What Will Break the Gold and Silver Manipulation?

By: Gijsbert Groenewegen



Silver short positions at 23 highs! And the dumping of futures by the commercials is losing its luster

In the heels of gold and silver continuing to consolidate gains, the war in the gold and silver markets continues as the commercials (Fed, BIS, bullion banks) shorts in the silver market just hit a new all-time record! As we know the silver futures short positions are at record levels in order to depress the silver price at all costs. The silver market is less deep than the gold market, and therefore easier to manage. This way it is less difficult for the authorities, by suppressing the silver prices, to demotivate investors to invest in the precious metals. The monetary authorities don't want the silver price to break the $18.50/oz. and $21/oz. resistance levels for fear of much higher silver prices. They don't want the lit to come off of the pressure cooker.

We can clearly see the tug of war going on in silver on the point and figure chart here below.

Silver Point and Figure Chart

And for gold the authorities don't want gold break the $1,300 level, which could open the way to the important $1,400 level and subsequently give us $2,000. We can see on the chart here below why the $1,400 level in gold is so important.

Gold PM Price Fix since 2007


In recent days we have seen the strongest price manipulation going on in gold when the bullion banks dumped 22,000 gold futures contracts on Tuesday April 18 just before the London fix, which resulted in a $8, fall of the gold price in order to rise subsequently $15!!! In my point of view this is a clear sign of the increasing demand for gold from investors wanting to hedge themselves against the geopolitical risks, peak markets and an imminent weakening of the US dollar whilst the Fed and bullion banks seemingly are losing their control in depressing the gold and silver prices. The number of strong hands, investors that believe in the long-term prospects for gold and silver and are holding on to their positions, are clearly increasing and will give the commercials a huge headache. This dumping was respectively repeated on April 19 when an additional 20,000 futures contracts were sold. Both dumps had a notional value of between $2.5-$3bn (20,000 x 100 x 1290= $2.58bn). See below the chart of the net short position of the gold futures held by the commercials (Fed+ BIS + bullion banks)

Commercials have been adding to their gold short positions, but not nearly as aggressively as they have been in the silver market (see chart below).
Gold Hedgers Position

Commercial Silver Shorts Hit All-Time Record (10-year chart)

Silver Hedgers Position 10-Year Chart


The net short position of the commercials now almost amounts to 125,000 contracts equal to 125,000 x 5,000 = 625m oz. of silver or 71% of the 2016 annual silver production of 880m oz. Below is a look at a longer-term 23-year chart of commercial shorts in the silver market, which puts even better in perspective how extreme the current short positions are!! We all know what happens when short positions need to be covered!

23-Year Commercial Silver Chart Shows Record Short Positions

Silver Hedgers Position 23-Year Chart


Pushing gold and silver prices to bargain levels is frustrating the suppressing efforts of the commercials and triggering ever so more purchasing

In my point of view at these low and bargain price levels the bullion banks undermine their own goals of depressing the gold and silver prices "in order to make the dollar look better than justified on the basis of its fundamentals". Remember when the time is up it is up and the fundamentals will rule and no attempted manipulation will succeed because there will be no doubt in anybody's mind which path to choose. Price will meet time.

Quite similar as with gold despite the increasing short positions the silver price reverses its sell-offs the whole time indicating that people find silver a real bargain hence the funds of money flowing into silver. What the Fed, BIS and bullion banks don't seem to understand, or do they, is that considering the peak markets and deteriorating fundamentals gold and silver look very attractive, especially at these low levels. And of course the most important inverse correlator for gold and silver the US dollar has run its course. As described in my last article
http://www.safehaven.com/article/44222/what-if-the-fed-lowers-instead-of-hiking-interest-rates  

I think that the real fundamentals of the US economy are as such that there is no room for further hikes if anything the Fed will most likely have to cut interest rates. And thus the reasoning for so many investors to hold long positions in the US dollar will be over hence why gold and silver become more attractive because of their inverse correlation, after all they are expressed in US Dollars.

Anyway these fundamentals put a support under the gold and silver prices and thus the lower the commercials push prices the more purchases they automatically trigger. Why? Because as mentioned gold and silver are the bargain of the century as will be proven by history. Why do you think the Russians and Chinese are accumulating as fast and as much as possible without causing higher prices? Because gold and silver are real money, remember gold and silver nobody's obligation (nobody's counter-party obligation). It is like getting a Christmas present from the US. The Russians and Chinese must be laughing all the way to the bank, the best bargain they ever got from the US.

They are selling their treasuries because they know that the levels of US debt and US dollar are not sustainable despite all the QEs and thus swap the treasuries for gold. And the Fed, BIS and bullion banks in their almighty wisdom think they can keep the inevitable debasement of the US dollar at bay and gold and silver depressed. Or do they know they don't they have any choice?

The HFT algos, also used by the Fed, BIS and bullion banks, are not programmed to deal with unexpected high sigma events. It is these events that will ultimately break the manipulation of gold and silver

This is a tug of war that is coming to an end. The monetary authorities have so far been able to control the gold and silver prices using algorithm trading. In a world where HFT represents 80%-90% of daily trading volume the "counter-parties" need to use the same tools to be effective. In fact everything is being driven by these momentum programs and for human intervention is no place anymore. Who needs research if computer determine the decision to buy or sell. Though for the exception that confirms the rule, we know that when we have unexpected events ("emotional" or extraordinary events such as Brexit or Trumps election or other geopolitical events) algorithm trading doesn't work these algorithms are not programmed to trade unexpected events or high standard deviations. Algos are purely based on mathematical patterns that interpret facts and models and can't trade on discretionary unexpected events. Extraordinary events are those when the standard deviation, a deviation from a normal range or the mean, would be in excess of 4 to 5. I will explain. If a data distribution is normal then about 68% of the data values are within one standard deviation or divergence from the mean about 95% are within two standard deviations and about 99.7% lie within three standard deviations.

