Two events occurred in the silver market recently.
On Tuesday, September 22, and Monday, September 28, the price got hammered. It is true this didn’t happen in a vacuum. These downdrafts occurred across basically all markets. However, it would be a mistake to leave it at that correlation and not investigate further. While most markets share an electronic trading “character," there is much more that meets the eye - and more so for silver.
We recently explored this topic in an exclusive Q&A interview with silver analyst, Ted Butler.
Below is the edited transcript of his answer to today’s question.
Ted, as you pointed out in your commentary, we saw the price went down forty-five cents at five-thirty in the morning and then basically stayed that way all day. Who was that? And when will it stop?
Well, not soon enough as far as I'm concerned as far as the stopping part of it but what it is… Is that all of our markets, including the stock market and the bond market, have been taken over, and captured via these algorithms and high frequency trading.
The way it works specifically in COMEX silver and gold is that there's this giant, constant battle going on between two specific sets of traders. One set of traders is what we call the managed money traders, or technical funds that buy and sell based on price change.
They don't look at fundamentals, they don't consider supply and demand, or anything like that. They're programmed to be purely technical traders, basically following moving averages. When the price goes up they buy, when the price goes down they sell, and only when the moving averages are violated.
Against this group (the managed money, technical fund traders), are the commercials, including J.P. Morgan and maybe about thirty other entities. They basically game one another. That's how the price is set in silver, and it has nothing to do with supply and demand. Ninety-nine percent of the time it's strictly this changing of futures contracts, buying and selling of futures contracts on the COMEX.
Specifically, what I think happened Tuesday when the price of silver dropped suddenly by 5:00am and then flat-lined and stayed there the rest of the day centers on the moving average. When the most important moving averages are violated, this usually attracts significant buying and selling. In this case, it’s the fifty day moving average. These technical funds, these managed money traders follow a whole variety of moving averages from the five-day, thirteen-day to twenty, thirty, forty, fifty day, hundred and two hundred day moving averages.
The fifty day is probably the biggest and most sensitive. Commercial traders, using high frequency trading can put the price anywhere they want. They basically control the price. What happened on Tuesday (September 22) morning at 5:00am was that the computer jocks decided, "We're going to take this below the fifty day moving average." Which they did, it was around $14.85 mark. No trading volume. They set the price below it.
This is the hard thing for people to fully grasp. The big volume and the selling that came in afterwards - by the managed money technical fund traders in reaction to that breach to the downside of the fifty day moving average - came in after the price went down. In other words, the price didn't go down because the managed money traders started selling it forty cents higher and then sold it all the way down. The price goes down with a thud. That's why you have these sharp moves up and down. There's really very little trading that takes place as that move is created.
The volume comes in afterward, after the price goes to whatever designated level that the commercials decide beforehand. In this case, just below the fifty day moving average on Tuesday, September 22. Then the volume comes in, then the managed money traders come in with their (now algorithm-activated) sell orders.
So the commercials have the perfect set up. They know how the managed money traders are going to react at certain prices, be it up or down. We have a long history of this. Everybody knows it, it doesn't take you long to figure out whenever technical funds, the managed money traders are going to be buying and selling, we know that before hand and it's simple, it's just when the moving average gets violated. The perfect set up, the scam that the commercials have, is that they know this beforehand. And they have the ability to set the price.
It's like a puppet with puppeteers, they know if they move their hands a certain way the puppet's going to dance a certain way. The puppet in this case is the managed money traders, or the technical funds who are just being controlled by the people who control the price.
The J.P. Morgans, anybody with a high speed computer and market making ability to be able to set the price so it's important to know that. Now that's good in this particular case on Tuesday because once you get enough managed money selling to the downside then it's time we got to take it the other way, bring it up, which they did today (September 24). The managed money traders will be right in buying today forty to fifty cents higher than what they sold on Tuesday.
Again because they're being controlled, the price is being controlled and therefore their trading decisions are being controlled by whoever is controlling the price.
That's a simple explanation of what took place on Tuesday (September 22) and we dropped. It wasn't anything to do with legitimate supply, demand, or anything like that. And that's the problem. It's phony. None of these traders, none of these managed money traders and none of these commercials (which are mostly banks), have any legitimate hedging that they're doing.
It's all pure speculative gaming on both parts. And that's basically the problem that lays at the heart of the manipulation because prices are being set by these computer jocks and not mining companies or industrial consumers of silver. This is true for a lot of commodities and it's getting worse. It's terrible and it's against the law in my mind. But I'm not the enforcer of the law.
Commodities are supposed to reflect actual supply and demand. No one can come up with any kind of legitimate supply and demand explanation for what took place to the downside on Tuesday or the upside today. It's strictly this game, this competition between the commercials and the managed money traders.