A Massive Wednesday Sell-Off Clouds Gold Market Future

Includes: GLD, PSLV, SLV
by: Tim Iacono

The massive sell-off on Wednesday, during which the equivalent of 24 tonnes of gold was reportedly offered for sale in a single futures market transaction, took the shine off of what would have been another stellar November for precious metals, raising new questions about manipulation in gold and silver markets.

With just one month left to go in 2012, the gold price is all but sure to rack up its 12th straight year of gains while silver is set to turn in another big double-digit gain as investors eye developments in Washington related to the fast-approaching fiscal cliff and await the next round of Fed money printing.

For the week, the gold price fell 2.1 percent, from $1,751.90 an ounce to $1,715.20, and silver dropped 2.0 percent, from $34.13 an ounce to $33.44. Gold is now up 9.5 percent in 2012, down 10.8 percent from its high last year, and silver is 20.0 percent higher this year, down 32.4 percent from its early-2011 high.

There were other important stories in precious metals markets last week, such as more record highs for ETF holdings, the approval of the long-delayed third bailout for Greece that should bolster the euro (precious metals prices often move with the euro, opposite the dollar), along with news of strong gold demand from India and China.

But, nothing compares to the dramatic market action seen early Wednesday morning when, within a matter of minutes, the gold price plunged more than $20 an ounce before tumbling another $10 in the hours that followed as shown in the BarChart graphic below.

The silver price also plunged, falling more than a dollar an ounce in early trading on Wednesday, and neither metal was able to mount much of a recovery.

(Click to enlarge)

Though not nearly as extreme, this was reminiscent of the late-February plunge in metal prices that occurred after one or two big sell orders (in that case, about 31 tonnes of gold), caused the gold price to quickly tumble almost $100 an ounce.

Last Wednesday, there was massive concentrated selling when the COMEX gold futures market opened at 8:20 AM New York time as the equivalent of 108 tonnes of gold was sold in short order, highlighted by a single sell order of 24 tonnes.

A CME Group spokesman denied early rumors that the selling was due to a "fat finger" (i.e., human error) and gold trading volume reached a record 486,315 contracts, each representing 100 ounce lots, or the equivalent of almost 1,500 tonnes, roughly half of world-wide annual gold production.

Surely the most interesting explanation for what happened came from Ross Norman of Sharps Pixley who filed these reports:

In short, this was believed to be a well-orchestrated trade by "a well known $14b US fund" in which an equally massive amount of put options (bets that the gold price will go lower) at around $1,700 an ounce were placed late in the day on Tuesday prior to the massive sell order being placed on Wednesday morning. Once the sell order began pushing prices lower after markets opened on Wednesday, stop-loss orders were triggered, accelerating the decline.

Clearly, this was not the work of an ordinary seller since anyone wanting to unload a sizable position in gold futures would surely want to get a good price and they would have to know that dumping this many contracts at once would not accomplish that goal.

It's hard to agree with Mr. Norman's conclusion that the hedge fund's motivation for this manipulation was to exit a large gold position in advance of a strong dollar environment (that would hurt the gold price), this following a prompt resolution of our fiscal cliff troubles. Events late last week made it quite clear that Democrats and Republicans are farther away from a deal now than they were a week or two ago.

Conspiracy minded individuals observed that this move came just two days after the gold price underwent a technical breakout the Friday before, that is, on the day after Thanksgiving when many U.S. traders were away from their desks. The sell-off also came about six hours prior to the Federal Reserve's Wall Street Journal "mouthpiece" Jon Hilsenrath filing this report confirming that an additional $40 billion in Fed money printing will be launched in mid-December.

This lends more credence to the many theories of organized gold price suppression that, with each subsequent sequence of events like this, seem more plausible.

Nonetheless, last week's price declines were surely viewed as a buying opportunity in Asia as gold and silver continue to move from the West to the East, China's central bank likely "buying the dip" as part of their ongoing surreptitious accumulation of gold. Trading of the yellow metal in China is expected to get a boost on Monday with the launch of interbank trading, their latest step toward becoming a world leader in gold trading. Chinese gold demand is expected to surpass 1,000 tonnes this year, overtaking India, and it's worth pointing out that the Chinese New Year - when gold demand soars - is right around the corner.

In India, gold demand is expected to come in at about 800 tonnes this year according to the World Gold Council. While this is down from last year's record 969 tonnes, it is a remarkable testament to the demand for gold by the Indian people who are widely considered to be the world's most price-sensitive buyers. This comes at a time when the Indian government is going to great lengths to discourage gold ownership through higher taxes and a concerted public relations campaign to promote paper assets over gold jewelry and gold bullion that have served as a store of wealth for many generations.

World-wide gold ETF holdings reached a new record high last week as the popular SPRDR Gold Shares ETF (NYSEARCA:GLD) added almost seven tonnes, but the silver holdings at the iShares Silver Trust ETF (NYSEARCA:SLV) fell by over 60 tonnes. There was good news for owners of the Sprott Physical Silver Trust (NYSEARCA:PSLV) as the premium paid for this fund rose from a record low of 0.77 percent last week to 1.72 percent per the latest data at the company's website.

Rest assured, all of the factors that have led to a rising gold price in recent years are still firmly in place, namely, low real interest rates, world-wide money printing on a scale never seen before, strong demand from investors around the world, strong demand from emerging market central banks that continue to trade in their dollars and euros for gold, and seemingly intractable budget problems in the countries that print those dollars and euros.

Last week's market action was just another little bump in the road, offering slightly better prices for those looking to add to their gold and silver holdings.

Disclosure: I am long GLD, SLV, PSLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I also own gold and silver coins and bars.