The big news this week was the flash crash in silver late on 6 July.  We will publish a separate forensic analysis of this, as there is a lot to say and see.

It’s hard to tell—we don’t have the tools to measure such a thing—but it seems like the hype and aggression from the gold bugs and conspiracy theorists is reaching a fever pitch. For example, one high-profile commentator, whose reputation goes way beyond the world of gold, claimed that 1.8 million ounces of gold were sold in a few seconds on June 26. A contract is 100oz, so that means 18,000 contracts. Surprisingly (so often these guys are off by orders of magnitude), this is in line with the data in our own analysis.

On a typical day, it is common for 250,000 (active month) contracts to change hands. This is about 777 tons. That conspiracy theorist compares this quantity to the amount produced by the miners. He does not acknowledge that virtually all of the gold ever mined in human history is still in human hands, and all of that metal is potential supply, at the right price and under the right conditions.

And there is another point. Of course, in a free market there would be no futures market in gold or silver. A futures market is for goods that are produced seasonally, but consumed throughout the year. It is a market for warehousing.

There would be an interest-rate market for gold, i.e. a bond market. A gold futures market is a bizarre creature, a Frankenstein created by the artificial environment of irredeemable currencies and laws that force everyone to use them.

A futures market for gold is a mechanism to turn gold into a chip in the casino, just another way for speculators to bet on the price action, to generation profits in dollars. Like all other derivatives markets, the gold futures market offers leverage so that traders can maximize profits even when price moves are small.

Of course, big leveraged positions mean big risk. That is why traders must set tight stop-loss orders, creating opportunities for other speculators to hunt for stop-loss levels, adding more risk to the casino. And it is also the basis (no pun intended) of our basis analysis. We like to see how much these leveraged bettors are moving the price.