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Gold And Silver Price Discovery

Published 11/28/2014, 12:07 AM
Updated 07/09/2023, 06:31 AM

I’m not a real farmer. But I suffer the lessons and I do my best when I talk with friends, neighbors, and families about the unintended benefits of ‘growing your own’…

..There is universal agreement about the problem of not really knowing where ‘the food’ comes from. 

That may be at the core but is the basis for another fiasco of ignorance. The basic need for fair value underlies civil society; it is part and parcel to understanding where the food comes from. 

I referenced this piece for readers over the weekend. 

Veteran S&P Futures Trader: “I Am 100% Confident That Central Banks Are Buying S&P Futures.

I have been an independent trader for 23 years, starting at the CBOT in grains and CME in the S&P 500 futures markets long ago while they were auction outcry markets (and have stayed in the alternative investment space ever since). Now, I run a small fund.

I understand better than most, I would think, the “mechanics” of the markets and how they have evolved over time from the auction market to ‘upstairs”.  I am a self-taught, top down global macro economist as well as historian of “money” and the Fed and all economic and governmental structures in the world.

One thing so many managers don’t understand is that the markets take away the most amounts of money from the most amounts of people, and do so non-linearly.  Most sophisticated investors know to be successful, one must be a contrarian; and this philosophy is in parallel. 

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Markets will, on all time scales, through exponential decay (fat tails, or black swans, on longer term scales), or exponential growth of price itself.  Why was I so bearish on gold at its peak a few years back for instance?  Because of the ascent of non-linearity of price and the massive consensus buildup of bulls. 

I believe Didier Sornette, author of “Why Stock Markets Crash”, correctly summarizes Power Law Behavior, or exponential consensus, and how it lead to crashes.  The buildup of buyers’ zeal, and the squeezing of shorts, leads to that “complex system” popping.  I have traded as a contrarian with these philosophies for some time.

The author makes an excellent case for the Fed intervention in the equity market. 

‘Equity market” could refer to any array or combination of companies using all manner of derivative products trading twenty four hours per day, nearly seven days per week. 

The entire is well worth the read. But, it was his description of how he saw the gold bubble that I got me thinking. Like everything, the further you go down the rabbit hole, the farther from familiarity you go. In the case of finance — far from reality. 

While it appears to be very detailed, it comes nowhere close to the surface of what happens in the trenches of price discovery…and what has been entrenched as the ‘normal’ course of COMEX business for decades.

Once an outcry floor worked by the ‘everyman’, protected by camaraderie and common sense; futures markets are now infested with a faceless ivory tower elite. An algorithm for disaster.

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Before being replaced by programs, the floor traders were a close-nit gallery of regular people with an affinity for dealing and managing emotions. The markets were fast, efficient, imperfect, but protected by an unspoken code of honor that played as the middle man. How unromantic and rudimentary that must have been for today’s central planning, champaign socialist elite. And yet, it worked. 

There is no middle man anymore. 

Once the golden shackles were broken, big finance crept in and transformed the mechanics of price discovery. Faces were replaced with cables connected to servers in some new virtual reality. What we have today is an opaque tapestry of algorithms working independent of reality.  

Ultimately, they disappear in the wake left behind by the natural market. This pricing mechanism is a living fantasy that is worshipped by a legion of direct and indirect beneficiaries. Derivatives wagging dogs. 

But the risk is real. Responsibility for consequence gone. In 2011, everything happening in reality was woven into a narrative that fit the price discovery. Price action made the commentary. Gold wasn’t a bubble – the move didn’t move the masses. 

In a fiat system, Gold and Silver will always be either bubble asset or hated asset. 

In September and October of 2010, long before the parabolic ascent to come as the price flirted with $1000, consensus was convinced it was a bubble. Plenty of evidence suggests direct intervention. All along the way, the ascent toward $2000 gold faced all manner of attempts by bullion banks to slow the price. 

GATA.org is an absolute must read in order to establish the premise and deep foundation of opaque, yet legal intervention. 

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Writing options, activity in the miners or adding selling positions can cap the daily price movements, which, no doubt, appear omniscient and legitimate by taking the other side of the action then finally adding selling positions to slow down the rise in price.

Observers had been calling for the drop in price; they had to be right eventually. And there is a pseudo-science for interpreting the movements of manipulated markets. So what?

The only thing one can know for sure is a scary reality. Nothing has changed. 

Gold is managed. Then and now.

The whole thing reminds me of the old Chinese expression:

When the wrong man uses the right means, the right means work in the wrong way.

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