Wednesday, October 2, 2013

How long can gold prices be smacked down on the COMEX?

How long can the pigmen keep suppressing gold prices?

The short term price of gold on the COMEX is very clearly being manipulated down.  The price smack down yesterday, October 1st is illustrative.

Harvey Organ lists the large, timely sales that smashed the price.  
8:00 AM: 120 Dec. contracts traded
8:01 AM: 4,531 Dec. contracts traded
8:30 AM: 594 Dec. contracts traded
8:31 AM: 8,175 Dec. contracts traded
10:00 AM: 284 Dec. contracts traded
10:01 AM: 1,738 Dec. contracts traded

No rational seller would flood the market with orders like this.  We can be sure that the seller has visibility of the trade book and knows where all participants have set their stops and limits.

Jesse shows graphs of COMEX gold prices and volume by the half hour:

COMEX trading activity yesterday is not surprising.  It is a repeat of the smack down in mid-April and to a lesser extent what the bullion banks have been doing for years to manage the price.

What is surprising and frustrating is that this game perseveres.  Any of these 3 sources could have, should have put an end to the short term paper charade by now.  
1) The CFTC could actually enforce position limit and trading rules.  The bullion banks have had no fear of regulation.  These two recent events are evidence.  I could list hundreds.
     - The CFTC ends 4+ year investigation in silver market manipulation and finds nothing wrong
      - Bart Chilton the Commissioner of the CFTC stated in an email on October 1st that "no regulators are looking at the market due to the government shutdown."
2) Long gold contract holder could stand for delivery and force the COMEX to reveal how little physical gold they actually posses.  The amount of contracts open on the COMEX is typically for about 50 times as much gold as the COMEX reports is eligible for delivery.  So if just more than 2% of contract holders insisted on physical delivery the COMEX would default.
3) Gold investors could buy up any/all sales orders quickly, which seems to be happening today.  As I write gold is up $30.30 or 2.4%  so far today after dropping $41.49 or 3.1% yesterday, October 1st.  

Perhaps it is too much to expect gold longs to buy up large volumes quickly when the bullion banks dump sales orders.  The prudent course is to wait until after prices have been bombed and then take advantage of lower prices.  Of course you would have to be confident that another bull wouldn't start buying before you and drive prices back up.  

Dropping volume on the COMEX will be an indicator of pending market dislocation or default.  When gold longs perceive an increasing risk that the COMEX will not be able to deliver physical gold to those contract holders who opt to stand for delivery, they will shun COMEX contracts as a effective vehicle for investing in gold.  Unfortunately, the reporting of COMEX trading statistics is fraught with potential misleading data.  The bullion banks could, for example trade amongst themselves to pad the volume statistics.  So watch for it, but don't expect to see that warning light until there is steam coming out from under the hood and there are many other, more explicit signs of market dislocation.

October is an active delivery month at the COMEX.  And, December is typically the most active month of the year by far.  The real test for the bullion banks will be December when the most contracts are likely to stand for delivery.  

Lord, how long can this go on!

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