 or 5 years. You can watch the gold market.
If gold goes up 2 percent; it usually never goes above 2 percent on n update, but if it happens to go up 2 percent typically the next day it will follow through and go up 1 percent. If that pattern develops, there's a very high probability that the next day there will be a major downslides. You get this 2 percent, 1 percent and then down. In silver, it works similar but it's more exaggerated silver, typically moves a couple more percentage points or it's an exaggerated move compared to gold.
Overnight if you're on the West Coast like me and you go to sleep at midnight and it's 3am some place in New York and you see that the price is already down 2 or 3 percent, that’s a tall-tale sign of what's going to happen. On the opening someone is messing with the markets overnight and then also mid-day capping of rallies, so that’s happening probably right now. I haven't [heard 11:49] with the price since we started, but you can chime in if you see it. What happens is that we've probably moved up 30 cents in the first few minutes and then it began already being capped.
We can see evidence of that and it won’t be this week's Commitment of Traders report, but it will be the following week we'll see the change in relative positioning. From the commercial bank perspective we'll probably see an increase in a short position. They’ve added shorts in order to cap this rally and/or the managed-money category will actually increase where there will be more of a short side. In this case actually the managed-money shorts are covering positions today. This is part of the fuel for this little 2 percent move.
One thing that’s positive about today is that we were already a little bit above the 50-day moving average coming back to technical analysis. Not that that is really their ultimate reality, but it's what these traders are looking at. It's typical if we stay a day above the 50-day moving average or a significant moving average. The next one is a 200-day moving average. We have ways to go before we get there then typically you'll see more short covering.
One other thing I want to point out about these managed-money traders, these people who manage other people's money and conform this technical-analysis driven standard of care is that they never take delivery of metal. They are only in it for the trade. They're all computer-driven and if they put on short position that position will end at some point. It's almost a guaranteed fuel for whenever the next rally begins.
There are 2 main convergence factors that I want to talk about. Many of you are familiar with these currency wars and of course physical wars. Physical war I think is a reality. I don’t know if you guys saw this story the other day. I didn’t see it spread around too much, but one about who is being interviewed about the economy and the relative participants in the economy. There's this large number of people that don’t participate in the current economy and he was asked about this. He said, "Don’t worry about it. We can just send those people to Afghanistan."
I thought that it was unbelievable. I know he's getting up there in age, but he basically in that slip basically gave us insight into the mindset of the elite. This is the course we're on. It's inevitable that there will be a hiding conflict somewhere. Conflict creates volatility. Volatility can upset the already fragile financial markets that all of this illusion is based upon.
The other one that I wanted to go through in terms of currency wars, most of you are familiar with just the competitive devaluation between countries that goes on to keep their currency weak. Certainly, like today's announcement, I'm sure Janet Yellen wants to see the dollar decline and it is declining I think a little bit today. She wanted to see it decline significantly so we can mange our debt.
The other 2 factors I called I think that are just as important and as insightful is these 2 fronts that the Fed, the US Central Bank has been fighting in this other war. Peter Warburton I think many of you are familiar with him. He wrote a book in 2000 actually which is an excellent book. Here are a few paragraphs in that book that; I'll put a link in the comment section so that you can see it, but I think it's really important to keep in mind.
One front the Fed is fighting is the liquidity front. They're providing constant liquidity ion order to keep this overall Ponzi going to keep the balls floating in the air. If they were to pull the liquidity back, the entire debt structure, the debt bubble would collapse in a minute. They'd actually been fighting it and not doing a great job. You see today they couldn't raise rates a quarter point. I'll show you a slide in a minute to show you another illustration of how poorly they’ve been on this front.
On the other front that they’ve quite successful with and they’ve been able to do this with very little leverage is they’ve been able to capture and incite commercial banks to bet against the rise of commodities. They’ve been able to do that from a regulatory standpoint by looking the other way and this is really what price manipulation is all about. They’ve been able to induce and incite commercial banks to bet against the rise of the whole host of commodities, but mainly silver and gold or including silver and gold probably first and foremost.
