Silver Prices And The Fiduciary Standard Of Care

Once again we get to continue along this discussion of how the price of silver is truly formed in the market as we see it today.

The reason for that is so that you can have as a resource the ability to go to a whole set of information that shows you what’s really happening in real time, rather than going out and feeling disconnected or disintegrated and looking weak correlations that have no connection to anything.

This episode will cover the “Trading Standard of Care”.

We’ve started this series going shallow and wide, on the subject of the major factors that control price discovery.

If you’re just going us, starting one month ago, I presented about six or seven factors that I believe have primary influence over the current silver price.

As a recap, we discussed futures a couple weeks ago. Then HFT. Last week we discussed technical analysis, and today we’re going to talk about Standard of Care which is loosely related to technical analysis.

In subsequent episodes, we’ll go over data releases, option expiration, and the FOMC meeting complex in addition to some others.

As time goes on, as we compile your questions, we develop more information in conjunction with this, so it’s another reason why it’s exciting to be able to do this in an interactive medium.

Last week, we discussed silver prices and technical analysis. The major indicators being the moving averages, relative strength indicators and the moving average convergence and divergence.

I’ll show you how those were interacting today a little bit later after the core presentation. If you want to catch up to where we are or where we’ve been if you just go to YouTube.com/silvercoininvester where you will see all of the videos, including the episodes where we started this off.

The subject today is Trading Standard of Care. To get started, what the heck do I mean by standard of care?

I think the easiest definition is:  a treatment or methodology that’s based on evidence and what’s going on in the community. We can think of it in terms of medicine, but we can also apply this to finance or fiduciary relationships.

In medicine, it’s straight forward.. If you come in my clinic and you have a red eye, and I determine it’s a bacterial infection, then I can give you an antibiotic that has been proven to eliminate this bacteria. Most of my colleagues in my community would likely agree with this course of treatment and then hopefully you’ll get better. Most of the time you would.

Now, occasionally you don’t get better. If things really went south and we ended up in a courtroom, at least I could defend my treatment in terms of having followed the standard of care protocol. So I would be somewhat protected. Therefore, there is a powerful incentive for me to conform to what my colleagues might decide to do and to use something that’s based on evidence.

It’s not a perfect system by any stretch. As many of you know the pharmaceutical industry has a major influence on how health care is administered, and the way we determine a diagnosis for many conditions… Of course, preventive care often does not get included in the standard of care.

And yet it is even more perverted, with technical analysis as it relates to trading, finance, or the fiduciary standard of care. This is where traders or portfolio managers, or asset allocation managers make decisions of behalf of clients. Largely it also based on what their community or peers are doing. Yet, their community is totally enmeshed with the wrong set of ideas.  We’ll go into that in a minute.

First, what do we mean by a fiduciary?

In general, we mean people or funds that trade other people’s money.

For example, we have been discussing the formation of the silver prices based on the interaction of the two major classes of traders. The commercial traders and the manage money traders. Both groups, though especially the manage money traders conform to this standard of care and that we are talking about.

People or entities who have a fiduciary responsibility to other peoples money and therefore they seek an objective way to evaluate asset value or to come up with a reasonable portfolio allocation. Mainly, it’s to cover their butts, like I would do in the case of the eye infection I mentioned above.

They, the fiduciaries, have a very strong incentive to conform with what’s happening in the community.

On the surface, if you are going to evaluate a portfolio or an asset allocation or just a commodity in general, you would look at fundamental analysis, technical analysis, and then perhaps consider the influence of behavioral economics.

Fundamental analysis from the perspective of the managed money trader has evolved to become strictly window dressing  or public relations. Perhaps they want to present themselves in order to attract investors as having this sort of core belief or ideas. But to protect themselves at the end of the day, they’re going to conform to technical analysis (which we covered in the last episode).

They are also going to be influenced, (in fact, because they’re ignoring fundamental analysis), by behavioral economics. A phenomenon referred to as M.O.P. or management of perception economics, another layer of influence that we will go in to a deep dive and discuss later…

But many of you are familiar with the way the strings are pulled. The way data is treated, the way data releases influence price.