Standard Deviations

Statistical theory holds that 68% of all observations in a normal distribution lie within one standard deviation of the average of that sample. Events that lie on the fringes of this distribution are defined by a number of sigmas (standard deviations), which denote the increasing improbability of this outcome being realized. So if something, an event or fact, is statistically within the realm of normal expectations it will be within SD 1 or 2.

A good example out of real life to illustrate the concept of standard deviation is the following. The average height for adult men in the United States is about 70 inches (177.8 cm), with a standard deviation of around 3 inches (7.62 cm). This means that most men (about 68%, assuming a normal distribution) have a height within 3 inches (7.62 cm) of the mean (67-73 inches (170.18-185.42 cm)) - one standard deviation - and almost all men (about 95%) have a height within 6 inches (15.24 cm) of the mean (64-76 inches (162.56-193.04 cm)) - two standard deviations. If the standard deviation were zero, then all men would be exactly 70 inches (177.8 cm) tall. If the standard deviation were 20 inches (50.8 cm), then men would have much more variable heights, with a typical range of about 50-90 inches (127-228.6 cm). Three standard deviations account for 99.7% of the sample population being studied, assuming the distribution is normal (bell-shaped). And one uses the same methodology for determining trading patterns of equities, bonds, interest rates, currency movements etc. etc.

Though as mentioned it's the unpredictable and unexpected events that can hardly be modeled using the fact-based algos, as we have seen with Brexit. Following the Brexit vote the British Pound suffered an 18-standard-deviation devaluation! In other words believed to be impossible to happen within the normal business practices.

Soros/Black Wednesday, Lehman and Brexit


And in my point of view it will be these kind of moments, the unexpected not foreseen events, whereby the HFT algorithms can't function and will be obsolete (similar to having no market makers in the pit to provide price quotes), that the gold and silver prices will need in order to finally break free from their relentless manipulation.

5 minute suspension rule on the Comex doesn't apply to the OTC market allowing the bullion banks to re-adjust their positions

And although the commercials will have hedged the short positions they hold on the exchange traded Comex by opposite positions on the non-standardized and opaque OTC market they are most likely to double turn (replace one short position with two long positions) in order not to incur huge losses and in turn make significant profits from going long. Though the question will be who will be so stupid to take the short side when this happens. Another point of interest I should emphasize here is that when the comex suspends trading for 5 minutes the commercials can use that time to also get their positions readjusted in the OTC market. The OTC market doesn't suspend trading because it is not an exchange traded market but an unregulated bilateral market without any standardized rules. When the prices are too much in flux it is difficult to agree prices on a bilateral trade hence why when the prices on the comex are suspended parties will be granted time to agree their OTC trades. See the 5-minute Comex rule here below.

Nymex/Comex Rule Regarding Special Price Fluctuation Limits for Certain NYMEX and COMEX Metals Futures and Options Contracts

"The Exchanges will monitor the price movements of lead-month primary futures contracts in real-time on a daily basis. Price movements in lead-month primary futures contracts will result in triggering events. Triggering events result in monitoring periods, possible temporary trading halts followed by the re-opening of trading, and price fluctuation limit expansions.

If the lead-month primary futures contract is bid or offered via CME Globex at the upper or lower first special price fluctuation limit, the Exchanges will consider such an occurrence a triggering event that will begin a five-minute monitoring period in the lead-month contract."

The force majeure will propel gold and silver prices much much higher because of the criminal imbalance between paper contracts and physical backing

In other words the commercials will be able to save their skin despite their sanctioned unlawful behavior though the lit will be off the gold and silver prices. With hundreds of gold and silver contracts "backed" by only one physical ounce of gold and silver the Comex will have to call for a force majeure and settle nominally in US dollars. At this moment the Comex will have failed and the commercials will lose their price setting monopoly.  Paper futures without 100% backing of physical gold or silver will be a phenomenon of the past. Gold could straight away go to $2,000/oz. and silver to $125/oz. especially when counterparty risk is showing its ugly head and the dollar is losing its value.

People ask me why I believe that gold and silver could make such leaps higher. Well if you have 200 paper gold futures outstanding for only one physical ounce of silver or gold in registered inventories and suddenly nobody trusts the dollar anymore and wants that one physical ounce the real laws of supply and demand kick in and will leap prices much much higher.

Conclusion: Insure your wealth against the fake valuations!

I think anyway that investors would do well to shift their focus more and more from the flakey intangible assets to the tangible assets such gold and silver, agricultural land and non contaminated fresh water. Next to that investing in the stock and bond markets is already for a long time not based on fundamentals. Everything is fake; the valuations of stocks, bonds and currencies are completely distorted by QEs, ZIRP and NIRP, actions of the Plunge Protection Team and the HFTs with their algos. So explain to me how an investor can invest on the basis of real fundamentals and is not taken for a ride as we are witnessing for example with the GDX and GDXJ. We live in a fake society whereby fake is ruling our reality!

Anyway why buy insurance for your house, your car, and your life but not for your wealth?

Why not put 10%-15% of your wealth in physical gold and silver and the gold and silver mining companies if you want to hedge your investments in your house and investments. If everything goes well all your assets will do well whilst if things turn sour gold and silver could give that nice leveraged hedge if you have the physical. When it happens people will wake up and realize that physical gold and silver are money the only real money the only reality and that everything with paper is just paper, worth hardly anything, fake!

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