From Ed Steer:

Both gold and silver tacked on smallish gains once the Globex trading system was open for business in the Far East on Monday morning. But the moment that trading began in London, the selling pressure became relentless. There was a rally in both metals on the Comex open, but a waterfall decline ensued in both silver and gold shortly after London closed for the day. Both metals (and a lot of other commodities) closed on their lows of the day as well. It was a rout everywhere you looked yesterday. There was a 'rumour' on the CBOT that a commodity fund had blown up and was liquidating its positions in everything.

Open interest numbers for Friday were as follows. The standout was gold, with open interest declining 20,960 contracts. This would be mostly spread related, because there wasn't the volume (or price action) to account for a drop of this magnitude in any other way. Silver o.i. only sank 342 contracts.

Needless to say, I spent some time on the phone with Ted Butler yesterday. He feels (and I sadly agree) that both gold and silver are being set up to be smashed down one more time before the 'all clear' can be sounded. Monday was just the start. The prices that both metals sell for at the very bottom is not as important as the number of long contracts that the bullion banks can get the tech funds/small specs to liquidate. In gold, it could be around $870...and don't forget that the boyz got silver $2 below its 200-day moving average in August 2007. So be prepared for anything. As Ted Butler said..."it's painful, illegal and manipulative...and it's no fun to watch your portfolio shrivel". Ted's latest commentary is part of today's required reading, and it's linked further down.

And, for what it's worth, here is part of what I had to say in an e-mail exchange with John Hathaway over at tocqueville.com yesterday..."As I said in my Saturday commentary over at Casey Research, the bullion banks are still short 83.7% of the entire Comex gold market and 80.8% of the silver market. These guys are Desperate...with a capital "D". There's no way that they're going to be able to flush all the spec/small traders, but they are going to (get as many as they can)...but the BIG question is as follows...what happens once this flush-out of long positions on the Comex is complete...as we will be out of the 'summer doldrums' and into the major gold (buying) season by then. On the next price rise, will the bullion banks go short against the tech funds once again...or will they stand back/(or cover) and let the price (rocket) for a while? That is the only question that we should be asking ourselves...as it's the only one that matters." (emphasis added - Ed)

Here's another chart of interest. This one shows the rising percentages of late payments in credit cards, home equity loans (HELOC)...and passing them all is construction loans. Can you imagine what this graph will look like this time next year? All I can tell you is that it will be a lot uglier than this.

Let's see what the highlights of the bad news were yesterday. While the precious metals were being crushed, I saw in a Reuters story that consumer prices rose the fastest in 25 years. UBS AG's top U.S. legal official quit as New York Attorney General investigates the sale of auction-rate securities. Iran tests anti-ship missile and says they will shut the Strait of Hormuz if push comes to shove. And, via the King Report, from The Wall Street Journal: "Finance Unit of Chrysler Fails to Renew Some Funding. In another blow to Detroit and the auto finance industry, Chrysler Financial was unable to renew all of $30 billion in short-term debt after a month of high-strung negotiations with 22 banks, coming up $6 billion short."

Today's first story is from The Salt Lake Tribune, and it's about one man's battle against naked short selling. The headline reads: "Wall Street War: A win for Utahn: Byrne's battle helps bring curbs on naked short-selling practices." This is an issue near and dear to a lot of investors in the precious metals market. The link is here.

As I mentioned earlier, here is silver analyst Ted Butler's latest commentary. It is entitled "Paper Selling, Physical Buying". Needless to say, I think you should take the time to read through it carefully. The link is here.

The only action to prevent selling is our stunningly time-worth Plunge Protection Team who had multiple recent failures propping shares. Will they win during the summer push-'em-up event? We think with all the other market dangers, they will prop their little hearts out, and not permit the Dow and S&P to get out of control. - Roger Wiegand, Trader Tracks Newsletter, 01 August 2008

The Potemkin village that the US financial and equity markets have become, is still standing in front of us...creaking, groaning, and swaying to and fro. The whole structure might be worth ten cents on the dollar...and I'm being generous.

See you tomorrow.

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