Every time we get a run up in the price of gold and silver of late, we seem to get it pushed right back down again like today when we see falling gold and silver prices. Sure, news of what’s going on in Europe or Japan can have some short term effects on the price of gold and silver, or even the movement of the Dollar Index, but some of the time the fall in the price of gold and silver has nothing to do with news at all. While a fall in the price of gold or silver is a cause for concern for some people it isn’t for me. Not because I sell gold and silver for a living, where some may point out I might be biased, or “always bullish,” but because I have been around long enough to know what market makers are capable of when they throw enough money at something.
Market Makers Do What They Do Best: Manipulate Price
When I first traded stocks back in the days of scalping a 1/16, 1/8 or a 1/4 point for a quick profit, and before the digital era we are in today, I became painfully aware of oddities when I decided to buy shares of thinly traded stocks. All of a sudden, the stock would take off in the opposite direction of my trade and squeeze me out of my trade. In this case, market makers, those who put the bid and ask price as live prices for each stock, or in particular, a market maker known as the “ax” would see someone buying or shorting the stock they follow and throw money at the stock to move the price in the opposite direction of the individual or institution who dared try to play their stock.
Market makers get compensated on manipulating the market to try and make a profit for their company. These market makers consist of professional traders who sit in front of their desk and watch their multiple computer screens and trade news, rumors or they just get bored and make the news by pushing a stock down or up, hopefully catching the other players who trade the stock off guard as they’re out to lunch or took the day off early. Heck, even Kevin Spacey’s latest move, Margin Call, had one large company take just one side of the trade, “to save the company.” Investors be damned!
And the little guy thinks they have a chance to profit against these professionals? Well, the truth is, they do. But how?
The Market Makers In Action
Everyone knows who the players are in the field (the Ax for example) and they can easily be followed on what’s called a Level II screen that shows each wholesaler or market participant for each stock or ETF who places their out of market or in market bid or ask price. You will see the Level II screen below which shows some of the players of the stock Microsoft (MSFT), like Goldman Sachs (GSCO), Morgan Stanley and Company (MSCO) and UBS Securities LLC (UBSS) to name a few.
Sometimes, on these thinly traded stocks, the losses can amount to the $1,000’s for retail investors (the Mom and Pop traders who like to trade their own accounts thinking they can outsmart the professionals. You will see their trades come through via a retail broker like Etrade (ETRD), or via ECN’s like ARCX to execute the bid/ask (buy/sell order). The market maker tries to get them to cry uncle and sell or cover a short so the market maker can make their profit. They get the investor to chicken out and sell/cover while they move the stock a few points against you, possibly in just a few minutes (like with thinly traded stocks. I know. It’s happened to me…in the early days. A good explanation of the players involved can be found here. While one can profit from this type of trading, it’s not for everyone. I am not condoning it, but allowing you so see how the markets work and how the big boys make money.
What Does All This Have To Do With Gold and Silver Prices?
Continue to Part 2 to read more of this article…
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About Doug EberhardtDoug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
Disclosure:
Commodity Futures Trading Commission Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with capital you can’t afford to lose. This is neither a solicitation nor an offer to Purchase/Sell futures or options. No representation is being made that any account will or is likely to achieve gains or losses similar to those discussed in this outlook. The past track record of any trading system or methodology is not necessarily indicative of future results.
All trades, patterns, charts, systems, etc. discussed in this outlook and the product materials are for illustrative purposes only and not to be construed as specific advisory recommendations. All ideas and material presented are entirely those of the author.