From Ed Steer:

Gold declined gently throughout Far East and early European trading on Tuesday...and by shortly after lunchtime in London...had given up around four bucks. From there, a smallish rally developed that made an attempt to continue rallying on the Comex, but got cut off at the knees [at its high of the day] shortly after 9:10 a.m. Eastern time. This decline lasted until 1:15 p.m. in New York...and by the time electronic trading ended at 5:15 p.m. yesterday afternoon...gold was back to virtually unchanged from Monday's close.

Silver didn't do much. It lost a dime in choppy trading.

I mentioned yesterday that the open interest decline on Friday [in that short-covering rally] would have been somewhat offset by the big rally that we had on Monday. Well, I was only partially right. Open interest for Monday's big day showed a staggering increase...up 12,999 contracts to 393,536...on big volume of 139,361 contracts. Friday's improvement in o.i. got buried by more than 10,000 contracts! I was stunned! Ted Butler was flabbergasted! Ted feels that the net short position in gold is now back over 20 million ounces, as the bullion banks have increased their net short position by 20,000+ contracts since last Tuesday's Commitment of Traders report cut-off.

With these open interest changes for Monday now public information, it is more than obvious that bullion banks prevented an explosion in the gold [and silver too?] price on Monday. The reason I say that should be crystal clear to all...because if the bullion banks hadn't been there to take the short side against all these speculators pouring in on the long side, there would have been nobody else to take the short side and the price of gold [and silver] would have been bid to the stratosphere in a New York minute! This was not an act of strength by the bullion banks...but rather one of extreme weakness...desperation, if you will.

With this untimely [and unhappy] turn of events, Ted and I spent most of our time on the phone discussing a 'where to from here' scenario for the bullion banks. In five trading days, they piled on the short positions that just took them five weeks to get out of...and again have a short position that would choke a whole herd of horses...but the questions that remain to be answered are...can they, or will they?

And in silver??? I'm glad you asked. Silver also had a robust day on Monday, and its price also got trashed along with gold's. It would be fair to presume, would it not, that silver open interest would have soared as well? Well, one would be wrong to presume that. Silver o.i. on Monday rose a magnificent 191 contracts to 98,823...on decent volume of 21,428 contracts. Ted figures that there has been little, if any, deterioration in silver open interest since last Tuesday's cut-off. I feel [and Ted agrees] that, at the absolute maximum, there are about 7,000 speculative long contracts left to be liquidated in silver for it to be all cleaned out on the downside. In gold, it's 50-100,000 contracts...and more than that, if we talk about returning to the lows of last November.

It should also be obvious that the bullion banks are treating the silver market like it was a bucket of nitroglycerine...which, in fact, is exactly what it is. They have the kid gloves on here. Ted Butler has always said that the silver market is the center of the universe for the bullion banks...and he would be right about that. These changes in open interest...gold vs. silver...should speak volumes to you. The bullion banks [principally JPMorgan] do not want to go back on the short side of this market.

Many times in the past, the bullion banks have used the price of gold to smash the price of silver. But the question keeps coming up...can they? Will they? If this effort we saw over the last six weeks [gold down to $907...silver to $12.45 at the lows ten days ago] was the best they can do…well, it could get interesting to the upside. But...they have the firepower in their arsenal to blast gold down at least $100 from where it is right now if they choose to. But can they...or will they? The price action in the days and weeks ahead will tell us a lot. The rest of the summer could be really interesting.

Yesterday's Comex Delivery Report showed that 3 gold and 42 silver contracts were delivered. There were no changes in the alleged holdings at SLV...and over at GLD, a smallish 68,713 ounces were withdrawn. And at last...after six days in a row...the U.S. Mint reported no changes in their production numbers on Tuesday. Over at the Comex-approved warehouses, total silver inventories dropped by four rather small good delivery bars...3,891 ounces.

