Ah, guys, what a pleasure to finally understand more about OTC trading, the existence of electronic quotes and prices being transmitted via arbitrage. Thank you.
Things make more sense to me now.
This is one of the most informative comment threads I’ve read in quite some time, especially after reading some of the links in various posts.
I am repeating myself a bit, but I still have questions and I am very suspicious of the many fishy events that occur, for example counterintuitive waterfall price drops before major CB announcements of more printing and/or devaluations. I do wonder whether central banks are entering the markets and trying to use the gold price as a signal at times like those. Comments from central bankers like the one that Volker made about his mistake in not containing gold during the 70’s are not reassuring, plus other comments that have been made by important figures at various times. And one reads of other anecdotes such as Morgan Stanley (I think) having been sued, successfully, for charging customers storage fees on bullion that wasn’t even in the custody of Morgan Stanley, if I remember correctly. It’s the sum total of many little details like those that give people their doubts about the integrity of what goes in the gold and silver markets.
I have to say, one of "gut feel" problems with the idea of central banks relentlessly leasing more and more gold and shorting gold via intermediaries on exchanges to supress the price or JPM mercilessly dumping silver is that if you are going to short something to overwhelm the market with the intention of buying back your shorts at lower prices, why haven’t enough futures market participants cottoned on to this? I don’t believe markets are totally efficient, but surely they should be efficient enough that people would try to antipate these moves, making it more difficult for JPM to get away with it? That mechanism, which I think Ted Butler has written about, relies on the theory that longs, in the aggregate, get "flushed" out repeatedly and without learning from their mistakes and always eventually buy back at higher levels than they sold, does it not? I’m not a futures trader, but it just seems odd to me that they would be able to continually get away with this activity year after year. Also, it means the HFT algorithms are never improved upon. Maybe lots of traders are that stupid though, what do I know.
If JPM does have an advantage would it not stem largely from the fact that they bird’s eye view of the OTC markets and the COMEX, and know exactly how much is really hedged, how much physical bullion is being delivered, what levels speculative interest are at, etc. etc, i.e. they have an asymetrical information advantage and are in a unique position to profit from it? Whether they are going long or short? I dunno. Maybe they would say that’s unethical and they don’t engage in that but who trusts what Wall Street bankers say these days.
PS Victor, correct me if I am wrong, but gold and silver are the only futures traded commodities whose price is determined by arbitrage on the OTC market, and is dependent on what happens in the OTC market, then doesn’t this make the COMEX gold and silver COT reports totally meaningless? So what if speculators are flushed out of COMEX, and so what if "commercials" are going increasingly net short or not? Without knowing what is happening in the (bigger) OTC market, it’s totally impossible for us puny mortals to see the bigger picture, right? I guess all that the COT can tell you are things like the general level of speculative hedge fund interest in precious metals?
Erik, please send thanks to Jeff Christian for taking the time to give an explanation. And thanks for your excellent set of replies.
Hey, I’m a small investor (really, really small) and I’m trying to learn as best as I can.