Every time I go to a carnival, I’m always suckered into the $5 basketball shots in a knowingly rigged attempt to make a basket in an oval shaped hoop that’s 25% smaller than an actual basket. I know it’s rigged, but it’s fun and there’s always a chance that I could walk away with a giant stuffed animal.
To a way more consequential degree, the financial markets are the same way, with insiders and financial elites skimming billions of dollars off the top of foundational industries and stripping the actual companies of real profits they deserve.
Most people are unaware of this and have no clue what is going on because it’s very nuanced and hard to even identify.
You may hear about manipulation in the metals markets or even in equities in general, but not really understand why its happening and really who it hurts. This is where the rubber meets the road…
Lets talk metals and mining as an example.
It’s the equity and derivatives traders who are making a killing – it’s business as usual for the wealthy elites who move the markets and profit handsomely. Even so, while these insiders skim millions of the top, it’s the mining companies themselves that are starving for capital while institutions and the 0.01% that capitalize on metals markets, getting fatter and richer.
How does such a gross disparity take place? Is it just another example of the rich fleecing the struggling middle class, or is there something more sinister and perhaps illegal going on?
For an analogy and to illustrate how deep and systemic the problem is, we can compare it to what’s happening in the corn market: the price of corn today is the same as it was in 1998, yet the price of a box of Corn Flakes is up 300% in that same time span. Where’s all that money going?
It’s not going to the farmers – that’s for sure. According to Farm Policy Facts, for every dollar spent on food, farmers receive less than 16 cents for the raw products. In reality, the markups are happening in the financial markets and the proceeds are going to moneyed financiers and derivatives traders – sometimes legally, sometimes not.
Case in point: The Commodity Futures Trading Commission fined commodities conglomerate Cargill $10 million (a slap on the wrist for the largest privately held corporation in the United States in terms of revenue) for “providing mid-market marks that concealed from counterparts and its swap data repository (SDR) its full markup on certain swaps.”
In other words, Cargill concealed up to 90% of their markups. Cargill responded by asserting that the company is an advocate for “open, competitive and efficient swap markets” – and if you believe that, I’ve got a bridge in Brooklyn I’d like to sell you.
The farmers slave over the labor and production and consumers pay higher and higher prices while Wall Street skims billions of dollars of value off the top. Check out the Produce Price Index Website and fully take in the heart-stopping markups on everyday produce items:
This is the reason why silver is in an 8-year mining shortage yet the price continues to be depressed. What other market can you think of that can have high demand and a supply shortage without prices rising? It’s a manipulated one – that’s it…
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The price differentials are shocking. Take silver as an example: with the spot price at around $15, the average price of production is at $16.10, which materially exceeds the cost of the metal:
Meanwhile, institutional derivatives traders are flush with cash.
You have hedge funds bidding the price of gold and silver futures higher, followed by the COMEX bullion banks accumulating a massive short position.
It’s like a grand-scale game of ping-pong in which futures contracts are manipulated up and then down – rinse and repeat. These raids are often implemented on Fridays, after the rest of the world has shut down for the weekend – though greed never sleeps, does it?
You can learn to spot these raids by studying charts and price action in the commodities’ derivative markets:
While derivatives traders play their games, the gold and silver miners have to contend with escalating production costs, including the cost of electricity, water, wages, and materials. With these challenges and relatively low gold and silver prices, mining companies have been forced to reduce their debt levels and slash capital expenditures.
There will ultimately be a breaking point and a complete supply drop-off because of starving miners or a takeover of the sector by Wall Street to subsidize losses on the production side while skimming fortunes in the derivative markets.
Natural laws of economics will win out and the outcome will be prices increasing. But in the meantime, widespread education of what goes on behind the scenes is all we can do other than get positioned in the best-positioned companies.
Chief Editor, CrushTheStreet.com
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