A Single Large Seller Smashed the Gold Market Yesterday: Dr. Evil Strategy?

There are a variety of reasons to liquidate a large position.

But whatever the reason, no experienced trader would take a very large position into a thin market and then just dump it at the market, if they wanted to achieve some sort of reasonable economic benefit from selling that position.  One does not do this unless they were under significant duress, or have some motive other than profit. Such a trade is called 'selling against yourself.'

Usually one diversifies their positions slowly and carefully, selling some and buying others without roiling the markets. At some point their trading objective becomes known, but by then it is fait accompli.

Unless of course they may have a strategy to lose some in one market while making huge profits and buys in others at cheap prices, as in the case of buys in the mining sector while slamming bullion for example. Here is one old hand explaining how funds rig the markets.

A trader who was being paid to obtain the best value for the seller would be fired if they simply dumped a large position in the market, driving the prices realized down almost 10 percent in less than an hour.

The same situation occurred at roughly the same time in the silver market, as hundreds of millions of paper ounces of silver were just dumped in the market in less than an hour, breaking the price down dramatically.

Such unbridled selling triggers other selling, as the complex web of trades and relationships drive other parties to liquidate their positions and trigger stop loss orders.

I have described in the past how the big trading desks use the Dr. Evil tragedy to artificially disrupt markets. Regulators are in place to prevent such things from happening.

And this is the story of the economy and the governance of the US markets today. There is little rule of law, only the power of size. And it will get worse as the paper game comes closer and closer to default.

Personally I think there were multiple reasons and beneficiaries from yesterday's market action in the metals. When the word goes out from some powerful party, others in the market find out and craft their own strategies and trades to benefit from this insider information. This is how outsized profits are made.

I believe that some parties who were heavily short silver were staring into the abyss, seeing a first delivery notice going out into a paper market that is many multiples larger than their ability to deliver silver bullion into it. And a default of a major commodity exchange would have disastrous results for the confidence in the markets, already stretched thin by fraud and scandal.  So the interests of the big short, the government and the exchange might be aligned.

Let's see what happens. Because when these artificial market operations occur in a long term trend, they often are short lived, and tend to reinforce the primary trend, in this case the shortage of real bullion caused by many years of price manipulation and the resulting underinvestment to meet demand.

Still, there should be no need for speculation about what happened. The CFTC have the direct responsibility to question the seller's motives and trades, and to reassure the public about what happened. I am sure they will be doing that shortly, if they are actually doing their jobs.

When this tide of corruption goes out, 'we will see who was swimming naked,' as someone who some years ago owned a huge amount of silver, and then capitulated under duress and sold it, once said. And he remains bitter about it to this day.

“Large Seller in the Market” as COMEX Gold Hits $1,708
By GoldAlert Staff
February 29, 2012, 11:39am EST

...Commenting on the sell-off, CIBC World Markets wrote in a note to clients that “Gold – looks like a large seller of gold in the market. a 10k contract traded, down ticked the price by $40/oz. roughly 200k contracts trade per day, but unusual to see such a large single trade. not likely due to contract expiry either. That transaction represents 1mln oz of gold.

Postscript: Apparently I am not the only trader who saw this in the market. Caesar Bryan of Gabelli raises exactly the same concerns.

“What we saw yesterday in the gold market was very large volume just pounding the market lower and it raises the question, is this a seller who is trying to maximize his revenues? The answer is, maybe not because it was very sudden and the volume appeared to be very large.

This is actually similar to other experiences that we’ve seen in the last year where there has been a very sharp, sudden pullback in the gold market. But what I can tell you is the seller was not looking to maximize his revenue from the sales and to market participants like myself and others this is strange. The design of the selling raises serious red flags and leaves some questions unanswered.

I can only say the action was very odd and that’s as far as I want to go because I don’t know what the seller’s or sellers’ motivations were. We have seen this on a number of occasions over the last year where indiscriminate large selling will come in and the gold price falls like a stone. Sometimes gold falls $50 to $80, literally, within a few minutes..."

