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Valyooo (33.19)

Supply and demand and price action



September 25, 2011 – Comments (4)

This is another quickie blog.  I am confused by the way people view silver and gold prices.  Whenever silver prices plunge I always see blogs about how silver is so cheap now that the physical websites have completely sold out of bullion.  If a company sells out of bullion then clearly the demand is huge.  If the demand is huge, it would push the price up. So how could they be running out of bullion as the price keeps dropping?  Strictly because the futures market is out of wack?

Also, a lot of people think it is absurd that anybody would buy gold on a spike.  Although I never would, obviously somebody would because it could not reach a level without a transaction taking place.

4 Comments – Post Your Own

#1) On September 25, 2011 at 5:24 PM, Frankydontfailme (29.40) wrote:

The gold and silver markets are volatile because the little guy buying bullion online or at coinstores is insignificant. The bulk of these markets are run by heavily leveraged futures contracts (both short and long). When a liquidation occurs due to margin calls, selling can be ferocious. This is especially the case when the metals exchanges let the big players know ahead of time to expect margin raises/calls. It sounds like conspiracy mumbo, but it's really not. The exchanges want to make sure that a big dip won't wipe out their clients, so they make sure they can get paid by insuring the big guys transfer extra cash or sell... they usually sell knowing not everyone will be able to cover the maintenance fees.

The same is true on the long end. With the prices soaring over 1900, hedgies and momentum chasers will let the winners run and add leverage. A pullback isn't the end of the world for them because they are pro's... they have tight stops for their trades so they never turn a profit into a loss.

No long term investor likes to admit to buying too high. Personally, I bought some at 1740, 1780 and 1820. Frankly, gold prices would have gone much higher (I planned to take some off the table at 2150 and more at 2350) if central banks did not heavily intervene. And I mean heavily, thousands of contracts sold at 3AM everyday like clockwork. Not conspiracy theory mumbo... reality. Anyway, that's part of this market. No reason to complain, just buy more as cash allows. 

If you don't think silver and gold are oversold here, then I guess we disagree.  


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#2) On September 25, 2011 at 11:30 PM, Valyooo (33.19) wrote:

I am not saying that...I want to pick up some gold, I just think it can fall to $1500.

Can you explain the 3 am central bank intervening thing?  I don't know much about the futures market for PMs

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#3) On September 26, 2011 at 8:11 PM, Frankydontfailme (29.40) wrote:

I think 1500, even 1480 is possible, although not the base case. A solid base around 1575 to 1600 seems more likely to me.

The 3AM thing is bizarre, and at first I wasn't convinced at all and even thought the analysts that espoused it were a bunch of kooks.

 Here is some correlative analysis: 

Personally, this type of analysis never convinces me because statistics and correlations can be used to show anything, but if you're mathematically oriented you can find all sorts of analysts with this type of cold calculating process.

I was convinced when I saw this:

From this newsletter: 

The swiss bank pegged to the euro, removing the last ultimate safe-haven currency. This is absurdly bullish for gold. Instead, gold dropped hard. 

There is no doubt in my mind, that gold dropped because central banks dumped gold onto the thin volume traded globex. This is now standard practice (and has been decades). To keep the price of gold in check, they work together to sell some of their gold (western central banks hold much of the world's gold).

Here's trader dan on the topic(a consummate pro and not a kook at all):

Even the Goldman Sachs gold trader admitted something was up: 


Here is a quote from legendary federal reserve head Paul Volcker: ""That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake."

Paul Volcker, Nikkei Weekly 20 

The point is, it's common practice for central banks to take down the price of gold to maintain stability. I'm a freemarketeer and thinks is atrocious, but at least I understand why they do it... to maintain stability. Not sure why they pick 3AM but if you check the overnight gold prices, you're very likely to see a rout, right around then. Heck, I bet it's a self-fulfilling prophecy at this point. The asain hedgies are waiting for the drop to buy, and probably sell short leading into around 3AM EST, doing the central banks job for them.

Here is more information on the practice of gold price manipulation if you're not already bored :) (gata has done excellent work to legally uncover gold price manipulation). 


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#4) On October 01, 2011 at 9:19 PM, Valyooo (33.19) wrote:

Thank you for an excellent reply.

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