Gold took two big tumbles the last week of November, pushing prices down for the week and to even on the month. The trigger for price drop for gold on Wednesday has been traced to 7,500 futures contracts that were dumped right at the opening bell, triggering a wide swath of stop-loss orders. Prices recovered on Thursday, then the selling resumed on Friday, the last trading day of November.
When the dust settled Friday gold was down $11.00 to $1,714.60 and silver was off $0.77 to $33.40, with the silver/gold ratio ending the week at 51.3. The sudden rise in the silver/gold ratio indicates that the selling in silver was reactionary and that gold took the brunt of the red ink.
While I’m usually not one to traffic in conspiracy theories, the trading last week is highly suspicious. There was no major news that would account for a drop that drastic and so analysts started grasping at some pretty thin straws for an explanation.
Some pointed at the badly misnamed “fiscal cliff” negotiations as the reason. First, the fiscal cliff is more like a very gradual fiscal slope, but you can’t panic people with talk of a fiscal slope. The other thing to keep in mind about the fiscal cliff is that any deal before the end of the year can be painted as a tax increase, but five minutes after the Bush tax cuts expire Congress would be voting for a middle class tax cut. It’s the same net effect with a wildly different media spin. The process of addressing the fiscal cliff is entirely predictable and largely a non-factor for precious metals.
The rest of the economic news for the U.S. is overall positive, at least at the corporate level, but not positive enough to account for that steep of a drop in gold prices. That puts market manipulation on top of my list of usual suspects. I would start to think I was being paranoid if we didn’t see the same behavior in the equities markets.
It’s a conceptually simple gambit that works like this: When traders are working in uncertain waters, there’s a tendency to keep their stop-loss orders relatively close to the trading price to try and be the first one out of the burning theater if the markets turn negative. In that scenario a single large player can dump a large number of positions and trigger all those stop-loss orders, creating a cascade of selling. When prices bottom out the traders that triggered the panic selling can feign surprise and buy back in at a profit.
That’s one of the reasons I try to stay out of derivatives trading and stick to actual physical gold and silver. There are just too many ways for big players to game the system in their favor and when you hold bullion-priced metals for a long period of time, you’re opting out of the Wall Street Follies.
Chris Poindexter, Senior Writer, National Gold Group, Inc