Read the rest here at King World News.

Kinross Gold to Buy Red Back Mining for $7.1 Billion, a 17% Premium, Or Was It?

Consolidation and acquisitions of smaller exploring companies by more mature companies with strong cash flows will be a dominant trend in the precious metals industry for the next ten years at least.

The long bear market in gold and silver has left mining companies ill-equipped to meet the growing demand for the metal by industry and investors. The majors will have to buy ready supply from the mid caps and juniors with proven resources, but a shortage of capital to successfully extract it and bring it to market.

There are a number of mining companies sitting on very attractive proven reserves, with market caps that scarcely reflect what they are known to have in the ground. If the stock market remains inefficient, for whatever reason, the acquisition activity will rise to fill that void.

I would also expect more of the junior to enact 'shareholder rights' plans to prevent predatory takeover offers, given the penchant to naked shorting and the sport which the funds have with these thinly traded small cap stocks on the Canadian exchanges. There are many junior mining companies that are not worthwhile investments or acquisitions. It takes due diligence to discover the value, take a position, and wait for price and that value to converge.

None of the stories I have seen so far discuss the price per ounce of proven reserves that Kinross paid for Red Back, which is a key metric. Also, the "17% premium" over market paid for the stock at 29.80 per share is really nil because this is the market price of just a few weeks ago before this artificial smackdown in the price of gold and silver, and the miners. Still, the stock had an amazing ramp higher over the past year. Management seems to be well taken care of in this acquisition. I should like to see more data about price per proven reserves and also prospective reserves to see if shareholders were taken care of as well.

And I should caution you that hedge fund managers, analysts and major companies are notorious for 'talking their book' when stalking their prey, so as to not drive up the price while they are accumulating their positions. Often managers are talking down the sector, and even the market most often through 'professional intermediaries,' while they are privately buying their initial stakes in target companies. That is how this game is played.

Their are a lot of restless dollar reserves around the world parked in dollar bonds paying negative returns looking for hard asset investments. China Plans to Help Bullion Producers Expand Overseas

"China “will place heavy emphasis on supporting large-scale gold producers in their development and overseas expansion plans,” the central bank said in the statement."

There seems to be a new gold and silver rush just beginning, and it could become quite impressive once it gains momentum.

Bloomberg
Kinross Gold to Buy Red Back Mining for $7.1 Billion
By Laura Marcinek and Rebecca Keenan
Aug 2, 2010 7:32 PM

Kinross Gold Corp., Canada’s third- largest producer of the metal, said it agreed to buy the shares of Red Back Mining Inc. it doesn’t already own for about $7.1 billion to add mines in West Africa.

Red Back investors will get 1.778 Kinross common shares and 0.11 of a Kinross common share purchase warrant for each Red Back common share held, the companies said today in a statement. The value of the offer is C$30.50 ($29.80) a Red Back common share, they said, which represents a premium of about 17 percent over Red Back’s July 30 closing share price in Toronto. The city’s stock exchange is closed today for a public holiday.

The volume of gold-mining mergers and acquisitions is increasing as producers are discovering less metal while the bullion price has advanced each year since 2000. Gold-mining companies have been involved in about $32 billion of deals this year, compared with about $4.8 billion a year earlier, according to data compiled by Bloomberg...

Gold discovery rates have been dropping by 4 million ounces a year for the past three decades, Credit Suisse Group AG’s Michael Slifirski said in November, citing a presentation from Gold Fields Ltd. The price of the metal has increased 7.8 percent in London this year. Gold traded at a record $1,265.30 an ounce on June 21.

Red Back, based in Vancouver, operates the Tasiast mine in Mauritania and the Chirano mine in Ghana, and has exploration projects in both countries.

“It is a fashionable part of the gold world at the moment,” Craighead said. “Kinross is probably chasing Red Back specifically for its growth attributes.”