If you know how commodities are traded on the world markets, you will already know that what was meant to serve as a hedge mechanism for producers is now a platform to rig prices of underlying commodities by speculators. Physical markets and futures price discovery process have diverged a lot.
Futures markets were meant for the producers to sell future produce so that they hedge the price of future business. However, speculators have become the major crowd in those markets and logically the major factor in price setting. Some commodities’ world annual production is now traded in a singe day. In some record days for example (19.2.2013), 2.5 years of world production of silver is traded in a single day. So you can imagine speculators’ role in the markets is quite high. And that goes on like forever. The bad thing is that real producers should sell real products to real consumers for a price set by speculators that flip contracts all day long and never take or give delivery. This is quite different from stocks for example where everybody trades expectations and promises. Here we are talking real labor, knowhow and products – silver, crude oil, wheat, corn etc.
Silver market is one of the most rigged throughout the years as it is a relatively small market ($20 bln. worth of annual production). For my sweet surprise it seems that producers are fed up with this game and start at least publicly to condemn the whole thing. First Majestic Silver’s (one of the biggest silver producers) CEO slams Commodity futures trading commission with the following letter:
What the silver producers argue about is that the market has stopped serving the purpose of an honestly price discovery mechanism as the producers are not represented there. His discontent stems from the fact that large positions are opened (163 days worth of annual production) short despite the low prices and those positions are from speculators and not real hedgers.
I personally hope that others will follow.