Was Someone 'Piling On'?

There were several important developments for gold over the past week.

1. On Monday, the selling pressure that started the week before continued.
2. Beginning during Comex trading on Tuesday and then continuing early Wednesday morning (i.e., when the Asian markets were open), gold went into a mini-freefall. Within one day it dropped nearly 10%, before finding support in the $540s, which was the level I suggested in my last alert 11 June 2006 alert that support would re-appear.
3. It is significant to note that the Dollar Index barely rallied during this gold rout, and much less than I indicated in the last alert was necessary to break the gold price below $600. This observation is important because it suggests Tuesday's mini-freefall was gold-specific. In other words, it was factors unique to gold that caused its price to drop. There was no simultaneous rush into the dollar. Therefore was someone 'piling on' to drive gold lower?
4. By Wednesday, the closing price of gold on the Comex was down seven days in a row, which is a very unusual occurrence. That degree of selling pressure indicated the market was due for a bounce.
5. Indeed, by early Friday morning gold had climbed back above $580. The selling pressure then resumed, probably fed in part by profit taking from the day traders and 'scalpers' who played the bounce from the $540s.
6. Friday afternoons (after London closes) are always treacherous. The markets are thin, i.e., there is limited liquidity without London's physical market and many traders leave early for the weekend. I have written in the past how the 'gold cartel' (central banks and their select few bullion banks that are used to execute their orders) have used those illiquid market conditions to 'paint the tape'. Their selling pressure has maximum impact in an illiquid market. Sure enough, around 12.05pm on Friday (i.e., just minutes after London closed) gold started another freefall, dropping nearly $8 in a matter of minutes. But instead of turning into a rout, something extraordinary happened.
7. The selling was stopped dead in its tracks, and gold then rallied $12, closing at the session's high. It was an extraordinary reversal, unprecedented in recent memory for a Friday afternoon. It was an indication that something is different this time around. Instead of predictable results from gold cartel intervention to drive the gold price to the lowest possible weekly close to 'paint the tape' and discourage gold investors, gold rallied late Friday afternoon, in effect 'stuffing' the short selling gold cartel.
8. While that event was remarkable in its own right, the news after the Comex close was even more stunning with the release of the latest Commitment of Traders Report. Here's what Dan Norcini wrote about it in www.lemetropolecafe.com (subscription required - but this daily advisory service is well worth the money): "What is quite extraordinary about today's report was that it detailed something which I have not seen during the course of this entire bull market since 2001, namely, increasing short sales by the commercial category in the midst of a falling market - not just a falling market, but a precipitously falling market at that. This is a startling new development. What is even more remarkable is that the big trading funds, instead of dumping their longs into the lap of the waiting commercial cartel, actually appear to have been buying on the way down! This also is a FIRST! In other words, we have seen in one week a COMPLETE REVERSAL of the norm of the last 5 years in the gold market." In other words, the gold cartel was 'piling on', but the big trading funds were prepared for the onslaught and stepped 'up to the plate', or 'chopping block' may be more appropriate - heads are about to roll if we get a short covering panic.

So last week was extraordinary indeed for many reasons. And what does it mean? I think we have a reasonably good possibility (i.e., 50/50) that we could see a V-bottom (the chart pattern will look like a "V" as the gold price rises at the same rate at which it fell). It will be caused by the shorts as they rush to cover. Because they are competing with the buyers in the physical market (where demand below $600 is strong) and the big trading funds, the potential exists to spook the shorts here. If so, gold prices could boomerang to the upside as the shorts run for cover. The next week or two should be very interesting to see whether a short-covering panic develops.

The following chart highlights one V-bottom that occurred in 2003.

When gold back then finally broke above $325, it shot straight up all the way to $380. A steep correction ensued which took gold back down to the breakout point, but by May, gold was back near the $380 level. By early September gold broke above $380 and resumed its bull market uptrend. Importantly, that same bull market uptrend remains intact.

Even though gold is presently within resistance and support at $715 and $500 respectively (horizontal dotted red lines), it remains above its 40-week moving average.

Silver also remains above its 40-week moving average, as can be seen on the following chart.

I present below a long-term chart of the gold/silver ratio.

The ratio moved back toward its 200-day moving average, but remains within a downtrend (parallel red lines). Silver will continue to outperform gold as long as the ratio remains within this downtrend channel.

To conclude, gold and silver remain in bull markets, but there have been two important changes. First, the huge short position established by the gold cartel this past week has created the possibility for a short squeeze. That's bullish news, and the other change is also good news. The selling pressure last week has moved both gold and silver to price levels at which they are again exceptionally good value.

Keep in mind that the Dollar Index has not rallied. The problems adversely affecting the dollar have obviously not been fixed in one week. Instead, it seems clear that central banks 'circled the wagons' to give time to Mr. Bernanke to remove his foot from his mouth, which leaves one unanswered question. Did the central banks also intervene to prop up the dollar last week?

We can presume that they did because past experience suggests that they intervene in the precious metals and the dollar simultaneously to gain the biggest impact. So it is noteworthy that the Dollar Index was little changed on the week, closing well below its high on Tuesday when the gold cartel was 'piling on' to the short side in gold.

Published by GoldMoney
Copyright © 2006. All rights reserved.
Edited by James Turk, alert@goldmoney.com

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