If the longs had been exiting the market, the open interest would have declined more significantly.
These big plunges in price look to be driven by short selling, with weak hands being driven out, and then short covering or determined buyers stepping back in to maintain the overall number of contracts at a relatively steady level, but with some good profits from covering their short positions at cheaper prices. There is also a lucrative cross trade to be had in other markets like the mining stocks. An operation in bullion is often preceded by some noticeable movements in the miners.
Recall the case in the Euro bond market, wherein Citi came in and sold an enormous volume precipitously, running the stops and driving the price down sharply. The Citi trader came back in and covered his shorts, pocketing the difference in his market disruption based on size. This trading strategy was known as 'the Dr. Evil' trade at Citi, but has deep roots in speculative market manipulation, with its counterpart being the bull pool.
Citi Fined for Euro Bond Trades By British Regulator; Italy Indicts Citi Traders; Citi Haunted by Dr. Evil Trades in Europe; Citi Agrees to Pay 14m in Bond Scandal
I recall reading at the time how the Citi traders were incredulous at being outed by the regulators, because that is how they would do things in the States, running the stops and using outsized positions to perform short term price manipulation. In the states 'price management' has become quite notorious around key market events, such as option expiration. It is so prevalent that it has its own momentum among traders. The only time that it is remarked by the exchanges in the states, however, is when other prop trading desks are caught by it unawares and complain. The public is fair game.
Even the Treasury recently got into the act, with young Tim's Treasury granting a $38 Billion tax break to Citi in order to enhance their financials and the price of their stock.
Citi had quite a record of bad behaviour around the world a few years ago. Citi Never Sleeps The power of money corrupts, and under-regulated banks that have the power to create and confer wealth can corrupt all that they touch, absolutely: regulators, media, exchanges, economists, politicians.
Has Citi cleaned up its act? Well, it was one of the banks at the heart of the debt securitization scandal that almost brought the US financial system to its knees last year, and is still a major source of global instability. The US seems unable to do anything to keeps its house in order. But in fairness, all the big US banks were caught up in the scandals, most notoriously in those exposed by Eliot Spitzer, who was later 'taken out' in a scandal exposed by a special federal investigation ordered by the Bank's good friends in government.
This may give you some idea of how the US markets continue to operate these days, with the banks loaded with cash and regulators turning a blind eye to their antics and outrageously non-productive economy related trading positions. The large hedge funds do the same things, but do not have the clout that the banks have, especially with the commingling of guaranteed deposits and subsidized liquidity from the Fed. These banks do not lend; they gamble while rigging the game. The most outrageous example is Goldman Sachs, the upstart which bought the lordly title of Bank from the Fed, and all the privileges of seignorage therein. Droit du seigneur with the public money, at the heart of its creation.
It was not all that long ago that speculative manipulation by the predators at Enron in the energy markets caused widespread disruption in the State of California. And little has been done by the US regulators to prevent this happening again and again. All is hushed up to maintin the facade of freedom and public confidence. Reform is continually weakened and placed on hold for "the good of the financial system" and its global competitiveness.
Barrick Gold filed a motion to dismiss the 2003 price manipulation lawsuit against it and J. P. Morgan on the basis that some foreign central banks (England, Germany?) and other bullion banks were involved, but were not named as defendants. These foreign central banks were immune from litigation. Naturally the scandal kicked up by this caused the defendants to regroup their strategy and the motion was withdrawn. Barricks February, 2003 Motion to Dismiss
The claim that J. P. Morgan was engaged in fulfilling government policy in its price manipulation was intriguing indeed. It is too bad that it was not granted and sent to discovery and disclosure. But it does highlight one potential reason why a government might not wish to downsize its 'too big to fail' banks, who can become instruments of financial engineering and policy, both foreign and domestic. Who can say what is truth, because unfortunately despite the many abuses, cases are normally settled with no admission of guilt, wristslap fines, and genuine reform is push aside for the sake of temporary expediency.
In closure, the opaque short position in the silver market held by J. P. Morgan and a few other banks is a potential scandal and a disgrace for a 'reform' administration. They do not deserve the benefit of the doubt any longer. Innocent until proven guilty is correct procedure for the courts, but 'where there is smoke there is fire' and 'once bitten twice shy' has its own place in the court of public opinion where trust is a necessary component of good judgement.
Friday, December 18, 2009
The CME Final, just posted, indicates that open interest yesterday rose 475 lots (1.48 tonnes) to 502,930 contracts. Volume remained as reported in the Preliminary at 258,576 lots, 15% above the estimate. See CME Daily Bulletin.
For a $28.80 down day (indeed down $46 intraday) this result is astonishing. Considerable stop losses must have been triggered, but apparently fresh short selling predominated.
Of course, the CME reported a similar event following gold’s $48.80 drop on Friday Dec 4th – only to apparently slip a 21,000 lot fall into the following Monday’s data
But then they did have the excuse of huge volume –almost 400,000 lots that day. And presumably they do not actually want to make these errors.
So on its face the gold market has seen the entry of a large volume of new Shorts, who will have to contend with reviving Eastern physical appetite. If commercially motivated, this is likely to be an alarming experience.