17 April 2013

How the Gold Market Was Crashed - But Most Importantly, Why? Leveraged Default? And Silver?

Many are still sorting through the data to try and figure out what happened, but it is hard to look at the available data and the market action and conclude that the recent 'flash crash' in gold was anything but a calculated takedown.

Some big players had been trying to work the market price of bullion down in stair step fashion for some time.  Their tracks on the tape were big enough to be hard to miss, and any number of people who watch the market structure as it develops were seeing them, and a few were reporting what they saw.

But it just wasn't enough.  The pressures were building, and something had to be done. 

A plan for a market operation to relieve the pressure was made, and then executed ahead of the upcoming option expiration on the Comex on April 25th.  The word was quietly spread so the important monied interests would not make a fuss about losses when the time came, as in the case of MF Global and Cyprus.

And then Goldman gave the signal to the market with their 'short gold' call.

As I said at the time, I was not sure if this was done to try and avert a disaster, or to cover up some longer term corruption. Or perhaps a bit of both.  Motives are never easy to discern where leverage and opaque trading pools are involved.

This could be in advance of a major announcement out of Europe with regard to the Eurozone and also their monetary policy following along the lines of Japan.  Perhaps it is even something regarding US policy.  Obviously one has to have an open mind about that.

But there were persistent rumours of a potential default situation at both the LBMA and the Comex. Well, one has to take those with a skeptical eye.  But there are some data that point to the LBMA in particular, although the drawdown of bullion from the two exchanges could have been more general. 

Linked just below is a report that includes more data and it well worth reading. It tends to concentrate on the Comex.

How the Gold Market Was Crashed.

It seems that the word has gone out to the media and the stories are being spun to protect the system.   And the parrots dutifully pick up the chatter, without knowing why.

The story being spun that there was a speculative excess in gold being held by pension funds that panicked.   Foolish people, outsiders really, got over their heads and caused this regrettable incident.

There is probably a grain of truth in that, but I think it is more likely that they were forced out of their positions by a market operation designed to do just that.  And market insider knew exactly what they were holding.

Price declines caused by legitimate selling and panicked longs are not marked by increasing open interest. That is the hallmark of short selling with a purpose.

This is a big deal, and it was writ large across the media.  And that suggests that there is an equally big problem that had to be dealt with quickly and brutally.  Ordinarily market operations are more adept and protracted.

Something was close to breaking, and it most likely still is. 

And if it broke, it would prove to be embarrassing to quite a few very important people.  At least, that is what this situation suggests to me. 

Even the endlessly levitating stock markets seem a bit 'edgy' with a tension on the tape.

I cannot possibly know what is at the root of this.  Can't find Germany's gold, and can't buy enough at the LBMA to deliver it, because the market is leveraged 100 to 1?

Maybe not that but something of that magnitude.  A major TBTF tottering on the brink of a derivatives domino collapse? There are rumours out of Switzerland about Italy and France.

Most eyes are on the States, but how quickly we forget that ABN/Amro declared a force majeure and stopped all physical delivery of bullion, forcing settlement in cash.  The soft default of a major bullion bank is no joke, especially when it appears they could not obtain suitable goods at any price

This tends to point towards problems in Europe and the LBMA.  And one of the big sources of LBMA 400 oz. qualified gold is the big SPDR Gold ETF, GLD which is stored by HSBC in London.  I have included a chart of who tends to use 400 oz. bars below.  The COMEX does not.

As you may recall, Andrew Maguire reported early on that there were indications of problems on the LBMA with regard to gold inventory.  It is said to be leveraged 100 to 1.

“Entities went to the LBMA and said, ‘We don’t trust anybody anymore. We want our physical metal.’ They were told they would be cash settled instead by a bullion bank. The Western governments have been trying to plug holes, and the reason for it has to do with the default that was taking place at the LBMA.

This is why this smash has been orchestrated because of the run that has been taking place on physical metal. So Western governments had to do this because of an imminent run on the unallocated LBMA system. The LBMA bullion banks had become so mismatched at one point on their trading positions vs real world demand that they had to orchestrate this smash."
The 'entities' in question are again just rumour, but they are most likely to be from the Mideast or Asia.    They could be a central bank, or even an ETF for that matter.  But the size was said to have been substantial, and untenable for withdrawal without a severe market disruption given the leverage on which the LBMA operates.  100 to 1 leverage is no joke when the drawdown is physical and available supplies are tight.

If you have not picked it up, the implication in this theory is that the big price declines allowed some non-allocated repositories, like GLD for example, to disgorge delivery ready bullion to the LBMA for delivery to the entity that had demanded delivery.

And something like this might not be a singular event.  People talk, and if one entity got nervous and took delivery that information cannot be kept from other sizable players in the same circles.  And so others step up and ask, and there is the threat of a run.  And it could be happening in more than one place, ie not just the LBMA.  Hence the decline in inventories at the Comex referenced above.

JP Morgan holds enormous derivatives positions in the precious metals not reported anywhere in detail except occasionally in the OCC report.  If something were to perturb the markets, it would almost certainly affect them. 

And recall that the outrageous excesses of the 'London Whale' were not uncovered by regulators, but rather by market participants who reported JPM to be distorting the market because of the size of their position.  And the OCC is having a bit of recent notoriety from overlooking irregularities (some say crimes) to protect the banks.  So keep that in mind.

Changing the subject, if you wish to get a bit more baroque, gold may have been a necessary misdirection with the real target being silver, which hardly anyone is talking about, even the house economists and spokesmodels for the status quo. 

Keep an eye on stocks and the markets.  The big money always moves first, because they get to know what is happening first.

But I have to remind you, your guess is as good as mine.   It is an opaque market, and it has gotten worse and not better, despite all the show of 'reform.'

When the tide goes out, you not only get to see who is naked, you see who they are naked with.  And so the smokescreens go up.

I suspect that this is going to get ugly.

Related: Update to the Update: The Attack On Gold - Paul Craig Roberts (this gets more into the general government-business-as-usual theory rather than something that was incidentally related, ie a major impending default.  As I pointed out I think those sort of antics tend to be a more elegantly executed and gradual.  The recent gold/silver smack down was sheer brute force.  Could have been shock and awe but it really was over the top and probably called far too much attention to itself to have been a 'policy thing.')