Here Are The Real Reasons Why Gold And Silver Plunged

TBI ^ | 9-24-2011 | Mike "Mish" Shedlock

[blam]

Here Are The Real Reasons Why Gold And Silver Plunged

Mike "Mish" Shedlock, Global Economic Trend Analysis
Sep. 24, 2011, 7:28 AM

Many people have asked me to comment on the plunge in gold and silver. First let's take a look at the wrong answer: Case Closed: CME Hikes Gold, Silver, Copper Margins

And there you have it: CME just hiked gold margins by 21%, silver by 16% and copper by 18%. Mystery solved. Sorry Tyler, wrong answer.

Four Reasons for Metals Plunge

* Fed did far less than expected
* Mutual fund redemptions
* Margin calls at hedge funds
* China growth story fading

1. Fed Did Far Less than Expected

The Fed did not do what everyone thought, which is to say something far more than "Operation Twist".

As noted in advance, I explained why the Fed wouldn't do more than Operation Twist, in Six Things the Fed May Announce Tomorrow (But Likely Won't); Would Any of Them Matter? Gaming the Reaction.

In short, the Fed did not print, or even threaten to print. Moreover the Fed committed to a strategy not through the end of this year, but all the way through June of 2012. Perhaps the Fed does more in the interim, perhaps not.

For those expecting drama, the Fed's non-action was decidedly bearish for commodities in general, even gold.

2. Mutual Fund Redemptions

Mutual fund cash levels are at or near record lows. In general, mutual funds were not prepared for the market selloff and sell orders came in. Rather than sell garbage like Bank of America at $6, mutual funds unloaded stuff like gold, taking profits.

3. Margin Calls at Hedge Funds

Hedge funds unloaded gold and silver for the same reasons as mutual funds,

(snip)

[BooBoo1000]

Just remember Eco 101, there are only two forms of money. Gold and Silver, the rest is just paper.When the smoke clears away, you will be considered a wizard to having bought Gold and Silver, just hunker down and watch the show.

[agere_contra]

Apparently the CFTC (in their next meeting in October) will be discussing the imposition of a strict, 1500-contract position limit in silver. It wouldn’t happen in October, but the timeline would be discussed: you know how committees work.

Any such imposition would (I guess) force JPM to divest themselves of most of their gigantinormous short position.

While I still give credence to the rumour about JPMs lopsided derivative position that would wipe them out if Silver is over 36/oz for 60 days - maybe the CFTC is starting to do its job of regulating the silver market. As JPM is being sued for manipulation it would smack of misprison for the CFTC not to do anything.

So JPM is running scared, and is burning the paper price to buy physical Silver cheaply.

In summary: my preferred characterisation of the Silver market is that of a vastly underpriced commodity held down by paper manipulation. This manipulation has multiple possible end-scenarios: the most obvious one is when the market runs out of physical silver because it’s so underpriced. So we should *buy silver until our ears bleed*.

Hope this proves helpful.

[cuban leaf]

Well, I confess that I bought about $500 worth of silver eagles at $40 each a couple weeks ago, and two morgans at the VERY peak for about $45.

But the lions share of my silver was purchased below $20. And being in this for the long haul, I may need to go big again.

[cuban leaf]

—No, this is just what the Fed needs in order to start the printing press again. Get commodities way down, so inflation looks like it is no longer a problem and that to contain the price of goods from going to high.—

I think there is some truth to that. It is said that the time to get out of any market is when everybody is into it. One guy said, many decades ago, that when his shoe shine guy was giving stock market advice, he knew it was time to sell.

And the converse is true. When “everybody knows” that only a fool would actually buy a house or stock or whatever, it’s time to go in big. It’s pretty much hit bottom.

[dila813]

I am buying at spot and buy when I see it pull back on the ETF.

I have some physical metals but most of it is in ETFs.