There have been all kinds of theories as to the cause of the huge drop in the gold market over last weekend, and the best I have seen to date has come from Bill Downey – proprietor of the internet site www.goldtrends.net and long term student of the gold and silver markets.  

Interestingly, the driving down of the price may not have directly involved the Fed (although there could perhaps have been some collusion) – but relates initially to a drawdown in physical stocks of gold on COMEX and in the JP Morgan vaults (and perhaps others too) to levels which could seriously damage the short position holders in the metals.  While the analysis is yet another theory on what actually happened, its parallels with the gold price take-down of December 2011 are too close to be ignored – even down to the assumed possibility of a total breakdown of the computer systems allowing trading of physical gold at a critical point in the price action.  Too unlikely perhaps to be a coincidence.

The crashing of the gold price would probably not be possible without the computer trading systems which dominate the market today with trigger points for stop-loss trades which come in at specific levels – and themselves drive the price down in a continuing spiral once the key trigger points are reached.  It is the market manipulation to bring the prices down to these trigger points which is key to the whole scenario.

As Downey puts it, the market controllers would thus “need to devise a plan that would collapse the market and trip up all the stops at the correction lows in gold of $1525 thereby setting off the stop loss orders under this important market low. And what if the plan included a way to stop the physical market from purchasing gold under 1525 while that correction was underway?

The first move would be to spook the gold market, perhaps with disinformation – but key this time was an indication from the FOMC minutes that the Fed might be considering ending QE sooner than previously indicated.  This was leaked earlier than usual, whether by design or coincidentally, who knows – but it created the initial trigger for the big gold price take-down.

Downey goes on “You start the ball rolling with disinformation and early leaks and surprise with potential policy change considerations at the Federal Reserve level and you follow it up with a potential huge gold supply story that could come to the market” 

In this case the story which triggered the next fall in the markets was the enforced Cyprus gold reserve sale one – which may well have been pure disinformation given that the Cyprus central bankers say this had not been discussed at all!

And then the final blow to the market was massive selling on the futures market.  One report talks of a single 400 tonne sale.

Downey again “You’ve shaken up the market and the selling begins and gets to within 20 dollars of two year lows where all the stops are and then you bring it down to where all the stops start getting tripped up and you just sit back and watch the market do the rest.  Finally, you shut off the physical system and stop gold buying and at the same time you force physical dealers to sell the futures to hedge themselves.”

This appears to be what happened even down to total computer shutdowns on the Friday afternoon which prevented physical gold trades being accomplished in this manner, (although telephone trades could still be made) – which could possibly have halted the decline.  Unable to trade and fearful of margin calls coming due at market opening on the Monday, many traders were forced into panic shorting of the futures market to protect themselves, all contributing to the gold freefall – or so Downey’s theory suggests.

One might think that the computers freezing at a critical time might have been coincidental – but the same happened in the previous big gold price take-down in December 2011.  Maybe it was just volume related, but it is certainly suspicious. Of perhaps some comfort to those who have kept their gold holdings – or have been buying on the dip, following the December 2011 crash gold rose by $270 over the next two months given the then shortage of physical metal.  This time around the volume of buying at the lower gold price levels appears to have been enormous which is likely to exacerbate any precious metals shortages which may have developed.  Thus it may not be ridiculous to anticipate an even greater bounce back this time around.

Downey reckons that in reality there are only two things that can bring gold down. A manipulated event like we just saw or a liquidity squeeze like we saw in 2008 where an immediate need for cash forced the liquidation of all assets. “Can it happen again?” he says – “ Yes, but this time it would be on a global scale and much more powerful than the Lehman crisis of 2008.”

This article is but a brief summary of Downey’s thesis on what actually happened to gold over that fateful weekend.  To read his full analysis click here.  It makes for fascinating reading.

Be aware though that this is a theory of what happened, but one which fits the scenario well.  Other analysts, like Doug Casey for instance, do not subscribe to the overt manipulation theory, but would reckon that a whole combination of events occurring over the past two weeks could have had the same effect.  Whether the real truth will ever come out is anyone’s guess.