What that does is it creates this chaos. No one has a solid benchmark by which ultimately to value of a currency or any other fiat currency. You don’t know what anything is worth. We end up scrambling around and we become more vulnerable to this behavioral economics, this management of perception economics. I think that that is beginning to … We're seeing cracks in that and the way that they're manifesting is that they’ve doing this for so long that gold silver by definition or precious metals by definition they're rare. We're seeing physical market tightness developing across a whole host of friends in gold and silver.
What I think you're starting to see also I a switch from these big banks that were induced to short the commodity complex. They're beginning to move to the longer side and we can see it. I know that this particular data point is controversial, but we see it in the warehouse data. The COMEX or the futures warehouse data shows that JP Morgan has been accumulating a big position. They’ve been actually offloading a position. Goldman Sachs has been taking a position of gold, but in silver JP Morgan has been going long physical. We may be seeing a shift and that shift I think is the other convergence factor that gets us from where we are in this price discovery illusion back to a reality where price is based on supply, demand, the economy and the dollar underlying all these.
Again, I just wanted to present those factors in shallow and wide way. We can go deeper and narrow in subsequent episodes, but I wanted to at least plant those seeds and give you a little bit of a place to go when you wake up in the morning like I do. You check the price and you see that it's like, "It's 5 percent down, 4 percent up." You won’t know that this is done and so we start seeing 20 and 30 percent moves, big moves in a day and then it becomes something else. We'll have another discussion about that.
This hopefully will arm you with at least keep you from going off into the inter-webs and if you're getting lost in these conversations that are interesting an fascinating. Supply and demand and the economy are interesting subjects and topics. They deserve focus and attention, but I want you to stay on the surface a little bit more. Look at where price discovery is coming from in real time and hopefully that will keep you from at least by not walking around with this anxiety or this negative feeling and/or it will help you hold on while we approach this next phase about this. That’s what I wanted to present.
What I'd like to do now is to go through. I want to say hello to a few of you. If you have questions, please type them in. We can talk about that. If anything stood out as something that is really helpful or something that you thought helped you, please type that down and share with others. Again, there'll be a replay of this. I know I went through it fast. Also I'll produce a transcript and edit the transcript so that you'll have that as a way to consume this again. I'm going to just switch over and take a look over here and check the chat box. Again, I'm Jeff Lewis. I'm in San Francisco, California. I run the silvercoininvestor.com website. We also have our paid program at lewis-mariani-research.com. Thank you for being here and let's start and take a few questions.
Hi, Steve. Steve is in LA. There's another Steve in Sweeny, Texas. The reason I'm waiting is that there's a delay. With the way that this works there is a delay. When I ask the question and you type it in, it will take bout 30 seconds for me to see it.
Chris asked, "Any chance that the CFTC and the SEC will get honest and do their job," Chris in California. No, I don’t think there's any chance. I think they’ve had a chance for years. They’ve just been part of this. They’ve been captured as part of their system. It's clearly revolving though we see 1 story after another each week. These officials they go in and they create the regulations and then once they’ve created these regulations that no one can understand except for them they're hired by the banks again that have been induced, incited to be short or to rig these markets. Unfortunately, I don’t think there's any chance of that.
Russell has a comment here. These are robot markets. These are not human. These are machines playing against each other using again technical analysis, which is meant to be of an objective way of trading again that has nothing to do with reality.
"Where was I surprised to see the price move in silver before and after the Fed announcement," Steve asked that question. Thanks Steve. I think not really. I was actually on the fence until the very last second I thought, "They probably will raise rates to see what happens." They'll have language. I think people pay just as much attention to what they do with rates as they do with the statement that follows. I figured they could probably get away with a quarter point rate or even half of that like 12-1/2 basis points. Why not just to see what happens? Then have this statement that clarifies or pads the situation.
I was waiting. I thought I picked the best day to have a webinar about price discovery in silver when this is an FOMC day and they're going to raise rates by a quarter point and silver is going to be down $2. We're all going to feel exactly when I'm trying to help people who avoid feeling. Good for me it turned out that the price is up. I don’t know what it's doing now, I haven't checked. Really quickly I want to show the effectiveness of the Fed in this liquidity operation that they’ve been on. I'm going to show you a slide if I can find it here.
