The dominant explanation (in the sound money community at least) for the precious metals crash is, well, sabotage. The metals exchanges were running out of physical product and faced imminent default, so the major governments via their money center bank proxies sold tens of billions of dollars of gold and silver futures contracts, forcing prices down and triggering stop-loss orders and margin calls that produced Monday's epic bloodbath.
These short positions were then covered at huge profits for the manipulators, leaving nothing but smoking rubble where prosperous gold-bugs used to live. It's a compelling story with a lot of circumstantial evidence to back it up. But one piece of concrete data is needed for this narrative to win out: The Commitments of Traders Report that will be released on Friday at 3:30 EST by the US Commodities Futures Trading Commission (CFTC) has to show massive short-covering by the big banks. Here's a more complete explanation from silver analyst Ted Butler:
So, if it wasn't abrupt change in the fundamental story in the various separate markets that were hit to the downside yesterday, then what the heck accounted for the steep declines in price? Stated differently, what was the common denominator present in the markets that plunged? The most visible common denominator was that the various big price declines occurred on the NYMEX/COMEX markets owned and run by the CME Group. But the most important common denominator was the nature of the buyers and sellers across all the markets that got smashed. Without exception, in any market that declined significantly, the big net buyers were the traders classified as commercials and the big net sellers were those traders classified as non-commercials, largely technical trading funds. Not only was this true yesterday, it has been true on every single big price decline throughout history, according to US Government data (COT reports).
This may seem elemental, but I ask you to contemplate this anew. In the highly-charged emotional state of significant price declines, it is tempting to accept fabricated stories as to what may be the cause of the declines. Because of that, it is more important than ever to rely on the known facts and only that which can be substantiated. COT data have and will show without question that the commercials are always the big buyers and the technical funds are always the big sellers and there was no exception this time. Once you know who the big buyers and sellers are (which is the beauty of the COT), only then can you proceed to the how and why of the big price declines.
Armed with the certain knowledge that in every market that declined substantially the big buyers were the commercials with the big sellers as the technical funds, how and why fall into place. Why is real easy - in order to make money. The way one makes money is by buying low and selling high, although not necessarily in that order. For instance, JPMorgan the big concentrated short seller and manipulator of silver and other markets, has made a boatload of money, many hundreds of millions of dollars, by short selling at higher prices than the prices they have been buying back at. I don't begrudge JPMorgan for making large trading profits if they were doing so legally, but that is not the case. The trading profits being made by JPMorgan and the other commercials are as far from legal as is possible. That's the only plausible conclusion a reasonable person could reach when answering the last open question - how do they do it?
Knowing who the buyers and sellers are and why, all that's left is the how. Simply stated, JPMorgan and the commercials have captured control of the mechanism that sets short term prices, by means of High Frequency Trading (HFT), which dominates modern electronic trading. Whenever JPMorgan and the commercials wish to set prices for any market sharply higher or lower, they can and do set those prices. That is an incredibly powerful trading advantage. Since the technical funds, which are always the counter parties to JPM and the other commercials, rely on price changes to initiate their buying and selling, these funds are, effectively, controlled by JPMorgan and the commercials.
Sunday night was a classic example in that JPMorgan and the commercials kept setting lower and lower prices in the NYMEX/COMEX commodities mentioned to induce more and more technical fund selling so that JPM and the commercials could and did buy. The commercials knew there was residual margin call liquidation for Monday morning, following Friday's rout, so rather than let panicky margin call sellers out with additional losses of 50 cents in silver or $20 in gold, the commercials rig prices lower in thin Sunday night Globex dealings by $3 in silver and close to $100 in gold. This is similar to the May 1, 2011 Sunday night $6 massacre in silver. The only difference is that this time the commercials took all other important NYMEX/COMEX markets down with silver.
The proof that this is how the market operates can be seen in current and historic COT data in that on big declines in price the commercials are always big buyers and technical funds are big sellers. In fact, I don't know that there can be an alternative explanation based on actual data. Of course, there is no way a small group of large banks and financial firms could be continuously pulling this trading scam off without prearrangement and collusion. And of course, this collusion and price control is against the law and any sense of fair trade. We actually have in place a federal regulator, in the form of the CFTC and a self-regulator in the CME, specifically created to combat the trading operations I just described, who both refuse to end the ongoing scam.
Clearly, the main impetus behind Monday's price decline is margin call liquidation by those holding long futures contracts. Although I've always warned not to hold silver on margin, at times like this I kick myself for not having warned more forcefully. The $200 gold and $5 silver move over the past two days has resulted in most holding long gold and silver futures contracts to be forced to immediately deposit $20,000 to $25,000 for each contract held or be sold out by their brokers. These demands for such large amounts of money have resulted in an avalanche of panic selling. And it matters little if you believe, like me, that there was an intent behind the extreme price declines or if the margin call selling was spontaneous and beyond intent. In the end, there can be no question that gold and silver (and copper, platinum, palladium and oil) are down today due to extraordinary trading activity on the NYMEX/COMEX, led by margin call selling.
If you accept the premise that massive margin calls are at the center of today's price decline, the next question is when will the margin call selling end? We know from market history that such selling must burn itself out fairly quickly. This is particularly true in COMEX gold, copper and silver, since there was not a large relative speculative long position to begin with, following months of speculative net long liquidation and new short selling. I don't think that technical funds are adding aggressively to short positions today since current prices are so far below the popular moving averages so as to make the normal stop loss points above too excessive for prudent risk taking. This looks like plain-vanilla leveraged long liquidation in which the selling pressure has reached a climax and, therefore, must soon end. Prices will stop going down when the margin call liquidation, principally on the COMEX, ends.
We'll have to wait until this week's COT report, but there appears little doubt that it will indicate more record net commercial buying as has been the case for weeks and months. Since I'm convinced beyond question that the price of silver has been manipulated by the big commercials on the COMEX, watching them buy aggressively suggests they could let the price rip to the upside with the same intensity that they've orchestrated to the downside.
With the record-setting trading volume Monday and on Friday, I would not be surprised if JPMorgan had eliminated its concentrated silver short position. I think it obscene that the CFTC and the CME have stood by and allowed JPMorgan and the other crooked commercials to disrupt the orderly functioning of the markets, but this is nothing new. The reality is that JPMorgan and their collusive partners are better positioned for a price rally in silver and other markets like never before.
So on Friday at 3:30 EST we'll get a piece of data that tells us both what happened and what will happen. If Butler, the guys at GATA and the other pro-gold analysts are right, the manipulators have had their fun, and are now on the other side of the trade. For the next few months at least, their ability to (illegally) influence short-term moves in precious metals will be working in gold bugs' favor.
Meanwhile, this latest smash appears to have backfired in a way that might make future manipulations a lot tougher. Instead of panic selling in the physical market, the price collapse led to panic buying. Dealers are swamped and premiums and wait-times are soaring as investors small and large grab all the suddenly-cheap silver and gold they can get. These are strong hands. As anyone who owns gold or silver coins can tell you, once they're in their hiding place you tend to forget about them. You absolutely do not dig them up and sell them if prices go down a bit. So to say that record amounts of bullion are being bought this week is to say that record amounts are being taken off the market, leaving the exchanges even shorter of product and bringing the next near-default experience that much closer.