February 29 was an astonishingly volatile day in the precious metals markets. The silver market began the day by trading through resistance at $36; it cut through this level like a hot knife through butter! Silver traded all the way up to $37.58 an ounce, and gold went up to over $1792.
Then Uncle Ben Bernanke started testifying before Congress.
At around 10:48 AM EST the precious metal rally came to an abrupt and very ugly end. Silver tanked; in fact, it spent the rest of the day trading down to a low of $33.825 on the active May futures contract on COMEX. Gold proceeded to trade down to a low of $1688.40-more than $100 below the highs made earlier in the trading session. Silver had an almost $4 trading range on the day, which is more than 10% of the price of the commodity. Gold had a trading range of over $100 on the day.
So what was so special about February 29th, 2012?
I did some research and spoke to some of my friends who trade in the pits at the commodity exchange - the COMEX - in New York City. I had just seen them last week while speaking at the Traders Expo, and they were happy to share with me what transpired. It seemed that when Uncle Ben began his testimony, a massive sell order came into the gold market. My sources tell me that the seller was JP Morgan (NYSE:JPM), and that they sold 15,000 gold contracts. That is 1.5 million ounces, worth over $2.5 billion! The 15,000 contracts were sold quickly, in fact in less than two minutes. That selling triggered stop loss selling and the rest is history: gold plummeted and silver followed.
My question is: why in the world would anyone sell such a huge quantity of gold in such a short period of time?
I do not ordinarily subscribe to conspiracy theories. I generally try to understand and explain why players do what they do in the markets. Yesterday's action leaves me dumbfounded. Some of my friends who trade precious metals futures on the exchange say that the gold and silver markets were up against resistance, and that there had been a lot of buying over past sessions as prices moved higher. Once gold came up to the $1800 level, it made sense for those "weak" longs to take their profits.
I don't buy this explanation.
The timing of the selling was questionable. Bernanke opens his mouth and the sell order comes in? 15,000 contracts sold in one minute by JP Morgan has the sweet stench of intervention. Gold and silver are hard money. The government printing presses have been going nonstop. The value of fiat currencies like the US dollar and Euro depend on the "full faith and credit" of those governments. Credit that we have all seen downgraded recently. And "full faith" in governments is questionable at best. Government policies since 2008 have put the US and Europe on a path towards inflation, and action in the precious metals markets are screaming this fact at us every day. Rising gold prices represent devalued currencies and signal inflationary pressures.
On Wednesday morning at $1792 gold was up 14% in 2012 -- the gold market closed 2011 at $1569.40. That is a pretty big move in two months! It is in the best interest of the US government and the EU to slow down the ascent of gold prices-the higher gold goes the more questionable the value of fiat paper currencies like the dollar and euro. And, the higher gold goes the more these governments start worrying about coming inflationary pressures. Selling gold at a key technical level in an aggressive fashion served to stop the upward momentum of the gold market causing weak long positions and algorithmic traders to sell on a technical break created by selling a huge cache of gold in a matter of seconds. In my opinion the selling on February 29th just put off the inevitable.
I can only think that the market action in gold and silver yesterday was intervention. Bernanke speaks; JPM sells huge quantities of gold. It appears to me that in an election year, the powers that be want to do anything in their power to avoid a pickup in inflationary pressures, and higher gold and silver prices are like a giant neon sign pointing directly at them.
According to my sources, there were no other banks that stood up and bought the sold that JP Morgan sold until prices cascaded lower. Additionally, once the initial 15,000 contracts were sold selling began coming out of the woodwork. Other banks active in the bullion market such as HSBC and several well-known investment banks were also sellers. That is why gold prices fell over $100 from the highs over the course of the trading session. The total volume traded on the COMEX gold futures contracts on Wednesday was over 366,000 contracts traded. That is more than double the usual volume of contracts traded in gold futures.
This action appears to me to be designed and coordinated. The selling curbed the enthusiasm of precious metals bulls. There were no reports of any banks stepping in to buy the yellow metal after the selling began and those other banks did not appear as buyers until much later in the day at much lower prices.
This action smells rotten. It reeks of the long arm of the government suppressing prices. It is only a matter of time before market forces rule the day. Prices are on the rebound with gold trading around $1700 and silver around $33.96. Gold is going above $2,000 an ounce in 2012 and silver will make a new all-time high. There is only so much ammo the government can throw at these global free markets.
The powers that be might very well have stopped the precious metals rally for now, but in the long run they are fighting the fundamentals of this market, and the fundamentals always win!
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.