The usual N.Y. gold commentator had the following..."[This week] the European Central Bank weekly statement of condition indicated no change in "gold and gold receivables". At a glance, this is only the second time in almost a decade nothing was reported sold. Last week’s disposal was only €2 Million – 0.09 tonnes. The ECB squadron of banks appears to have withdrawn from the market."

"[On Monday] very powerful opposition immediately materialized on gold’s challenging important technical levels. Both UBS and Mitsui have remarked that the Spec long as reported by the CFTC had, as of last Tuesday, come down to levels at which they could entertain the possibility of a rally. Perhaps the CFTC data influenced the instigator of yesterday’s move. Unfortunately, as of last night, open interest had added 23,027 lots (71.6 tonnes, or 6.2%) for a $26 rise (2.8%)." [Ted's comment in a prior paragraph that gold o.i. had increased 20,000+ contracts since last Tuesday's cut-off is obviously correct. - Ed]

Before I start on my stories for the day, I want to mention something from my commentary yesterday. One of the charts provided was the contraction of the Commercial Paper market. The chart I cut and paste wasn't overly clear...so here is the URL where I got the chart from...and it's infinitely better. The link is here.

Over at Bill Murphy's lemetropolecafe.com came this item of interest. It appears that a Café member e-mailed David Einhorn of Greenlight Capital to get some clarification on the switch from GLD to bullion (Did Greenlight simply redeem its GLD shares for bullion from GLD, or did Greenlight sell its GLD shares and procure the bullion from a source other than GLD?). The reply he got from Einhorn was as follows..."We didn’t discuss the transaction at that level of detail (and don’t plan to).”

Today's first story involves the U.S. Postal Service. It appears that four unions representing the nation's postal workers are pleading for a meeting with the White House to address possible funding shortfalls for workers' payroll and retiree health benefits. USPS top executives are now saying that the USPS will default on a $5.4 billion payment to prefund future retiree health benefits on September 30, 2009...and may not be able to make payroll in October and will be forced to issue IOUs instead. I thank Craig McCarty for the story over at myfederalretirement.com and the link is here.

In a story out of the Financial Times in London is this headline..."China to deploy foreign reserves"..."Beijing will use its foreign exchange reserves to support and accelerate overseas expansion and acquisitions by Chinese companies..." and the link is here.

Along with Philadelphia yesterday [and the ongoing bankruptcy saga in California] is this Bloomberg story headlined "Jefferson County, Alabama, to Put One-Third of Workers on Leave"...and unpaid leave at that! The link is here.

Thanks to Bill King over at the King Report on Sunday night, came this insider story posted over at advancedtrading.com. It's a fascinating look into the world of "proprietary algorithmic trading codes"...the story that engulfed Goldman Sachs just recently. Despite its rather complex subject matter, the article is pretty easy to understand...and very much worth your time. The article is entitled "The Real Story of Trading Software Espionage"...and the link is here.

And lastly is another article by silver analyst Ted Butler. Now that the U.S. Commodity Futures Trading Commission is talking seriously about imposing position limits in silver, Butler says the suppression of silver prices can be broken. But only if silver investors express themselves and encourage the new regime at the CFTC, every step of the way. For the commodity exchanges will fight behind the scenes to preserve the status quo...and the illicit profit it ensures for the market manipulators. Butler's new commentary is headlined "The Real Solution" and is linked here.

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It is hard to imagine a more stupid or more dangerous way of making a decision than by putting those decisions in the hands of people who pay no price for being wrong. - Thomas Sowell

I'd forgotten that Gentle Ben was giving his semi-annual monetary policy report to the House Finance Services Committee yesterday morning. That may have been part of the reason why there was no follow-through in the gold market on Tuesday. As to what's coming down the pipe...if you've carefully read what I had to say further up...it's really a crap shoot. Either gold and silver get killed and the bullion banks cover as many shorts as they can...or the price continues to rise and the bullion banks just get more mega-short. Then there's the issue of the CFTC's position limit changes...if, and/or when they happen. I think I'll flip a coin instead.

See you on Thursday.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.