Here we go. I don’t know if shows up on your screen. It should, but basically these are 9 charts to show. I pulled it from 0 hedge. Look at this. It's talking about inflations, student loans, the increase in food stamps, the amount of debt that we've seen, the amount of money printing. Health insurance costs have skyrocketed. The labor force participation is cratered. You heard the economy is cratered; median family income, cratered; homeownership, what recovery? I wanted to show that and then there is also … I should type in this box here. I want to show you the link to Peter Warburton's book. It's actually a GATA link, but I think it's a good idea. I'm going to type it in here.
Erick, I like your comment. The SEC is complicit. It's an answer to Chris' question about will the SEC or the CFTC will get their act together. Yes, they're complicit just by silver and then bite again and even if it hurts bite more.
Roger wants to know why don’t the regulators control the banks and what part can Congress play. Unfortunately, we've been down this path and I think all of the natural pathways have been attempted. The problem is and I hate to be cynical about this, but pretty much all members of Congress are bought and paid by this system. Again, the system is set up. This other front that the Fed has been fighting by keeping this sense of confusion about where the value is of anything in allowing these big banks to do basically whatever they want without regulation. You remember the Fed, not only do they control the cost of money but they're regulator in of it themselves. They're complicit and all of this.
I don’t see that there's a way to get enough of a movement behind this. We're all watching the political candidates right now, the top contenders, and none of them even come close. There's hope but then it's like, "Wait a minute." If I hear one more time someone talking about capitalism being the problem, we're not in it. This isn't a capitalist. This isn't capitalism. This is something. This is crony capitalism and it has noting to do with natural capitalism.
Jay Daniel says, "We have the very best politician's money can buy." If they had raised rates by a quarter percent; I think Steve asked, I think we would have been down. I think the set up we would have seen it a week later. We would have seen a pile on of more shorts from the managed-money category. Probably most of the algorithms were pre-programmed already. It was an either up or down decision. If it goes up then there's going to be this piling on.
The footprints the way they measure the influence of the commercial traders in the Commitment of Traders report is to see the overall size of their net short position. Their net short position has been creeping up as of late and they probably would have seen a reduction if rates have gone up, but again we would have seen that about a week later. I think I brought this up before. I think next week will be interesting to watch because it's an option expiration typically. 85, 90 percent of the time we see a lot of volatility usually do downside. Even if we stay above the 50-day moving average I think we should look out for another buying opportunity really.
Russell, it was a great comment. Russell has been with us for a while. He is a retired floor trader and a COMEX member. I knew guys that executed [Hunt Brothers 27:33] orders, someone would tell him the telephone order, they would state buy everything and so we tell you to stop. They wouldn't hang up the telephone. That’s what need again, someone to start the panic. Russell, you're alluding to this idea that why doesn't someone who sees of what that underlying reality the supply, demand, economy, the dollar; why doesn’t someone recognize this. Silver is a small market. It wouldn't take that much money.
I know that Ted Butler wrote an article about how easy who would be to turn $1 billion into $5 billion. I'm sure a lot of you saw that. Why isn't someone just step in and start hammering away at that? I think part of the reason why is that again it comes back to this whole standard of care. I think it makes sense into a certain degree. Again, back to the medical analogy, sometimes there are better ways of doing things. There are lots of medicines that before the FDA approved they make sense and so actually they work. There are procedures that are off label that are helpful in many instances. Some they never make it through the FDA approval process, so anyway that coms back to why I think some traders they don’t want to put themselves on the spotlight.
This is a great question, Roger. In other countries black markets develop when the government markets no longer work. Is there a black market for silver in the US? I don’t think there is yet. I think that what we're seeing in terms of tightness is an increase in the price of premiums, the cost of premiums, the premium prices that surged. Many dealers are having shortages or noticing shortages across an array of different product. I think that what's interesting about your question what I think of I that it's back to the buffet thing, what are we going to do with this huge, this vast number of people that are out of the workforce.
