Gunfight At The O.K. Corral And Gold Price Drop 'Reasoning'

Includes: GLD
by: Russ Winter

Stories about gold's drop seem to swirl around the most bogus of reasons. Much of the commentary is the poorest I've ever come across in what today passes for financial news. In my view, the "reasoning" has failed to mention or realize the most likely cause behind gold's nasty swoon: leveraged over trading and shorting by traders and funds (Slingers) that have partaken in some serious hallucinogenics.

I still strongly suspect it may be one whale or funds trading in concert. However, as the now month-old bankers' participation report attests, it's not JP Morgan that is doing the slinging. JPM is long the gold market from the 1,400 level ["Manipulators of Gold May Not Be Who You Think"]. I can only imagine how much gold JPM is holding a month later, with prices off $175. It seems the bullion banksters have much more than a couple-hundred-dollar rally in mind. We will know soon enough, as early next week the new banker participation report is released. I believe it will show the U.S. bullion bankers also long the silver market for the first time ever.

On Thursday night, when price of gold (POG) plumbed $1,185, the "reason" given was that China's banks were selling gold for liquidity purposes (see Zero Hedge: Day 5 of China-Open Precious Metals Smackdown) . That manufactured mantra is complete nonsense. Under Basel III, China determines the reserve requirements of its banks and can use 100% credit for gold [see my post on Basel III]. To sell gold for liquidity would shatter whatever confidence may still exist in support of these banks. If China's banks sell anything, it would be bonds in a market that is still functioning via central bank intervention. Gold will determine the last man standing and recapitalize their financial system, especially after it is repriced much higher.

Furthermore, there is no evidence in data reports from the transparent Shanghai Gold Exchange (SGE) that a liquidation of any sort is taking place in China. In fact, both the deliveries to and settlements out of the SGE have strong DEMAND written all over them. In the last two weeks, a stunning 158 metric tonnes of gold was delivered to the SGE. In just the last week, 57 metric tonnes was settled and taken out of the exchange. The SGE premium for gold is $35, once again completely rebuffing the liquidation theory and, if anything, reinforcing the panic-into-gold theory.

Incidentally a clue as to where some of that gold is coming from, the London Bullion Association (LBMA) reports, "On the back of falling prices strong physical demand particularly from China and India more than offset continued sales by ETF funds in the western economies, with the result that the volume of ounces transferred (out of the LBMA) in May increased significantly by 17.2% to 28.2 million ounces; the highest total for 12 years." To put that into perspective, 28.2 million troy ounces translates into 877 metric tonnes of gold.

But if there's any doubt about the forensics of the bear attack on paper gold, we have the Commitment of Traders (COT) report through Tuesday, June 25. POG was 1,277 then, but the next day POG was slammed by more Slinger indiscriminate selling of paper gold out of thin air. During the latest reported week, large speculators sold short another 7,670 contracts (767,000 ounces). Since managed money reduced net longs by about 9,000 contracts, the evidence points to a party or parties inside that complex as the short seller.

As far as so-called liquidation, selling, margin calls and other such "reasons," only 1,870 long contracts were reduced by large specs. In fact, small specs have added 1,705 contracts. So once again, the forensics point to short selling, not liquidation as the primary "supply."

On the other side of the ledger, commercials -- and especially swap traders -- were the buyers, picking another 9,655 contracts (965,500 ounces) of fresh longs. Among the garbage commentaria being offered is that gold producers were scrambling to hedge. This is unadulterated crap, as producers reduced their hedges by another 1,074 contracts and now hold a puny 19,266 shorts, one tenth of the levels of last October.

The Gold Cartel net short position is now down to just 35,208 contracts as of last Tuesday.

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The situation for the Slingers is even more stretched as they pour even more shorts in to the fray. With a gigantic reversal on Friday, it looks like the long side of the trade has arrived at the O.K. Corral with both guns blazing. The Slingers will end up in a tidy row of caskets.

One commodity that could be liquidated however is oil, where the Slingers have piled on enormous long bets. A resulting plunge in oil price input costs against a run up in gold and silver output prices will add extra firepower to the "mutha of all rallies" in precious metal equities.

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Disclosure: I am long PHYS, PSLV, GDXJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.