What follows is “Trader” Dan Norcini‘s excellent review on Monday’s P.O.G. clobbering:
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Comex gold was taken sharply lower beginning at 4:00 AM CST and then at the usual shellacking time of 7:00 AM, CST in New York. The reason given for the sell off was “risk aversion” as the US equities were sharply lower which once again saw further foreign currency selling and repatriation into the Dollar. There was the usual chatter of “long liquidation” but that has been ongoing for nearly 4 months now as open interest has continued to plummet since July and so is not particularly enlightening. One look at the Japanese Yen and that is all we need to know about why gold is down. Not to fear friends – this same kind of mindless selling was being seen across the spectrum of the commodity futures markets this morning. Every single commodity market that I track was showing red in its line on my quote screens this morning, regardless of its current fundamentals. That is the tipoff that the selling is indiscriminate and is originating mainly from the index funds and from some of the hedgies. Give them a dose of stock market friendly news and the same dopes will be all buying everything in sight once again. Unless you are a short term trader, and by that I mean a trader whose long term horizon is a 60 minute bar chart, all you can do is to simply laugh at the foolishness that passes for “sophisticated trading strategies” these days. If you think gold is acting irrationally, you should try trading cattle. Yes indeed, Microsoft stock and Amarillo, Texas have lots in common these days.

Having watched these markets nearly tic by tic for as many years as I have now been doing, I have to laugh at those who keep telling me about the “efficient price discovery mechanism” that our glorious financial markets are. Ask any bona fide commercial end user or producer who has to employ the futures markets to hedge their risk whether the futures markets are the least bit “efficient”. If you are not careful, you are liable to get whacked across the knees with a 2 by 4. As far as many of us are concerned, the futures markets have been completely ruined by the index funds. I for one wish they would all simply go away as that would make a wonderful Christmas present. Come to think of it, a few more hedge fund failures would also suit me just fine. Think about what these guys do. For “risk aversion” they run into a paper currency known as the Yen and run out of “risky” gold during a time of financial chaos and uncertainty. The guys who write economic textbooks in the future years from now will have to go back and proof read their texts to make sure that they actually got this right as it will be so bewildering to them that they will suspect that the printer typeset the words incorrectly.

Meanwhile, yields on some Treasuries are now at 50 year lows! Before long you will have to pay the government to buy their debt at this rate! And to think we have people who are throwing away gold in order to stash their life’s savings into US debt paying these kinds of yields. My suggestion is to buy brass, gunpowder and reloading equipment instead. You get to own something tangible and at the same time can keep the idiot who stuck all his money into worthless US debt from trying to steal your tangibles that are actually worth something.

I mentioned last week that many traders wrap up their trading year around the Thanksgiving holiday and take off the rest of the year. The result is that liquidity begins to dry up considerably with the spread between bids and offers widening out and smaller orders moving the market much further than such an order would move the market under more normal trading conditions. We are already seeing the effect of this combining with the plummet in open interest (it dropped yet again to 271,000). I see no reason whatsoever for this to change anytime soon. It will work the same way when the market moves higher. The perverse effect will be that so many traders will be getting whipsawed that more and more of them will have had enough of the madness and they too will move to the sidelines further compounding the already out-of-control volatility.

It does seem to me, however,that given the rather minor extent of the Dollar’s rally this morning along with the corresponding weakness in the Euro-Yen cross, the sell-off in gold is way overdone. I mention that only to emphasize the effect of the falling liquidity and how it is acting to exaggerate any moves either up or down. Those who like to play games with market prices LOVE conditions such as this as it amplifies their ability to push the market in the desired direction, namely DOWN. All you need to do is place a few strategically large sell orders to get the ball rolling and then step back and let the lemmings do the rest of your work for you as you pick their pockets. Even though I personally despise what the bullion banks do with the Comex, in some sense the longs who refuse to change tactics deserve what they get. If they will not adapt to what their enemy is doing, they should not expect to obtain a different outcome. Take the metal and end the charade. Play the paper game and lose. It is that simple.

Those of you wishing to secure some more physical gold from the Comex warehouses so that you may deprive the shorts of their only line of defense, just received a discount of nearly $5,000 on your purchase price for 100 ounces compliments of that same crowd. Each time one of these bear raids occurs and the weak longs rush out of the exits, those who want the real metal can easily step in and lock in a better purchase price for the physical. The more metal that flows out of the warehouses the more the shorts are being set up for a religious experience. The key is not to let up the pressure from the physical side of things. It bears repeating: the paper shorts have NO DEFENSE against determined longs who are taking possession of the actual metal at an increasing rate. Have you had enough of this phony paper market yet? Are you tired of the cart leading the horse around? Then take the metal away from the warehouses and the Comex will cease being the corrupt den of thieves that it is. Do not forget how the Hunt brothers handled the silver shorts in the late 70’s before the Feds stepped in to bail out their pals who were short the metal. The problem the Hunts had was that there were just two of them – an easy target – but in the case of thousands and thousands of investors who take physical delivery of the gold out of the Comex warehouses what is the claim going to be from the Feds? That the Comex market should not be a place where buyers can go and obtain gold? If not, then shut the damn thing down. If so, then buzz off.

Today we had another 2,566 deliveries that were taken, or stopped, against the December gold contract. That brings the monthly total to 11,166 ounces in just two days worth of deliveries. The entire month of October had only 11,554 to give you an idea how heavy the buying of the actual metal has been so far. Once again the stopper of size has been Bank of Nova Scotia. We are off to a very good start but cannot relax.

Meanwhile, back over in the HUI and XAU worlds, the indices were taken back down below the 50 day moving average after having successfully managed two consecutive closes above that important technical level. Generally, such a performance would be a confirmation that the lows are in especially with the shorter dated 10 and 20 day moving averages turning higher and threatening an upside crossover of the 40 day. What we will want to watch then will be at what level the dip buyers will perhaps make their presence felt. It looks to me from the HUI chart that the region near the 208-210 level should provide us some buying support. Below that is support near the 198 level although I would prefer to see the former level hold to keep the bearish chatter to a minimum. The shares had been managing to begin separating themselves somewhat from the broader US equity markets until today tripped them up so let’s see if they can regain their footing sooner rather than later.

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