-- Posted 2 September, 2010 | | Discuss This Article - Comments:

The silver market is one of those puzzles that continues to challenge our understanding of free market concepts because it is MASSIVELY volatile for such a stable supply/demand dynamic. When was the last time you heard of a gigantic silver discovery that would drastically increase the supply of silver? Or a new manufacturing technology that will replace the ever increasing demand for industrial silver? Let me save you some time...you have never heard of any drastic changes in the supply/demand equation. So why are silver prices so volatile when everything else related to physical silver isn't?

Taking a deep look at the details of COMEX silver trading can be very illuminating as to why but when you understand what is really going on... it is downright infuriating! I've put together a rare glimpse into what REALLY happens when buyers and sellers get together to make a market in silver on the COMEX. I hope you are sitting down because this covers just 5 MINUTES of a ordinary trading day...

September 1, 2010: COMEX silver traded sideways almost all day. This is predictable as there was no earth shattering news of a huge discovery or massive industrial purchase coming out of the mainstream media. Other than a brief spike up to 19.535 at 8:38:07 (likely people were trying to make a run at the highs in both gold and silver) the market was drifting down a bit, and traded in a tight range between 19.35 and 19.40. Ho hum.

Suddenly, the trading action changed dramatically. Starting at 13:20:00 (5 minutes before the COMEX floor close in silver), someone started to press the market down, and they in fact got a print at the low of the day at 19.32. To accomplish this they had to sell 215 contracts. Did someone panic OR was this a manipulation of the price lower (which is illegal)?

Then, turning on a dime at 13:22:30 (2.5 minutes before the COMEX floor closed), they started buying all available liquidity. At this time of day (final two minutes), the market participants and market makers are the most active. It's the highest liquidity in the day. So, they started buying all they could, and drove the price quickly back up to 19.40. They didn't go above that price. They just bought all they could for the final 2.5 minutes, gingerly, not wanting to rally above 19.40. In the end they had bought 853 contracts.

When the dust settled they basically were able to buy a net 638 contracts in the final 5 minutes of COMEX silver trading, without causing a price rise. They were able to do this, since they knew when the potential liquidity would be the largest of the day, and they started with a head-fake down move, to get extra sellers. If they had simply started buying, they would have created a much larger price rally.

This "play by play" account really shows the nuts and bolts of manipulation as it happens. When you equate this to physical silver the numbers are staggering. This was basically a paper dump of 1,075,000 oz of silver to rig the price lower hitting stop losses and the clueless panickers only to buy back 4,265,000 oz of silver within minutes. The net effect... 3,190,000 oz of silver bought ALL IN 5 MINUTES WITHOUT EFFECTING THE PRICE OF THE METAL!

They are clever crooks but they are crooks none the less. I think this also shows that someone really is trying to buy (or cover shorts) as best they can, without pushing the price up too quickly. The likely culprit is our friends over at JP Morgan. They probably didn't even reduce open interest. Just passed the "hot potato" short positions to someone else. Mostly market makers or maybe even others they collude with to hide the gigantic short position.

As JPM appears to be working hard to thin their position, the shorts are being spread around (since the open interest hasn't contracted). Since most folks don't have exceedingly deep pockets (other than huge banks), they don't have an appetite for big losses. As such, they will likely add to the buying frenzy a lot faster than JPM would have when we take out key levels on the upside.

Many professional traders might say this is just "smart trading" but there is a fundamental problem here. These gigantic trades are not representative of the underlying physical market in silver! There is a massive physical silver shortage in the world and having the CFTC sit back and watch as millions of ounces trade hands in a matter of minutes is outrageous. I'm not saying that someone shouldn't buy 4M oz of silver in 2 minutes BUT to do it in a way that is manipulative to the price of silver is ILLEGAL any way you slice it.

It seems that although the CFTC gained new powers to oversee the silver market and stop the manipulation...they are reluctant to use them. Here is Bart Chilton talking about the NEW laws that prohibit "disruptive trading practices".