Dave from Denver…

Thursday, November 29, 2012

The Unmistakable Sign Of Illegal Market Manipulation

I preface this remark by saying that it is just a theory, but could Wednesday's Comex paper raid possibly be a signal of desperation by the cartel? We have been hearing countless reports out of London - the nexus of the world's physical bar market - that delivery supplies of gold and silver are getting tight. Was Wednesday's raid an attempt by a desperate bullion bank to trigger open interest selling by longs in order to reduce the number of potential accounts that hold for delivery in the face of a tight physical bar market?

Wednesday right after the Comex opened, a total of 35,000 gold contracts were sold almost at once, with one order reported to be nearly 8100 contracts. This is roughly 104 tonnes and 24 tonnes respectively. It caused a "cliff-dive" in the price of gold/silver that was not cross-correlated with any other commodity market or equity/fixed income index. Why would someone, using paper, sell so recklessly and abruptly like this, flooding the market with an inordinately heavy supply of paper "gold." Any veteran trader knows that if you are trying to unload a disproportionately large long position - that is, large relative to the price and volume context of a given market - you have to bleed your offers into the market and not give away your size in order to try and maximize your sell proceeds. If you are not operating in this manner, you are either irrational or illegally attempting to influence the price lower. In the absence of any other credible explanation or theory being offered - and an open admission that a "computer mistake" was not the catalyst, this was clearly an attempt to exert manipulative - illegal downward influence on the price of gold. There is no other explanation for what happened on Wednesday morning.

I know that some analysts like to see some sort of proof that the manipulation occurred for the purposes of heading off a possible physical delivery squeeze. But you can't make trading profits without analyzing the "dotted lines" and anticipating future events based on what is likely unmistakable evidence. The motive for uneconomical selling like this is to derail potential stoppers (accounts who stand for delivery) as a means to avoid a physical squeeze.

In this case, the event has a long history and many experienced eyeballs and brains looking at the evidence of cause. We know that China and several other Central Banks are accumulating physical gold which, at the margin, puts total global demand well in excess of annual mined supply. We also know that several countries have either issued or are threatening to issue a recall of their sovereign-owned gold being held by the Fed, Bank of England and Bank of France (mostly those three custodians). We also have first-hand accounts from several hands-on operators in London who are telling us that the global physical supply of gold is getting very tight. Finally, the open interest in the December gold and silver front-month contracts has persisted at an unusually high level relative to the fact that today is first-notice day for December. This means that any account that is long contracts is legally entitled to receive physical delivery of Comex gold bars from the counterparty who sold the contracts. Usually the open interest starts declining starting a couple weeks before first notice as paper speculators either roll forward or exit the position. But this time the open interest remained quite stubbornly high.

The success of this operation is evidenced by the fact that the uncharacteristically high open interest for the day before first notice of a little over 97,000 dropped precipitously by over 65,000 contracts. I can't recall seeing gold open interest this high the day before first notice or a percentage drop in open interest like this in one day. The 65,000 drop would cover the 35,000 contracts sold to trigger the raid plus account for 27.2k overall drop in open interest yesterday

LINK. From the standpoint of reducing the degree of delivery demand today, this illegal manipulation was a resounding success. There will come a time when it will fail...

Is the physical market finally getting to the point at which demand for delivery is starting to overwhelm the amount of paper claims "issued," the amount of which far exceeds available delivery supply? There's no way of knowing for sure but, proverbially, if it looks like and duck and quacks like a duck

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