If you think that Gold has peaked on a fundamental basis, think again.
If you think this precious metals pullback was the death of the fundamental bull, think again.
What happened Monday in the precious metals markets was nothing less than predatory.
First, the backdrop: There are two markets by which to trade precious metals in the U.S., the open cry COMEX pit and the electronic CBOE futures. Of the two, the COMEX is the one that matters, it's where the heavy players are, the majority of whom are able to accept physical delivery of the commodity. The electronic CBOE is mostly just that, electronic, and most of the brokers-dealers will not allow clients to arrange for physical delivery. The cboe has both a small contract and a larger size one equal to the COMEX contract. The most liquidity (ability of a trader to enter and exit the market) is in the COMEX, then the CBOE "Z" (large) contract and then the pipsqueek "Y" contract is for the little players.
Second, the setup: The day started out like the last 28 days, new highs, another bull market. Around noon, a pullback took half the day's progress, to a level of support. It was, by all trends, a moment to be buying.
Then suddenly, a very strange thing happened. A flurry of sellers. Hell, call it a blizzard. But the very strange thing about these sellers, is they didn't wan't a good price for their contracts. Just the opposite. Instead of simply dropping 10 of the "ZI" silver contracts - or the same number of COMEX contracts, this seller sold 50 of the "YI" contracts. The former wouldn't have even rippled the market, and in most instances, the latter wouldn't either. But here's where it gets good.
The 50 contract sell order was scaled to sell 1 contract every .02 cents, all the way down one full dollar. Normally, this would just go off at the best price, since the scale is downward, the current bid should fill all the orders. But now the beauty of this trade, is it was entered slowly, in reverse order, to walk it down.
Example: The price of silver is 9.10 and you enter two orders to sell, one at 9.08 and one at 9.06. Chances are, the order to sell at 9.06 will get filled at a better price. Unless you wait a second for the 9.08 tick to get seen. Then other traders get scared, and drive the price lower - plus computers don't get scared, they react lightning fast when a new low is put in. Once the floor gets broken, just lather, rinse, and repeat.
Usually though, there won't be a disparity between the three futures markets. Most traders seek out the best price. But our phantom trader continued to enter successively scaled down prices for YI silver until it was a dollar under the ZI contract.
Finally, the endgame: What happens when the price of a futures derivative falls 12%?? People get liquidated, that's what. Based on a completely manipulated price of silver, futures traders who were holding YI silver contracts saw a radical loss of equity, which caused a watershed margin liquidation at fire sale prices. Get it? The sharks artificially dropped the price by $1.20, then said to traders that they would have to sell because they could no longer cover the massive loss.
How about the icing: Automated broker-dealers enforced a lockout which prevents an order from being placed beyond a certain percentage of the current price, based I believe on the last minute's closing price. So while YI longs were getting liquidated, no one was able to buy at the fire sale prices for 60 seconds because the order was considered "out of range."
The word I used is predatory.
Keep in mind that this whole time, the other silver markets saw only a nickel drop in the price of silver, and hardly any change in gold. But of course, after other traders saw that this wasn't just a single out of range trade, that the YI market was actually trading down a dollar, they started selling too. ZI silver lost .50 cents, Gold lost $13.
It's important that there was a steady stream of trades falling down a dollar. A "gap down" would indicate a single fatfingered trader - unlike Japan the U.S. markets have been known to break bad trades - but 50 individual trades along the price line shows an orderly market. So I ask the intelligent reader, was this turnaround in the metals markets based on the orderly exchange of goods and currency via the laws of supply and demand? Or was this a contrived event designed to force a well timed reversal in a bull market, in order to strip away contracts from traders on the long side?
Sharks Patrol These Waters
Sharks patrol these waters
Don't you let your fingers dangle in the water
Don't you worry about the dayglow orange life preserver
It won't save you
It won't save you
Swim for the shores just as fast as your able to - swim