Silver prices: It's all about the concentration

Naked shorting of silver is not really the issue, as silver analyst, Ted Butler has been pointing out for decades, it is more about the extreme concentration of short silver positions and less about the big players being caught red-handed sending blatant signals of market price fixing collusion.

Also, forget about gold and silver being valued as commodities, since most people will agree that these metals both have a monetary demand associated with them.

The market seems like two loose wheels on an axel careening down miles and miles of "monetary hills." They are not fixed and tend to drift back and forth along the axel, and this determines the price. Different axels price different currencies.

The Silver Market Remains Unbalanced

It also seems that the lynchpin of institutional confidence that has been keeping these wheels from falling completely off their axel is weakening, but still holding. Market twists and turns also result because the wheels in this analogy are not balanced.

Envision the spokes of each wheel. Wheels are of equal diameter and thickness, and both wheels are equal in size, one short for every long. The spokes determine balance, and if they are equally spaced, then the wheel is balanced.

Each trading entity is entitled to a space or position allocation. Usually there is a limit, but not so for the gold and silver market.

If the spokes are considerably displaced, i.e. one trader has an oversized share on either side of the market, the wheel becomes unbalanced. This causes it to slide toward one side or another, thereby influencing the market price. This situation is dangerous and it risks the wheels coming completely off the axel.

Run by Computers

Trading is also algorithmically driven by allowing computers to participate in the market in huge size, and panics can occur in either direction.

Why not worry about naked traders? Well, the majority of speculators who purchase or sell futures contracts are not transacting real metal anyway. Nevertheless, this artificially determined futures price still seems to be passing for price discovery in the silver market.

Basically, the physical silver market never seems to correspond to futures prices. Ultimately, the physical market will wield greater influence — either on another exchange or after the paper futures exchanges lose all meaning and importance.

About the Author

Jeffrey Lewis has been an advocate for silver purchasing for the past six years. He writes regularly about it at silver-coin-investor.com

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