20 December 2012

Gold and Silver Smackdown: Same Time Last Year

The takedown in gold and silver is fairly obvious, so much so that all but a career bureaucrat might have trouble not noticing it.

So how does one explain it away.

Who is selling this time? Soros? Paulson? And for what reason? Liquidation, redemptions, profit taking, tax selling?

Tax selling is fruitless unless you see a big change in the position coming anyway and are going to sell in the short term, because you sell and then have to buy back in.

Its possible to do it for pure capital gains considerations, but you have to be able to time/set the market price to suit yourself to allow a buy back in without losing on the price. Or you could shift assets from one market to another more adeptly without incurring the wash rule, that is, derivatives and stocks, playing the same fundamental direction if the regulators are asleep at the switch and don't have a look across your positions.

I have been hit several times in the past three weeks by people who claim to have talked to a insider friend who heard from 'high level money managers' in NYC, London, or Tel Aviv, that say that Paulson is facing redemptions and is selling off his GLD position. Everyone wants to be 'in the know.'

Well, I should like to think that these fellows are not cretins, just dumping positions carefully timed in ways to maximize the downside price movements. Unless of course it is purposeful, which there is almost no doubt in my mind that this is. There could be a squeeze on, and front running of forced sales, but the timing makes this a little problematic in my mind.

More likely this is the same thing which we saw last year. The bottom two charts are for gold and silver from last year.

There are any number of ways to explain this.

The one which I favor is that if a certain party is carrying a enormous, and losing, short position, one of the ways to manage the end of year mark to market would be to smack the price down as much as possible, and cover at least part of the short position going into year end, ending around Dec 26 or 27 given the "Buy to Close" rules.

This also provides a method of gaming that long term short position. Not only do you get to mark it at a lower price, but you can 'trade around it,' picking up metal on the cheap as weaker longs capitulate and toss it at the bottom. And the momentum wise guys get in on the action, the trading desks start spreading their rumours and deploy their useful idiot analysts and talking heads, and we have a major price bottom in the making.

For this and some other reasons, I think we see the usual rally in January, as the market starts to correct back to something roughly reflecting physical reality.

The complicating factor is that this time we have the 'fiscal cliff' to consider, and the potential for a liquidation event. That is a littler harder to play.

But Jesse, wouldn't other players in the market see this obvious manipulation and buy against the artificial price declines?

Yes in a theoretical model of independent players in an efficient market with transparent information and the rule of law this would happen. And how many moons orbit your planet, if you think this is reality given all that we have seen in the past five years?

How many scandals do you have to see and try to ignore before you 'get it.' The financial system is broken and corrupted.

As for now, there may be more downside, but most of it is over. Currency manipulation tends to overshoot. And this looks like a manipulation given the way in which all the usual correlations were pitched, and the downward movements were played in dull markets with concentrated selling. 

And I suspect we will be seeing the same thing next December, if the 'big shorts' in the metals are still on and being held by two or three of the big banks. As I recall HSBC is one of the big shorts.  A bank of their size and reputation could not possibly be involved in anything dodgy, with the officials turning a blind eye, could they?

So as always, the message is one of reform. Until there is justice and transparency and the rule of law, you may as well get used to this sort of thing, affecting an increasing portion of your daily lives. Not just precious metals, but the price of gasoline, electricity, natural gas, food, water, other staples, and your children's education.

And they will use their media to turn your anger against---  regulation and the rule of law.

This is not the abuse of 'big government' but the partnership of the monied interests and a corrupted government that is also known as corporatism, or deep capture. And where their interests align, the people should beware. They are becoming ever more open in their actions. And if you wake up and object they say, 'So what? How are you going to stop us?' It is an audacious oligarchy.

There will be no sustainable recovery until the financial system is reformed and the grip of big money on the politicians and bureaucrats is removed.
"It is the neo-liberal idea that has given us deregulation and de-supervision; that has given us the notion that markets can function on their own without breaking down or blowing up..

This is the great illusion of the last generation, and it fostered a form of economic growth that was intrinsically unstable and unsustainable. Why?...

To put it in simple terms, it was based upon financial fraud, on the most massive wave of financial fraud that the world has ever seen."

Jamie Galbraith, IG Metall Conference, Berlin, 6 Dec 2012