Daily Market Report 03/01/12

                                                (Who bought the 34 Million Ounces of Gold?)

GOLD

Yesterday was an extraordinary day for Gold traders.  First of all, the volume for the CME’s most active gold contract, which is now April 2012, was 344,994 one hundred ounce contracts (34,499,400 oz was traded) a record high. Gold prices dropped $77 per ounce yesterday based on slightly negative news, specifically the lack of mentioning a possible QE3 by Fed Chairman Ben Bernanke. Mr. Bernanke’s congressional testimony does not change any of the fundamental reasons to own gold. On Wednesday, during floor and electronic trading, the gold price ranged from $1,792 on the high to $1,688 on the low, a $104 price difference. Surprisingly, all this happened and open interest increased by 5,000 contracts, an additional 500,000 ounces of gold.

During my 50+ year career of trading gold I have seen similar exceptional days like this.  Traders call this type of day “shaking out the weak hands”, because many small investors and speculators are driven out of the market by stop loss sell orders and margin calls. So, who bought the 34 million ounces of gold and what will happen next? If the professionals (floor traders, commodity houses and hedge fund managers) have control of the gold market they will clean out the small buyer with margin calls and stop loss sell orders. 

Today, both in Asia and Europe, gold bounced back from the lows and held over the important psychological $1,700 long term support level. The volume of gold contract trading was high with excellent physical demand.

At 11am PST, Gold is trading at $1,719.50 per ounce, substantially above the $1,700 support level and up $2.50 from yesterday at the same time.

I think the real question about Wednesdays dramatic drop and today’s gold trading is, is this really a weak hands clean out, or is this a “Dead Cat Bounce” rally, within a gold market reversal?

I think that trading on today, Friday and Monday will tell the tale. If gold can stay above important $1,700 per ounce level by the end of Monday’s trading and hopefully rally above $1,725 per ounce, I believe this will tell us it was a cleaning out of small investors and speculators.  On the other hand if gold stays below $1,700 per ounce and begins trading at $1,680 or below, that could indicate that today’s rally was at “Dead Cat Bounce”.

SILVER

Silver reaction to Dr. Bernanke testimony was more powerful than Gold. Yesterday, Silver dropped to $33.82, over $3 per ounce, before we saw the rally. The volume was overwhelming 115,000 contracts of 5,000 ounces of Silver. At 11am PDT, Silver is trading at $35.46 per ounce, up $0.61 per ounce.  Silver needs to stay above $35 per ounce to keep the bullish sentiment.