On Friday 18 October at 8:42 am (UTC-05), a colossal amount of gold futures sell orders inundated the Chicago Mercantile Exchange (CME), plunging gold prices by $25 in two minutes. Five thousand contracts “at the market” (available market price) were suddenly sold, paralyzing the market as trading was halted for 10 seconds. Reports indicate that 2,700 contracts were sold before the market paused; the remaining 2,300 sell orders were executed after trading resumed.
Whoever dumped the sell orders sold $640 million of gold in one fell swoop. Market liquidity evaporated as these sell orders in effect performed as one coordinated assault on the prevailing price. Traders were adamant about the folly of placing such a sell order because, as iiTrader CEO Rich Ilczyszyn said, “The offset price could not (be) estimated.” Typically, traders coordinate sell orders for maximum returns. Whoever dumped these gold futures intentionally wanted lower gold prices.
A similar situation occurred 12 September at 2:54 am (UTC-05), when trading was halted and gold prices plunged. What is notable about the timing of yesterday’s sell orders is that they were seemingly made to guarantee maximum visibility.
Gold has languished at three-month lows despite the federal government shutdown and its looming debt default. This trend bucks expectations of gold’s market placement, as investors usually view precious metals as a haven during times of economic uncertainty. Moreover, China has imported over 2,000 tons of gold during the past two years. According to Wikileaks, the People’s Bank of China (PBOC) – China’s equivalent of the Federal Reserve – is intent upon backing the renminbi with gold and usurping the U.S. dollar as a reserve currency.
This latest market event is another windfall for China, who has purchased gold in amounts exceeding its robust demand for 2012. GoldCore.com estimates that China will amass at least 1,700 tons of gold for 2013, which includes all its domestic production of approximately 300 tons.
Yet market disinformation abounds. For example, the International Monetary Fund (IMF) officially pegs China’s gold holdings at just 1.3% of total world reserves. However, zerohedge.com estimates China’s gold holdings are approximately over 3,500 tons, ranking them second behind the U.S. and ahead of Germany. Even more telling is that China increases its gold reserves by 100 tons every month.
Why this massive amount of gold futures sell orders “at the market” deserves scrutiny is because it flies in the face of long-accepted market practices and thinking. For example, savvy investors don’t take huge future contract positions. As goldquarterly.com states, “Generally investors will buy gold futures when they believe that gold prices will rise while they can sell gold futures when they think that gold prices will fall, creating a short position.” The sudden onslaught of $640 million in gold futures sell orders guarantees a precipitous drop in gold prices. The market player who committed these sell orders (mysteriously, nobody seems to know who it was) appeared to make a clumsy, amateurish market blunder. It seems safe to assume that there must have been an ulterior motive.
As Taylor Durden noted in ‘Harvey Organ’s Daily Gold & Silver Report,’ a few hours before the mysterious sell-off on October 18, “Nanex found ‘six instances (there may be more) of 1 second periods in Gold futures with a high number of trades (700 or more).’ As those who have been covering our coverage of HFT (High Frequency Trading) manipulation will note, these are precisely the kinds of momentum ignition, and not rational price discovery, events that seek to manipulate prevailing prices lower (or higher).’
So who benefits besides China from the drop in gold prices? With investors scrambling to find investment vehicles that maximize returns, equities markets are obvious beneficiaries from the downturn in gold. The Federal Reserve is another beneficiary; lower gold prices have the effect of maintaining investor faith in the fiat dollar. Wall Street and central banks need to demonstrate to investors that the Quantitative Easing policies of creating billions of dollars from the ether have no blowback on gold prices. Hence, it is in their interest to manipulate the market price of gold.
Make no mistake that gold prices are being suppressed through market manipulation. It is a coordinated effort done in order to bolster faith in the U.S. dollar. How long this slight-of-hand act can continue is anyone’s guess. It runs counter to centuries of proven market dynamics. Ultimately, this market legerdemain will be exposed as an act of collusion between the Fed and Wall Street. One day the rest of the world will tire of shouldering America’s trade imbalance, rejecting the greenback for an alternative reserve currency backed by tangible value, e.g., gold.
China is already in the process of “de-Americanizing” the dollar as a reserve currency, as its binge of purchasing gold proves. Fortunately, the individual investor can similarly protect his wealth by amassing his own personal reserve of gold, transitioning from paper financial instruments that at the very least systemically lose value through constant inflation. Gold will also insulate against any sudden currency devaluation, which seems inevitable if the history of fiat currencies is a guide. So, don’t be misled by short-term market chicanery. Choose gold as an investment of intrinsic value that will retain wealth over the long haul.
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