Anyone who happened to be observing the intra-day trading in precious metals, on Thursday, June 23rd, through the morning of June 24th, saw a sudden flood of what appear to be "trading bots" vigorously creating paper positions in the precious metals futures market. Unusually huge numbers of intra-day short positions, far in excess of anything that could possibly be delivered this close to the beginning of the July delivery month in silver and platinum, suddenly flooded gold, silver and platinum markets, though it is actually an off-month for gold. The ballooning intra-day open interest expanded to negate buying activity, forcing prices down.
Real markets, of course, are strictly limited by the supply and demand of a real commodity. For that reason, when the open interest expands rapidly, reflecting more claims upon the same supply of goods, prices must go up. But, not at the fantasy futures markets. Instead, as we saw yesterday, continuing through the morning today, so many new fantasy short positions were opened that it overwhelmed the demand. These new short positions are backed by nothing but electrons, but are treated as a genuine supply of gold, silver or platinum and the price of all the metals went down as a result of the flooding.
Once the damage was done, as usual, the trading bots began to withdraw from the field of battle, closing newly opened "naked" short positions into what was probably a huge triggering of stop-loss orders and, perhaps, some margin calls which will surely increase as the hours pass. We don't know who is doing this, but we do know the results. As we predicted, here, as we get closer to the end of June, an opportunity for market manipulation has opened up.
The decision to reemploy the trading bots, however, after their dubious showing during the heavy silver-centric attack in May, in our humble opinion, stems from several factors. As a result of the heavy price attacks mounted in May, short sellers managed to shift large numbers of paper silver claims from weak and into strong hands, as is more fully discussed here. Yet, in spite of this, they seem to bull-headedly believe that such unsavory activity can be more successful employed now. This is motivated, perhaps by the convergence of several short term unfriendly events have occured at the same time.
First, in spite of what appears to be some short term success in the ongoing price attack, it is quite likely that many short sellers are in panic mode. Delivery demand for physical metal is likely to be higher in July 2011 than it has been before. This is partly the result of the price attack in May. Short-sellers are probably dealing with a intense drain on their metal stockpiles, as evidenced by the ever-decreasing availability of above-ground silver. An eloquent discussion of this situation can be found here.
More immediately, some commentators have pointed out the quickly falling COMEX silver warehouse inventories. The idea that COMEX itself will default is not likely to be well-grounded. The exchange is not the primary place for trading silver contracts. It is merely the most visible price manipulation mechanism. Since the needs for COMEX delivery are never particularly large, they can be accomodated. However, short selling bankers will be much more hard pressed to deal with intense delivery demand in fractional banking storage schemes and the big OTC derivatives markets of London. Trading bot activity, as well as current and soon-to-come withdrawals from the SLV stockpile, presents a contrived prospect of "falling silver prices" before the mandatory deliveries begin. Short-sellers have a strong incentrive and a "last chance" to try scaring long buyers out positions.
Second, the Federal Reserve has signaled that it is going to be taking a breather from its seemingly endless counterfeiting activities (a/k/a "quantitative easing"). Whether it is telling the truth, or not, remains to be seen. However, the belief that the Fed is actually serious and won't immediately implement "QE-3" has taken hold of the market. This is particularly true among currency traders who have bid up the U.S. dollar over the last few days, especially against the beleaguered euro . Since euro peans make up a big subsegment of the gold, silver and platinum buying public, when the euro falls, precious metals prices increase in their terms, allowing some softening of buying interest no matter how minor.
Third, the short-selling financial institutions are taking advantage of stop loss orders (and eventually margin calls) amid panic that stock prices are collapsing and a political decision that transiently collapsed oil prices when it was announced that 60 million barrels of oil would be released from strategic petroleum reserves. This political activity has linked up with price-suppression activity to injure all precious metals markets in the following way. Over-leveraged speculators were temporarily shocked by flooding in of so much oil and reacted by dumping their paper oil positions either intentionally or by the triggering of stop-loss orders.
The overleveraged speculative traders are cross-positioned in the broader commodities complex, as well as the stock market. They own not only equities, but, also paper based derivative positions in oil, gold, silver and platinum. When prices for oil drop, they are "stopped out," overall portfolio values falls and eventually, margin calls will result if they don't sell off their holdings. So, they sell whatever they can sell, at any price and this reduces the price of a the assets they are invested in, regardless of the fact that actual demand for gold, silver and platinum are now soaring. But, in the long run, the real demand will always win through demands for physical delivery.
It is interesting to note that JP Morgan (JPM), in particular, appears to be positioned long on both platinum and palladium, as noted here. One cannot assume, therefore, that this beleaguered institution, alone, is responsible for all the manipulation at the world's derivatives markets, as some would have us believe. Unlike back in May, the current damage to platinum prices are not merely a side effect of an attack against silver prices. A lot of the trading bot activity can be seen in the intra-day trading and open interest levels within the platinum market itself. Perhaps, this is because the current level of open interest in platinum is unusually high this close to the last trading day of the month. Short sellers may be deathly afraid that long buyers (including, perhaps, JP Morgan and Deutsche Bank (DB) who both appear to be long platinum), are going to make unusually large demands for delivery. There is only 1/15th as much platinum in the earth's crust as gold and, if even a small fraction of the people now holding long positions actually take delivery, it will be extraordinarily difficult for short sellers to find the metal.
At any rate, given the long positioning of some of the big banks in the platinum market, the manipulation, such as it is, may be coming from players positioned opposite to JP Morgan and Deutsche Bank, whoever they may be. The problem of market manipulation goes much further than just one big bank. Although they may be in a position to better protect themselves against manipulation than ordinary investors, corruption adversely affects everyone. Yet, the public likes to focus its attention on one thing at a time and the current exuberance on the diea of "bankrupting JP Morgan by buying silver" appears insatiable. Guilty parties must be brought to justice, obviously, but focusing attention on just one financial institution distracts us from the larger goal, which is cleaning the market as a whole. The secondary effects to innocent people if JP Morgan was bankrupted, for example, are substantial and may be something that enthusiasts have not considered.
The problems discussed here is not limited to one bank, nor should any one bank or group of traders be demonized and targeted for destruction. The problem is structural and systemic. It involves a level of corruption that needs be addressed by substantial legal reforms, regulatory restrictions on the use of high-frequency trading programs (trading bots) and the wholesale breaking up of oversized financial institutions all over the world.
Be that as ot may ... from a practical standpoint, it is very likely that prices for gold, silver and platinum will recover over the coming month, in spite of the end of QE-2 and in spite of the most technologically advanced trading bots that short sellers can bring to bear. That being said, the bot activity, experience and observation tells us that "bot" activity and price attack activities tend to continue into the first third or more of most big delivery months. The day to day action is going to be very dependent upon capricious decisions made by hedge funds and big banks. Good opportunities to establish positions in silver and platinum and to some extent, in gold, are now arising, as the prices decline.
It is impossible to call the exact bottom of a manipulation event, like the one we are now in the middle of. It is wiser to simply set a price you feel comfortable with paying, put in a purchase order and hope that you are successful. If the price goes down a bit further, after you do so, just grit your teeth and wait. Remember, short term thinking is usually the best way to lose money. Prices are headed up much further in the long run.
Disclosure: Long precious metals.