The dominant explanation (in the sound money community at least) for the precious
metals crash is, well, sabotage. The metals exchanges were running out of physical
product and faced imminent default, so the major governments via their money
center bank proxies sold tens of billions of dollars of gold and silver futures
contracts, forcing prices down and triggering stop-loss orders and margin calls
that produced Monday's epic bloodbath.
These short positions were then covered at huge profits for the manipulators,
leaving nothing but smoking rubble where prosperous gold-bugs used to live.
It's a compelling story with a lot of circumstantial evidence to back it up.
But one piece of concrete data is needed for this narrative to win out: The
Commitments of Traders Report that will be released on Friday at 3:30 EST by
the US Commodities Futures Trading Commission (CFTC) has to show massive short-covering
by the big banks. Here's a more
complete explanation from silver analyst Ted Butler:
So, if it wasn't abrupt change in the fundamental story in the various separate
markets that were hit to the downside yesterday, then what the heck accounted
for the steep declines in price? Stated differently, what was the common
denominator present in the markets that plunged? The most visible common
denominator was that the various big price declines occurred on the NYMEX/COMEX
markets owned and run by the CME Group. But the most important common denominator
was the nature of the buyers and sellers across all the markets that got
smashed. Without exception, in any market that declined significantly, the
big net buyers were the traders classified as commercials and the big net
sellers were those traders classified as non-commercials, largely technical
trading funds. Not only was this true yesterday, it has been true on every
single big price decline throughout history, according to US Government data
(COT reports).
This may seem elemental, but I ask you to contemplate this anew. In the
highly-charged emotional state of significant price declines, it is tempting
to accept fabricated stories as to what may be the cause of the declines.
Because of that, it is more important than ever to rely on the known facts
and only that which can be substantiated. COT data have and will show without
question that the commercials are always the big buyers and the technical
funds are always the big sellers and there was no exception this time. Once
you know who the big buyers and sellers are (which is the beauty of the COT),
only then can you proceed to the how and why of the big price declines.
Armed with the certain knowledge that in every market that declined substantially
the big buyers were the commercials with the big sellers as the technical
funds, how and why fall into place. Why is real easy - in order to make money.
The way one makes money is by buying low and selling high, although not necessarily
in that order. For instance, JPMorgan the big concentrated short seller and
manipulator of silver and other markets, has made a boatload of money, many
hundreds of millions of dollars, by short selling at higher prices than the
prices they have been buying back at. I don't begrudge JPMorgan for making
large trading profits if they were doing so legally, but that is not the
case. The trading profits being made by JPMorgan and the other commercials
are as far from legal as is possible. That's the only plausible conclusion
a reasonable person could reach when answering the last open question - how
do they do it?
Knowing who the buyers and sellers are and why, all that's left is the how.
Simply stated, JPMorgan and the commercials have captured control of the
mechanism that sets short term prices, by means of High Frequency Trading
(HFT), which dominates modern electronic trading. Whenever JPMorgan and the
commercials wish to set prices for any market sharply higher or lower, they
can and do set those prices. That is an incredibly powerful trading advantage.
Since the technical funds, which are always the counter parties to JPM and
the other commercials, rely on price changes to initiate their buying and
selling, these funds are, effectively, controlled by JPMorgan and the commercials.
Sunday night was a classic example in that JPMorgan and the commercials
kept setting lower and lower prices in the NYMEX/COMEX commodities mentioned
to induce more and more technical fund selling so that JPM and the commercials
could and did buy. The commercials knew there was residual margin call liquidation
for Monday morning, following Friday's rout, so rather than let panicky margin
call sellers out with additional losses of 50 cents in silver or $20 in gold,
the commercials rig prices lower in thin Sunday night Globex dealings by
$3 in silver and close to $100 in gold. This is similar to the May 1, 2011
Sunday night $6 massacre in silver. The only difference is that this time
the commercials took all other important NYMEX/COMEX markets down with silver.
The proof that this is how the market operates can be seen in current and
historic COT data in that on big declines in price the commercials are always
big buyers and technical funds are big sellers. In fact, I don't know that
there can be an alternative explanation based on actual data. Of course,
there is no way a small group of large banks and financial firms could be
continuously pulling this trading scam off without prearrangement and collusion.
And of course, this collusion and price control is against the law and any
sense of fair trade. We actually have in place a federal regulator, in the
form of the CFTC and a self-regulator in the CME, specifically created to
combat the trading operations I just described, who both refuse to end the
ongoing scam.
Clearly, the main impetus behind Monday's price decline is margin call liquidation
by those holding long futures contracts. Although I've always warned not
to hold silver on margin, at times like this I kick myself for not having
warned more forcefully. The $200 gold and $5 silver move over the past two
days has resulted in most holding long gold and silver futures contracts
to be forced to immediately deposit $20,000 to $25,000 for each contract
held or be sold out by their brokers. These demands for such large amounts
of money have resulted in an avalanche of panic selling. And it matters little
if you believe, like me, that there was an intent behind the extreme price
declines or if the margin call selling was spontaneous and beyond intent.
In the end, there can be no question that gold and silver (and copper, platinum,
palladium and oil) are down today due to extraordinary trading activity on
the NYMEX/COMEX, led by margin call selling.
If you accept the premise that massive margin calls are at the center of
today's price decline, the next question is when will the margin call selling
end? We know from market history that such selling must burn itself out fairly
quickly. This is particularly true in COMEX gold, copper and silver, since
there was not a large relative speculative long position to begin with, following
months of speculative net long liquidation and new short selling. I don't
think that technical funds are adding aggressively to short positions today
since current prices are so far below the popular moving averages so as to
make the normal stop loss points above too excessive for prudent risk taking.
This looks like plain-vanilla leveraged long liquidation in which the selling
pressure has reached a climax and, therefore, must soon end. Prices will
stop going down when the margin call liquidation, principally on the COMEX,
ends.
We'll have to wait until this week's COT report, but there appears little
doubt that it will indicate more record net commercial buying as has been
the case for weeks and months. Since I'm convinced beyond question that the
price of silver has been manipulated by the big commercials on the COMEX,
watching them buy aggressively suggests they could let the price rip to the
upside with the same intensity that they've orchestrated to the downside.
With the record-setting trading volume Monday and on Friday, I would not
be surprised if JPMorgan had eliminated its concentrated silver short position.
I think it obscene that the CFTC and the CME have stood by and allowed JPMorgan
and the other crooked commercials to disrupt the orderly functioning of the
markets, but this is nothing new. The reality is that JPMorgan and their
collusive partners are better positioned for a price rally in silver and
other markets like never before.
So on Friday at 3:30 EST we'll get a piece of data that tells us both what
happened and what will happen. If Butler, the guys at GATA and
the other pro-gold analysts are right, the manipulators have had their fun,
and are now on the other side of the trade. For the next few months
at least, their ability to (illegally) influence short-term moves in precious
metals will be working in gold bugs' favor.
Meanwhile, this latest smash appears to have backfired in a way that might
make future manipulations a lot tougher. Instead of panic selling in the physical
market, the price collapse led to panic
buying. Dealers are swamped and premiums and wait-times are soaring
as investors small and large grab all the suddenly-cheap silver and gold they
can get. These are strong hands. As anyone who owns gold or silver coins can
tell you, once they're in their hiding place you tend to forget about them.
You absolutely do not dig them up and sell them if prices go down a bit. So
to say that record amounts of bullion are being bought this week is to say
that record amounts are being taken off the market, leaving the exchanges even
shorter of product and bringing the next near-default experience that much
closer.
