Overnight Paper Attack On Gold – Why This One Was Different

Once again there was an overnight “flash crash” in Comex gold futures trading. This time it occurred at 3:56 a.m. EST at one of the quietest trading periods of the roughly 23 hour electronic trading day. India has gone sleep. The Shanghai Gold Exchange has been closed for about 90 minutes and the London markets are just beginning to function. I guess someone decided it was a good time to unload close $500 million worth of paper gold into the Comex’s Globex electronic trading system (click to enlarge):

The graph above is the Comex August paper gold derivative, sometimes referenced as a “contract.” The $500mm million number is from Zerohedge and likely includes all the contract months. At exactly 3:56 EST a clearly motivated seller decided it was the best time to unload 2,741 August pieces of paper gold, driving the market down $4.50 instantaneously. If the gold were actually physically delivered into the buyer, that chunk would be 274,100 ozs, or roughly $360mm worth of gold. It’s doubtful that amount of gold is actually sitting in the Comex “registered” vaults (yes, I know what is allegedly reported to be in the vaults).

INTERESTINGLY, the very next minute, some entity BOUGHT 2,373 August paper gold contracts, nearly offsetting the amount of contracts sold. That’s why the price snapped right back up. Also interesting is the fact that the apologists on behalf of those manipulating the paper gold market were dead silent as to the source of this large sell – i.e. there were not any reported “fat finger” excuses.

The question I have is whether or not the flash crash sale was perpetrated to induce the hedge fund black algos to mechanically sell, assuming stop-losses were triggered, to enable the buyer to buy 2,373 contracts at a lower price. We know for sure, based on the recent COT reports, that the bullion banks are feverishly covering their short position, with the bank swap dealers now net long gold. Concomitantly, we know the hedge funds are dumping longs and going short.

Unfortunately, whoever decided to implement this operation strategically executed it one day AFTER the reporting cut-off date for Friday’s COT report. It’s a neat little maneuver the bullion banks have doing for years as a method of covering up their “tracks in the snow.” It will be impossible to analyze what occurred overnight when the COT report a week from Friday is released. The “winds” will have blown snow over the tracks.

That said, it certainly feels like there’s real buyers of gold and silver accumulating positions at these levels. I know from looking at the data on a daily basis that the Indians are actively importing gold currently. For now, it looks like the General Sales Tax “boogieman” was a non-event. China is actively buying, albeit it’s somewhat seasonally slow on the SGE.

What is of interest, at least to me, is the fact that the market has a bullish tone in what is normally one of the slowest seasonal periods of the year. In another month the Indians will be gearing up for their peak buying period. Also of note is that fact that U.S. retail coin buyers have ramped up their appetite considerably for silver eagles and, more of note, for some reason India is importing silver right now in unusually large quantities. I have not been able to track down a link yet, but yesterday Reuters referenced an article in the Economic Times hard copy edition titled, “Silver Imports May See Three-Fold Rise as Low Price Drives Demand.”