Dan Norcini blames the huge falls in gold and silver of last week on possible central bank intervention which led to downside momentum exacerbated by computer algorithms kicking in and taking the markets down further.
With gold and silver plunging, along with stock markets and crude oil, King World News interviewed Jim Sinclair's chartist Dan Norcini. Norcini told KWN what we are seeing today in the gold and silver markets is not what most people think: "People will tend to blame this takedown in gold and silver on the bullion banks. Interestingly, I don't think that's the case this time, Eric. I think what happened last Wednesday was bullion bank selling related to central bank intervention, when we had that big takedown, which was timed with Bernanke's Congressional testimony."
"That did get the ball rolling, but once these guys create enough downside momentum and downside support levels are breached, the bullion banks don't have to do any selling. At that point, the hedge funds and algorithms start to do the selling for them.
On a day like this, I expect the bullion banks to be covering shorts. They are buying back some of their shorts they put on at higher levels. We've had a decade now to see their modus operandi and this has been the pattern. We've seen downdrafts in gold and silver accompanied by sharp reductions in open interest and short covering from commercials.
If past patterns hold true, and I'm sure it will, we will see sharp hedge fund liquidations on the long side being met by bullion banks buying or short covering. Remember, the bullion banks were big sellers up at the highs.
“That’s where they (commercials) do their selling is at the upper end of the range in order to cap the price rise.
Once the momentum slows down as a result of the capping efforts, then the bullion banks can just sit back and let the hedge funds do the selling for them and come in and begin to cover their shorts. That’s how the manipulation works and that’s how they make their money.
It’s corrupt. It’s hopelessly corrupt because you have the central banks interfering with the natural process of a market. The markets are all about price discovery. When the central banks look at market action and look at price action and they are not happy with the direction certain markets are headed, they deliberately interfere to alter or change the course of those markets. Of course that’s corrupt.
When you look at a day like today we have the S&P, gold and crude oil all trading down almost exactly the same in percentage terms. These markets are trading lower by 1.85%, 1.88%, 1.85% respectively. What this tells you just from looking at those numbers is this is algorithm selling. Nothing sells that precisely unless it’s being run by computers. So you have a massive amount of selling coming in due to hedge fund algorithms kicking into sell mode.
Obviously, Eric, for those of us who look at gold as a safe haven and a store of value, you realize this type of trading in gold is ridiculous. It’s not based on fundamental, value based selling or anything based on the physical market. It’s simply computer selling.
The catalyst for this today seems to be renewed fears concerning the Greek bailout package that was being put together. There are concerns that some of the private bondholders are not going to accept this arrangement. In fact, a large number of them may not accept this arrangement and that would mean you get a sovereign default.
This is what the market is reacting to. This is a time where the markets begin to price in the deflationary trade and that’s generally a tough time for the metals in the very short-term.”
Norcini also added: “When it comes to the physical market, we know that Eastern central banks have been buyers of physical gold whenever we get these bouts of liquidation. So we are now down at the level where we are going to see a fair amount of central bank buying. It will be interesting to see if this is enough to absorb the selling from the hedge funds.”
