Gold and silver prices: Been here before but this time is different

The precious metals have seen dramatic sell-offs before, although the primary difference between previous precious metal declines and the recent drop is the current shortage of physical metal.

It is also worth considering how well the commercial bullion traders are positioned for a rally after these past two days of sharply dropping prices, especially when the latest price drop came on top of a physical market signaling tightness all along.

The Developing Physical Shortage and Goldman’s Selloff Signal

Major dealers in North America and the EU seem to be out of physical precious metal stock almost across the board. This physical shortage had been developing for some time, in contrast to the 2008 drop.

In terms of the supply fundamentals, the loss of Kennecott’s Bingham Canyon mine last week, in addition to further postponements for Barrick Gold’s big Pascua Lama Project were as bullish as can be.

Goldman was also openly signaling the rest of the market by notably revising their gold price forecast lower just ahead of the big down move, followed by more major banks revising their price forecasts lower.

Price and Positions

Precious metal prices have now been falling overall or range bound for almost two years. Contrast the current situation with the historical September 2010 to April 2011 period, when 30% down moves occurred after a short covering rally as a speculative pile-on ensued.

This time, physical demand had been surging just before paper price declines led by the manipulated futures market. Also, hedge funds have also been piling in to short the market to a historic degree based on the negative technical picture.

In contrast, J. P. Morgan Chase et al have been slowly exiting or reducing their notable precious metal short position over the last month without a drop in the market’s open interest. Normally, heavy downside direction in price tends to be accompanied by a reduction in open interest.

Frankly, the most recent selloff seems like just an orchestrated opportunity for the big shorts to cover.

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