He says send them to war, but what they're doing is they're under the table already. They're not part of the system and so there's already somewhat of a robust trade happening, whether it's via Craigslist or some place else. People are working under the table. They're working outside of the system. It's part of why they probably want to ban cash so they can bring some of that back because that’s a huge revenue loss for the government.
I think we have the makings for a black market. If we were in crisis mode and suddenly the real value of things began standing out and you couldn't ignore the value of an ounce of gold or an ounce of silver, I think very quickly we see it happened in developed or semi-developed countries. If you look at Argentina as an example during their hyperinflation or their overnight devaluation, many black and gray markets semi-regulated or securitize markets came up and people were transacting outside of the system.
Mike is here in Iowa. Thanks for coming by. Gary is in Portland. Mike, in Ireland. I'll take a couple of more questions. Dawn asked a good question, "Is it safe to say that the crooks at JP Morgan still have a large short position in the silver futures market?" The answer to that is no based on the data. You can take the Commitment of Traders data that we see and look at that commercial category and see the net short position as it compares to where it's been. It’s actually very low. The lowest has been at some time historically low. Typically, this level is indicative of a rally that’s about to begin.
When you take the data from the Commitment of Traders and you compare it to the bank participation report, another report that comes right from the data, you can see that JP Morgan is pretty much out of. They're not short. It doesn’t mean that they don’t have the capability and that they don’t intervene in these markets using HFTs. High-frequency trading allows them, allows anyone but this category of trader to spoof the market. They can drop 1,000 contracts in a nanosecond and then not fill those positions, but because those contracts showed up the algorithm traders with authority responded.
Even those positions or those trades could never have been filled. They were too high no one would have come up to a price like that they put in or down to a price that they came in. The damage can already be done and so thy can get these rallies or these downside movement going. What's interesting and I know that many of you have seen the interview that I did with Ted Butler. I recommend that you watch it. You can go it's actually free on the lewis-mariani-research.com website, lewis-mariani.com. It's on the front page. You can watch. I should have a link in each of the episodes to the different parts.
Part 2 of that interview is where he goes through. I didn’t quite understand how JP Morgan could have accumulated such a long physical position in the silver market. He went through step by step. He lays it all out there. There's a transcript you can read if you don’t feel listening to the speaking. You can see basically where all those ounces have come from. I tend to believe it that he makes a good case for JP Morgan being long in the physical market. I know that many people assume that they're long and that just means that if there's a rally they're going to sell this position into the market.
I think you have to back up a little bit and remember this could be happening in gold, too. The way that they’ve accumulated this position is by not acting or not intervening or being a part of the COMEX. If they were buying 400 million ounces, that’s a giant position. There's no way hat the futures market would have been affected by that. What they were doing is buying it on the sides doubtfully. I think that what they'll do and what their best at and what they'll continue to be good at is positioning for the upside. This is a gift. They’ve been able to accumulate this position while at the same time lowering the price point at end of the market.
Anyone can see if you look carefully at the real supply and demand data that we are orders of magnitude below where any kind of fair price would be. I think maybe their position for this big rally in the market it would not surprise me in the least and so they're doing exactly what you and I redoing. They're accumulating on lower prices. We feel the pain. They know because they're controlling how old this manifest.
Guys, I think if there are no more questions I think I'm going to wrap this up. Again, I wanted to at least arm you with some information about how to look at price discovery. We talked a little about how that could converge. You can find me if you have more questions. Never hesitate to email as most of you know I'm really good at getting back to you in a pretty short period of time. You can find me at silvercoininvestor.com. You can sign up for any of our stuff and you'll be on the list. Our paid programs are at lewis-mariani-research.com. I encourage you to try it out. All of the programs are only a dollar to try. Let me know.
Also if you could check out 47forum.com, there's really great conversations going on in there. A few of you are there and they really appreciate the contributions. There's a lot of great information. I have been curating some content from that website also, 47forum.com. With that being said, thank you so much for watching and I look forward to seeing in an episode where we'll go a little bit narrow and deeper on these issues. In the meantime take care, be well and we'll talk to you soon. Thank you.
For more articles like this, and/or for a breath of fresh silver market reality amidst the stench of denial and technically meaningless short term price obsessed madness, check out http://www.silver-coin-investor.com
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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