I’m undertaking a 1000-day reinvention project, blogging here daily to track my progress. In Friday Flash, I share an epiphany or aha moment from the past week.
Yesterday, I shared a theory that we may see a panic in the traditional financial system as physical demand for precious metals overwhelms paper-based manipulation (through futures contracts and ETFs).
But this morning as of 6 am mountain time, the panic we’re seeing is in the opposite direction: a flash crash in precious metals. As I’m writing this, Gold is down almost five percent, silver more than twelve. Some suggest this is due to Trump’s nomination of Kevin Warsh for Fed chairman.
Warsh is married to Jane Lauder, a billionaire heiress to the Estée Lauder fortune. Her father, Ronald Lauder, is a long-time personal friend of Donald Trump and has donated large sums of money to Donald Trump. So some are surmising that this is why Warsh was selected. It makes sense, because Trump consistely prioritizes personal loyalty over institutional expertise.
Warsh used to be an inflation hawk but now favors lower interest rates, according to public statements he’s made, likely to cozy up to Trump. I cannot believe that Warsh will not do Trump’s bidding.
I think something else is probably going on, a combination of speculative traders locking in their profits and also possibly some market manipulation to washout weak holders and provide a better entry point for investors in the know.
Is there market manipulation going on?
Something I didn’t know until recently is that there are paper claims to silver and then there are physical holdings. On exchanges like COMEX (Commodity Exchange Inc., the world’s leading exchange for trading metals futures and options), the volume of paper precious metal (futures contracts) can be hundreds of times larger than the actual physical metal sitting in vaults.
Because the price of a metal, such as silver, is discovered in the paper market, a large institution can sell a massive volume of futures contracts — representing more silver than actually exists — in a very short window. This can trigger a price drop without a single physical bar ever trading.
If the price drops far enough, this triggers stop-loss orders and margin calls (requests for additional capital, when people have borrowed money to establish positions) for smaller traders. This creates a self-sustaining waterfall of selling, allowing the large player to buy back their positions at a much lower price.
Another way that the market can be manipulated is spoofing — when a trader places a huge sell order just above the current price with no intention of actually executing it. The goal is to create a false sense of overwhelming supply. Other traders, including algorithms, see this wall of selling, panic, and sell their own holdings to get out first. The spoofer then cancels their giant sell order and buys at a lower price.
Firms like JP Morgan have paid nearly $1 billion in fines in recent years to settle charges related to spoofing in precious metals markets. The firm engaged in this over a period of at least eight years.
However, this sharp pullback after a strong run looks more like profit-taking, repositioning, and macro repricing. It’s to be expected after the parabolic rise that all the precious metals have seen recently. And it will feed on itself in both psychological and mechanical ways. Investors who’ve been thinking “was that the top?” may convince themselves as they see the price go down that it was, and they’ll sell. They could be right of course. Mechanically, investors who used leverage to buy (taking on debt) will face margin calls where they need to put up more cash to keep their position. If they don’t, their position will be liquidated.
What does it mean for current and would-be precious metal investors?
If you are medium- and long-term bullish on precious metals, like I am, it means you can get them at a cheaper price, today and probably for some time into the future (though no one ever knows!) You might get them even cheaper in the upcoming weeks and months.
I’m short-term cautious but still adding bit by bit to my positions because you don’t know when it will turn back up. It could happen this weekend! It could happen after Chinese Lunar New Year in February. It could not happen until summer. It could never happen, or at least so long into the future, it is effectively never.
It’s also a good lesson in how volatile they can be, silver especially, sometimes known as The Devil’s Metal. You may be able to make amazing gains over the next two to three years with gold, silver, platinum, and palladium but only if you have the stomach for the wild ride you’ll take.
Good luck out there!