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“What if the dollar remains sturdy, Iran/oil fears vanish, and no other crisis point emerges as the US and global economy slows down? Big ifs or not, it could be a long way down for gold.” August 1, 2006
The ‘ifs’ are, at least for the moment, coming to pass, and following a $20 an ounce plunge yesterday October gold is now down by $83 an ounce (-12.3%) from its July 14 close. This dramatic slide has brought into focus the $550 ounce level last seen on June 14.
Incidentally, and for those bugs with a short term memory, yesterday’s slide wasn’t all that bad: gold plunged for seven sessions in a row from June 6, 2006 to June 14, 2006 and the largest single session loss was more than $45 an ounce! (June 13, Oct contract).
Following yesterday’s sell-off the regular suspects lined up to talk about manipulation. Here is a sample from Butler:
“Since there are so few dealers holding a very concentrated short position, It is no problem for the dealers to collude and tacitly agree to withhold offers to sell more short positions as the tech funds are buying with abandon. This assures that the tech funds buy at a high price. Once the tech funds are positioned on the long side, the concentrated dealer short sellers pull the rug out from under the tech funds. The dealers then collude and withhold bids until the tech funds begin to sell in a panic.”
What Mr. Butler neglects to mention is that in recent months the dealers have tried to slam the gold market on countless occasions and failed. They failed because the weak hands that ran for the hills yesterday stood firm. As for the argument that the dealers are pulling their sell orders in unison, then watching the tech funds buy ‘at a high price’, and then pulling the ‘rug out’…I sincerely doubt that after all the troubles the ‘manipulators’ have encountered since 2005 that they are doing much more than praying for a serious price collapse.
Jim Sinclair took a different approach to manipulation theory yesterday, claiming “This is an old fashion politically motivated raid that will fail. It will fail because the dollar has no significant upside and gold cannot be broken unless you can build a bull market in the US dollar.” For all of Mr. Sinclair’s undue speculations, his comments on the dollar are spot on. Gold is a hedge against a US dollar decline and in the coming years the US dollar should weaken. Enough said. As for ‘politically motivated raid’ on gold…you have to be pretty motivated to try and speculate why gold is the market that deserves to be raided. Unfortunately I am not.
Don’t get me wrong, a couple of years ago I was all a flutter about precious metals ‘manipulation’. I even penned a bunch of opinion pieces on the subject:
July 8, 2002: The Great Gold Conspiracy Has No End Game
April 7, 2004: Silver a Sell, Unless The Jig is Up
Nevertheless, the ‘gold is manipulated’ crowd needs to adapt to the reality in front of them and stop reading every price movement as being part of some secret master plan. In order to do this the manipulation crowd should consider the following two points:
* On November 11, 2005 net commercial short interest reached a record 227,566 contracts and gold was trading at $475 an ounce.
* Since November 11, 2005 gold has zoomed above $700 an ounce and currently sits around $600 an ounce.
In other words, the commercials – which are currently only 133,812 contracts net short – have lost, and those that purchased gold as a safe haven investment prior to 2005 have profited.
In short, if gold plummets below $550 (or dare I say $500 an ounce) it will be because the new demand that has swarmed into the precious metals market since mid-2005 has turned scared. Accordingly, whether or not the commercials try to nudge gold lower and start a potential tidal wave of selling is really quite irrelevant - the lesson since November 2005 is that if conditions are bullish enough manipulation efforts lose their effectiveness.
As of yesterday gold is still up by 16.9% in 2006. Please show me another manipulated market that is primed for a similar boom.
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