How Low Will Gold Go... And How Long to Get There

Gold gained and lost $5 or so between the opening of Far East trading on Wednesday morning and 4:00 p.m. in Hong Kong trading... which is the 'usual' 3:00 a.m. New York time. From there, a bit of a rally ensured that took gold up about $15 or so during the next four hour time period. This rally ended at the London a.m. gold fix at 10:30 local time... and from there, the price basically went sideways for the next five hours until London closed for the afternoon. A bear raid ensued from that point and in the space of just about three hours, the gold price got clocked for around $30... which was quite a bit. This selling pressure stopped [in gold] shortly after the floor session ended for the day, and electronic trading began. During the following two hours, gold gained back about $15 of that loss, and finished virtually unchanged from Tuesday's trading. Gold's high and low price ticks of the day were during the New York floor trading session. Kitco reports the high at $1,147.60 and the low at $1,115.20 spot.

Silver, for the most part, basically followed gold's price action... and the graphs for both look similar. Silver had a triple top yesterday [does it mean anything?], at a price of just over $17.80 during London and New York trading. Kitco reported that the high and low prices during New York trading were $17.89 and $17.09 spot... with the low tick coming precisely at the close of Comex trading. Silver is always treated more harshly than gold, as this metal is the bullion banks' [and CFTC's] problem child. When the hammer of enforceable position limits falls, this is the metal on which it will fall the hardest. It's just a matter of when.

We are now well below the 50-day moving average in silver... and I suspect that we will start to see major long liquidation from the technical funds and massive short covering by the bullion banks if we stay below it for any length of time. As I mentioned before, the bullion banks can hide their tracks by going long instead of covering their shorts. It has the same effect for them, but gives a false reading in the open interest numbers, and their true position only becomes apparent when it shows up in the Commitment of Traders report. All of yesterday's action will be in next week's report... as will a large part of Tuesday's open interest, which was not reported in a timely manner on that day.

Here's the 3-year silver graph. As of yesterday's close, the spot price was 31 cents below the 50-day moving average. The RSI is now down to 40.79... and doesn't have much more to go to get into oversold territory. Thursday and Friday's price activity should tell us a lot.

Now, let's talk yesterday's action in the precious metals stocks. I wasn't surprised that the stocks opened higher, as both silver and gold had done well during Tuesday's trading earlier that day in Europe and the Far East. It was also no surprise that they got sold off in the 11:00 a.m. to 2:00 p.m. New York time frame, because once London closed for the day [11:00 a.m. N.Y. time] and until the end of Comex trading, both metals got pounded pretty good. What was surprising was the fact that the HUI did not delve into negative territory, even though the metals themselves, did... and by quite a bit. Is that telling us something? Twice before, in the prior three days, I had mentioned that I was favourably impressed with the share price action despite the pounding that gold and silver were taking... "and that, in and of itself, is encouraging." So, you say... is yesterday's action even more encouraging? Is someone, or a group of in-the-know someones, buying in advance of the next big run up? Could be, but I'll reserve judgment on that for a while longer, if you don't mind.

As for Tuesday's open interest, it was not down as much as I expected for such a big drop in price in both metals. Gold o.i. was only down 3,078 contracts... but, like I said, the bullion banks could be covering their tracks by going long instead of covering their shorts, and I highly suspect this is what they're doing at the moment. Gold volume was a pretty hefty 256,272 contracts with open interest falling to 505,652 contracts in total. On the other hand, silver's open interest, fell 2,736 contracts... a pretty big number, but still no cigar as far as I'm concerned, as that's not much of a change considering the silver price was down over 80 cents from its highs in the Far East on Tuesday. The bullion banks are probably doing the same thing in silver that they're doing in gold... covering some shorts... but going long as well. Volume was a decent 37,092 contracts and open interest is down to 125,999... which is still a monstrously high o.i. number for silver.

As far as December open interest... it fell again in both metals. Gold's open interest for December delivery is down another 608 contracts to 4,225 contracts left to deliver. In silver, there's not much open interest left at all, and what was left [809 contracts] fell another 148 contracts to 661 yesterday. I was only keeping track of these numbers to see if a December delivery default was likely. It's now highly unlikely... and unless a big buyer shows up out of the blue demanding delivery of large amounts of both metals before December is over... this will be my last report on this issue until February, which is the next big delivery month for gold.

