Investors and observers watching the drama unfold in the Ukraine should not be surprised at the short price action of the precious metals, mainly gold and silver. Throughout the crisis (and as matter of record with practically every other crisis) the metals are driven down by a system that becomes more sophisticated each day.
The ramifications and consequences of events in the Ukraine and Crimea are dire and easy to imagine. These ramifications radiate and dovetail with the multitude of other potential and current hot spots in other energy strategic areas of the world.
Conflict creates palpable fear. Fear creates the need for security, confidence, and assets that are unencumbered by the machinations of the various parties involved. The precious metals have served as that anchor for the millennia.
What makes these events particularly unique is that the conflict has arisen in the full embrace of the fiat age – and at the end game of the financialization that came with it. The scale is unprecedented in history. With the extinguishing of risk comes the exceedingly fragile state in which we find ourselves, that overnight, a simple trigger could set ablaze a paper derivative disaster that creates a world wide tsunami.
Nowhere is that fragility more central than the instrument that underlies it, the dollar and the world’s reserve and energy currency. In direct opposition are the precious metals. Therefore, the motivation and incentive to quell prices is a given. That it is written into law is merely a disfigured aftereffect. It is also the propaganda that prevents the flow of awareness, in addition to a hideous nightmare about to be unleashed onto a mass of unsuspecting investors as well as ordinary citizens (and otherwise productive members of societies).
It is indeed one thing that the massive credit buildup over decades, set in motion much further back than that, are stifling for the normal organic growth of economies. But it is quite another in its guaranteed destruction of what remains of it from the global, national, and all the way down to the local level.
Therefore, there should be little surprise about counterintuitive price action. Indeed, on the eve of the Crimean referendum, a shadow of reality manifested in the GLOBEX market. This shadow surfaced only to be squashed like so many times before by the sudden and coordinated HFT-spoofing we’ve become so accustomed to.
The only surprise should be that apologists, the dogmatic technical traders of painted tapes and tea leaves, should not see the light from their darkened corners and leverage influence instead of their portfolios. These are those who otherwise understand the imbalances and the role of final payment assets in a world of paper promises.
Witness the price action leading up to the vote. Silver needed a close above $22, a SOLID 3% move or a $0.64 move – certainly not terribly significant given the magnitude of the situation. This would have also put the price up and over another technical cross, thereby paving the way to the next resistance point.
But the rule is: The higher the drama, the more likely it is to see “non-intuitive” price action. Predictions are useless; this applies to either direction of the move.
GATA Chairman Bill Murphy, via his daily newsletter The LeMetropole Cafe, has spent years chronicling and predicting the telegraphed precious metals price action.
Case in point: One of his long time contributors, James McShirley, veteran lumber trader, has devised an elegant and interrelated series for the last few years. This series can predict the direction and magnitude of the price action on almost a daily basis, up or down. It is both fascinating and tempting to game the system, but ultimately illustrative of the sheer disjointedness and blatancy of price manipulation.
In an article written for GATA and Bill Murphy’s LeMetropole Cafe called “The Curious Case of the PM Fix vs. the AM Fix”, James McShirley outlines the details of his years of research. Here is an excerpt:
“The most suspicious of all isn’t even the London Fix, but rather the “1% and 2% rule”. As I have documented for over 10 years, nearly all gold rallies are capped at +1% basis the COMEX pit close, which is the most widely reported price. A few, which I dub “expanded limit” are capped at exactly +2%. So outrageous is this behavior that I have predicted hundreds of daily gold rallies virtually to the exact tick. I have even predicted in advance on more than one occasion a sequence of four consecutive trading days within pennies of each day’s close. To do this once, as you know, would be extraordinary. To do it over and over is akin to winning a Powerball lottery over and over.
Perhaps to be a truly successful trader in these markets, it is best to dispense with traditional technical analysis and instead employ the following as you watch the inevitable return to equilibrium unfold.”
Aside from naked short selling, the mining index has been a major signal for softer short term prices. Any serious impending announcements by the U.S. Head of State or Federal Reserve Chairman would very likely be bearish. A jobs report release of FOMC minutes (beige book or as we saw, the threshold of war) would also bear watching for the downside.