On Friday, June 8, King World
News had a blog entry (
http://kingworldnews.com/kingworldnews/KWN_DailyWeb/Entries/2012/6/8_London_Trader_-_Staggering_515_Tons_of_Gold_Sold_in_4_Hours.html)
based on an interview with an anonymous London Gold Trader. Eric King quotes
said London Gold Trader as saying:
One full hour before
Bernanke's testimony [yesterday, June 7], the bullion banks started selling.
Over the next 4 hours, the bullion banks sold the equivalent of 515 metric
tons of paper gold. This was in just 4 hours, and again, the selling started
one hour before Bernanke's testimony.
The selling went on for
another 3 hours after the Fed Chairman began to speak, and as I said, over
515 metric tons of paper gold was sold. During this entire takedown, there
was zero physical gold available for sale in the market. However, this action
did create tremendous supply for the Eastern buyers to lock in the spot price
of gold. This will patiently be converted to physical in the coming weeks.
He does not define the term
"paper gold" but we can assume he means either London gold Forwards
or COMEX gold Futures. This seems to be confirmed by his remark that the
anonymous "Eastern buyers" will "patiently convert" their
"paper gold" to "physical in the coming weeks." I assume
this means that they will stand for delivery of their contracts.
I also assume that he is not
referring to naked, leveraged longs that are forced to liquidate as the price
falls, due to margin calls. He explicitly said it was "the bullion
banks" doing the selling of these 515 metric tons.
Let's look at the numbers. 515
metric tons equals 16,557,634.5 troy ounces. Rounding to the nearest
100-ounce COMEX contract, this adds up to 165,576 contracts. 165,576 new
contracts were dumped onto the market on June 7, according to the London Gold
Trader.
This is a graph of open
interest for every active month in gold from June 2012 through April 2013.
The graph also shows total open interest. With the exception of a small
increase (+2,337 contracts) on June 6, the trend has been that open interest
has been decreasing from June 1 (365,323 contracts) through June 7 (350,975,
or a net decrease of 14,348).
Even assuming that the bullion
banks were selling Forwards, there is arbitrage between Forwards and COMEX
Futures. We should see many tens of thousands (or probably close to one
hundred thousand) contracts added on June 7. Instead, we see a net decrease
of contracts of 10,327 contracts.
In what world does selling new
contracts into the market, to push the price down, result in a net decrease
in open interest? I don't know the answer to that. There is a children's
television show that may provide a clue. I like Eric King, and I think he
does the world a great service with his interviews on King World News. But
the next time anyone needs an anonymous tipster to give out traders'
"secrets", may I suggest "The Snuffleupagus" (http://en.wikipedia.org/wiki/Mr._Snuffleupagus)?