It is important to keep in mind in terms of the overall standard of care that a trader or a fiduciary conforms to. It is the premise or belief that that the price you see today is a true reflection of all relevant information.  A complete and true reflection of all relevant information. I said that a couple of times because I think it’s really important to keep in mind.

You and I came to this market because of the fundamentals. The fundamentals are being ignored. So the price in relationship to the fundamentals has nothing to do with reality.

You may actually apply this logic to pretty much any asset class. However silver is the poster child. We’re at price that’s below the average cost of production with surging demand based on continuation of a surging retail demand or retail premiums. Those two factors alone make the paper price a giant illusion.

To recap, we are discussing where price truly really comes from. This principle embedded in the definition of technical analysis that price reflects all relevant information. This is a pseudo-price or an illusion. Essentially technical analysis or trading standard of care is based on ignoring fundamentals. It doesn’t matter what real supply and demand are doing.

Most of these funds, even the largest institutions, don’t have dedicated silver analysts who look at fundamentals because it doesn’t matter. Why would you have a silver analyst on the desk when at the end of the day, it would just be a PR and you can have your marketing team do all of that.

They can ignore fundamentals because there are no consequences to this behavior – at least not yet. In the short term, there are never consequences because as I eluded to in our first episode discussing the catalyst to the how this will all end, is that we have constant intervention.

There is unlimited liquidity being injected in to all markets. Prices are being controlled, and this simpy reinforces that technical analysis and the price is a true reflection of what’s happening.

Ultimately, this whole mechanism becomes more and more vulnerable because the absence of fundamentals in conjunction with the reliance of management of perception is the third rail in all of this.

For example, when we get a data release or you see a headline number like the CPI, or the headline jobs number. The whole complex that informs this world of trading believes that as the truth. They take it as face value, with complete ignorance for the underlying fundamentals.

Lets say the FOMC meeting happened a couple weeks ago and there was a press release and the following there were minutes. Those releases and those minutes, they are designed for perception. We have this whole complex of traders or investors that are analyzing each word of those reports as if it’s some Bob Dylan song that contains a secret message of salvation. So they can then tweak their trading patterns or their algorithms around it. It’s really quite absurd and it creates a dangerous blindness.

Even though, many of these people are very smart. They understand what’s going on. They understand the true fundamental reality. They’re jobs depend on ignoring it. And they would be liable. They are captured by the system.

The system promotes this sort of blindness which is very dangerous as it leads to increasing fragility as time goes on. An increased susceptibility to these black swans or a straw that breaks the camel’s back, things that bring us back. Sadly, most people will not see it coming at all. That’s very dangerous and it’s unfortunate, but it is, again, one of the standards of care. It is one more factor that informs prices right now.

The purpose of these I wanted to arm you with at least three or four ways to rationalize or at least find some piece of mind when you see the price moving.

Question:

“Is the take away from today’s seminar that technical analysis is essentially bunk for silver?”

I think it’s bunk in a way, but it’s also important because it’s still what the standard of care uses in order to follow the market, so if you’re following it … I know that many of you have the ware with all, the fortitude to kind of turn it off, turn off the noise and focus, but most of use are bombarded with information about price.

The reason for all of this and to point it out is that people need, I know that most of you, when I speak with you in person, there’s always this sort of disintegration that comes when the price drops out of no where, and totally disconnected from reason.

A lot of people are excited about silver right now because there’s all of this demand, there’s surging premiums, there’s a shortage on the retail side or maybe there is maybe there isn’t, but the price has finally moved off it’s recent lows so we should just keep going. We should, but we’re in this pattern which is controlled by these factors, so I think that yes, it is essentially bunk. It’s like reading tea leaves, but these are the tea leaves that everybody believes in. This collective belief is pervasive.

It leads to a collective blindness about what’s really going on in our markets.

Thank you, so much to everyone for being here. Again, I hope this helpful and if you have any further questions please don’t hesitate to contact me either thought the website or many of you are on the subscription or the newsletter list, and so if you’re there and have a question just feel free.

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Again, I’m Dr. Jeff Lewis, the editor of silver-coin-investor.com. I’ve also created the 47forum.com an interesting community that’s evolving. I also run The Lewis Mariani Silver Letters which you could find at lewis-mariani-research.com where we have our paid program where we go deeper into the information that we’re discussing here.