Weekly Analogous Gold Chart

The Tuesday prior to options expiry on Friday saw a sell-off in gold.

What occurred in the markets just before this was Germany's announcement that they would ban naked short selling in sovereign debt outright. What this caused was a sudden turn on short term treasuries in the U.S., where naked short selling is illegal, but is undertaken in abundance through derivatives contracts.

The damage to bond prices would have been, much much greater had people been on their toes more and willing to flaunt the law. If you are betting on a rise in interest rates, this would have been a theoretical godsend, but nothing really happened. Treasury prices dipped, and short term rates jumped slightly. This is, overall, the best argument for a decline in interest rates, not an increase. If you were looking for interest rates to increase, you would be better off flogging a dead horse.

So with treasury prices dropping slightly, this allowed leverage to increase on the short side of gold, and the price dropped. But there is no justification to say this is a blow off top in gold. Doesn't look anything like it. Gold looks like a seasonal blowoff here, as it had done in the past, with the exception that it looks like times when the rally was in continuance, touching the 13-week EMA.

There are a couple of factors exogenous to gold which will weigh on COMEX options expiry tuesday, and in the coming trading days:

1. Prices have declined to the point where they actually validate supportive price settlements in futures contracts, not invalidate them.

2. A role reversal in the Euro/USD pandemonium.

3. A decline in short term interest rates.

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$IRX Daily

You can see where the discount rate is set to decline on the daily chart. Its important, because the net settlements of naked shorts in GBN.V shares is more precipitous on days where you have declines in short term interest rates. The reason for this is the largest naked short position overall, where shares were sold into the market without owning any, likely backed up with leverage based on derivatives contracts, which are interest rate sensitive.

The technicals here are resolutely negative, this means the onset of the decline will be rapid when it occurs.

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GBN.V Daily Chart Super Close-up

Take a ruler and line it up vertically(or use a vertical line on stockcharts.com annotations) on days where interest rates decline (in blue) since October of 2009. You will see that on those days, net settlements of naked shorts are occurring, and that volumes are higher on those days, actually supporting the share price. They are attempting to settle a large outstanding leveraged position in naked shorts which has yet to be closed. And this has been going on for months.

For each day of net settlements, other naked shorters are stepping into the breach with a firm intent of selling down the shares. They too, are heavily exposed to the same conditions in the market. They are probably in the camp which says that interest rates will rise, as opposed to a deflationist point of view that says the yield curve will flatten, and we will see zero interest rates for a long time, possibly negative rates.

A tentative elliot wave count was put in this week, which gives us a forecast for the uptrend.

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Snapshots Of Trades From Stockwatch.com

I believe snapshots of trades taken during the week proves definitively that we have net settlements in naked shorting at any price available. You will see that its always one broker on the buy, attempting to close their position, but that for these net settlements, there are always more naked shorters firmly willing to naked short the shares without buying any shares whatsoever. What is observed here this week, that net settlements of a large outstanding naked short position, where the vendor has forward-vended shares into the market without owning any, and is attempting to settle at any price, has been going on since October 2009.

Tuesday close, May 18, 2010

Note that even on low volume days 'National Bank' knows exactly when to buy in large blocks of shares in order to settle their naked short position, having sold into the market millions upon millions of shares over a period of years, and that 'BMO Nesbitt,' rarely on the buy, is committed to a sell-side strategy. Nobody watches these trades, they're all done by computer.

Wednesday close, May 19, 2010

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Here we have an example of closing your sell side strategy which sees you actually offloading inventory you don't want. 'National Bank' sold into the close, mostly in the hopes that this would actually limit the share price for the next day. 'Union' (certain) and 'Macquarie' (not quite sure) are on a buy-side strategy of accumulating inventory at the close. 'Union' will sit on downside risk, but 'Macquarie' always offloads should price move against them. 'Anonymous' has been naked shorting just about every mining share on the venture exchange, so their presence is unwelcome, but here they are, committed to a sell-side strategy. 'RBC' is committed to a sell side strategy, but they always close their position by buying in blocks if it moves against them on the short-term or hedge their position with settlements.

Probably none of these shares really exist, they are buy and sell orders. An investor is obliged to hold their shares over at least 55 days in order that they actually hold inventory. I truly wonder what will happen to these naked shorters should people start buying gold shares en masse.

Friday's Trading Day

Friday was an above average volume day where I managed to snap a few photos of the trading activity and show definitively that net settlements are occurring, while some brokerages are heavily committed to a sell side strategy.

Here we have 'RBC' and 'CIBC', which had formerly vended shares into the market without owning any, actually hedging or settling their position against naked shorters on the sell side, anxious to see a price decline. 'Anonymous' is selling in very largish blocks while 'TD Securities' is merely topping up their sell side position in the morning.

Friday, ~11:00 am, May 20, 2010

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Here we have a full spectrum of sell side activity. 'Jitney' sell into the market earlier, then hedges their sell side strategy with a buy later. So it looks like 'Jitney', where I had formerly thought them to be buying into the market, is a sell-side broker. 'National Bank' is settling in largeish blocks when naked shorters come into the market attempting to depress prices. As you can see, the majority of traders are on the sell side, selling shares they don't own, with one large settlement action buy one brokerage.

These sell side strategists, in my opinion, will be obliged to settle at whatever price the market gives them. The real sellers are all gone from the market. They cannot rely that anyone will panic and sell their shares into the market and front run that trade to move the share price downwards, especially since one broker is massively settling a huge position and offloading that directly onto the sell-side. 'National Bank' is uniquely able to repurchase all of their sell orders in any number, at any given price.

Friday's Close, May 20, 2010

Friday was a higher than average volume day, probably the sell side strategy wishing to close found their opportunity at the lowest share price available in the highest volume available with the decline of gold prices into options expiry and a small decline in the discount rate for this day.

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Here we have 'National Bank' settling in large amounts, and 'RBC' clearing out their position. 'Anonymous' is committed to a sell side strategy, along with 'BMO Nesbitt' and 'TD Securities.' Note that 'Jitney' is buying higher, when they originally sold much lower, so they close their position right away. Not a big position.

The irony here, is nobody watches these trades and totally expects the computer to do their work for them, and assume higher interest rates, when the matter of fact is that lower interest rates are in the cards.

Eric Sprott On BNN.ca

Eric Sprott comments on gold:

http://watch.bnn.ca/#clip304448

-F6