Yesterday's Daily Delivery Notices from the CME showed that 771 gold and 48 silver contracts have been put up for delivery on Friday. So far this month 7,414 gold and 2,226 silver contracts have been delivered. Yesterday's CME Delivery Notice is linked here.

There were no changes in either GLD or SLV yesterday. The U.S. Mint, not surprisingly, had nothing to say for itself... and over at the Comex-approved warehouses, a very miniscule 4,054 contracts were reported taken out of inventory.

Not a lot of stories for you today. The first one I stole from David Galland's column over at Casey's Daily Dispatch. I had an article up in my Tuesday commentary about North Korea devaluing its currency 100 to 1. I hadn't given it another thought until I read this piece out of The Times in London. I found it deeply disturbing... as ever person in the country became impoverished overnight. The devaluation was done "in an effort to crack down on the country’s burgeoning free-market economy." This is totalitarianism at its most brutal. The headline reads "North Koreans in misery as cash is culled"... and the link is here.

Just in case you think that I'd forgotten about the U.S. residential real estate market, here's a piece that I received from reader "u.doran" yesterday. It's a Bloomberg article headlined "U.S. Homeowners Lost $5.9 Trillion Since 2006 Peak". It's an ugly read, too... and the link is here.

The next story is also from The Times in London. I lifted this from yesterday's King Report... and I'm sure Bill won't mind. Former US Federal Reserve chairman Paul Volker had a few choice things to say at "a conference of high-level bankers yesterday when he criticized them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms." And further into the article is this astonishing admission... "Another chilling contribution came from Sir Deryck Maughan, a partner in Kohlberg Kravis Roberts, the private equity firm, who in the 1990s was head of Salomon Brothers, the investment bank. He warned delegates that many of the flawed mathematical techniques that underpinned banks’ risk management approaches were still being used, saying that the industry had not “faced up to the intellectual failure of risk management systems, which are still hardwired into many banks and many trading floors”. Needless to say, this is a must read article from one end to the other. The headline reads "'Wake up, gentlemen', world's top bankers warned by former Fed chairman Volcker"... and the link is here.

And lastly, comes this gold-related story that also falls into the must read category. Tocqueville Gold Fund manager, John Hathaway, perhaps the most deliberate thinker on gold's side, has just published a 13-page essay evaluating the metal's contrarian success of the last decade and its prospects now that it's in the spotlight. While Hathaway is not comfortable with that spotlight, he still concludes that gold remains "under-owned and misunderstood by most" and that "as long as deflationary forces prevail, world governments will remain addicted to currency debasement" -- which means the market's increasing restoration of gold as a currency. Hathaway's essay is headlined "A Contrarian's Dilemma" and the link to the pdf file is here.

The nation must continue to spend its way out this recession until more Americans are back at work… - U.S. President Barack Obama, November 8, 2009

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As I put this column to bed for another day, I'm wondering what today's gold and silver trading will bring once it begins this morning in New York. Both metals have had serious sell-offs, but the open interest data still shows that the bullion banks hold monstrous short positions. Sure, they may have gone long in lieu of covering short positions... but if that's what they're doing, they're being awful clever about it. With the silver price below its 50-day moving average, we'll start to see some serious spec long liquidation... but gold's 50-day moving average is still $30 below where it currently sits at 5:15 a.m. Eastern time Thursday morning as I write these words. In order for serious liquidation to occur, that moving average must be broken with authority... and the price stay below that level for a bit. We'll find out soon enough if the bullion banks have that idea themselves... as they certainly have the firepower to do it.

Nothing much happened in Far East trading during their Thursday... and early trading in London isn't showing much action or excitement either. Volume in gold is pretty decent at 37,853 contracts... and in silver volume is considerably less at 4,447 contracts.

But these guys look like they're in a hurry, so nothing would surprise me to the downside today... unless they decide to take a break... but the next two days worth of trading should tell us if they're really anxious to get this cleanout over and done with as quickly as possible. So we wait.

See you on Friday.