By Gene Arensberg

The most recent pullback in precious metals was harsh, it seemed lightening fast and it covered a lot of chart real estate. The action certainly is consistent with yet another hot money fund profit taking exit rush. However, it is not consistent with what some analysts say was a deliberate massacre by very large, well funded and powerful players that the Commodities Futures Trading Commission (CFTC) class as commercial traders on the COMEX division of NYMEX.

Why isn t it consistent with an engineered sell down? Well, one would think that if clandestine and sinister interests intent on profiting from an engineered move were going to pull off such a monster three day plunge in a market, they would really get into position for it at least a little ahead of time.

Think about it. Say you are in the formerly smoke filled room where such alleged collusion among sinister (and mythical) market manipulators is hatched when The Plan is settled on.

That s it, boys, we ll take her down starting Monday, March 17, just ahead of futures and options expiration! The hot money guys will scream fire in a theater and rush the exits. It ll be great! You guys have three weeks to get ready.

It s an absurd notion that such things go on in today s global market, but go along with it for just a minute. Even if you agree that it s highly improbable, assume for the sake of illustration that there actually could be a group of heavies out there with the muscle to manipulate entire global markets (for any length of time) routinely by trading on one bourse in New York.

For those who may not be aware of them, there are analysts and market watchers that are so convinced that the markets are routinely manipulated, they end up seeing virtually all significant market action as evidence of manipulation. This report contends that while there may very well be some manipulation in all markets from time to time for extremely limited periods, nothing can overwhelm the supply/demand/liquidity equilibrium in any global market over time.

Now, if someone knew, in advance, that a big time plunge was within a short timeframe ahead, don t you think they would pull out all the stops and get strongly into position for it? If you knew with a high degree of probability that a muncher selling raid was in the works, would you be reducing your net short exposure, for example? No, of course not. You would be willing to accept even more net short exposure, to take the short side of any and all comers on the long side, wouldn t you? It would be like printing money.

Wouldn t it make sense that if the markets were rigged, as some analysts continue to suggest (even after silver moved nearly 94% higher and gold moved up nearly 59% in seven months) that as the big plunge were finally about to happen these sinister operatives would increase their short side exposure and take full advantage of it? If you are going to have a big sell down, why not really cash in?

Is that what just happened? Just before this latest harsh price move down did the large, well funded and presumably well informed traders classed by the CFTC as commercial strongly increase their collective net short positioning?

No, they didn t. To the contrary, in the four reporting periods just ahead of the most recent cascade lower for gold and silver those much maligned trading interests were reducing (that s right, reducing) their net short positioning nominally. Unless one believes that the figures are intentionally miss reported (for which the penalties are very harsh) data reported by the CFTC shows that if the commercials knew in advance that a silver and gold sell down was in the works they didn t improve their positioning for it very much. For the details, please read on, but please do so without the blinders of conspiracy affixed to your reading glasses.

Bottom Line

The bottom line from the indicators in this report is that this most recent sell down for the two most popular precious metals was without meaningful negative money flow from metal ETFs, there was no telltale spike higher in either commercial net short positions or in longer term forward futures open interest ahead of it, so the odds probably favor a significant surge in bargain hunting and dip buying of both gold and silver near term. All traders will want to take a good look at the positioning of the largest futures traders in this coming COT report (to be released by the CFTC Friday afternoon) to see how their positioning changed as of this Tuesday 3/25 with gold trading in the $930s. That report will likely be interesting and probably more than a little enlightening.

Sunday s offering of the Got Gold Report had additional commentary about the size and suddenness of the precious metals price moves for those who may have missed it, and that report strongly suggested that now is a good time to be positioning for the next bull moves for precious metals by taking advantage of the now very beaten up small miners and explorers.

Now for the details from some of the indicators.

COT Changes. In the latest commitments of traders report (COT) for the close of business Tuesday, March 18, just ahead of last week s big plunge for gold and silver, the COMEX large commercials (LCs) collective combined net short positions (LCNS) actually fell 4,130 contracts or 1.7% from 243,258 to 239,128 contracts net short Tuesday to Tuesday as gold added $8.66 or 0.89% from $973.00 to $981.66.

On Monday, 3/17 gold peaked intra day at $1,032.80 before aggressive profit taking showed, closing at $1,003.70. On Tuesday, the next day, gold tested a lower high of $1,012.55 on the cash market before strong selling pressure showed again, this time convincingly, driving the price down to the $970s before a minor rebound to close at $981.66. It was the lightening fast downward surge on Tuesday, fully $60 off the Monday peak which probably convinced the hottest of the hot money that it was time to cash in. And, cash in they did in droves on Wednesday and Thursday, right after the COT reporting cutoff, so the COT data for this week doesn t capture what happened since gold closed in the $980s.

Gold since sold down as far as $905.49 on Thursday ($127.31 lower than its Monday peak) before limping off for Good Friday with a last trade of $911.26 on the cash market. For the record, the net change for cash market gold for the holiday shortened calendar week was a net $91.40 lower or 9.1%.

As of Tuesday s COT reporting cutoff, COMEX gold open interest rose for the first time in three reports. The open interest edged up 7,020 from the previous week s 482,035 to 489,055 total open contracts.

Long term April 2009 and beyond COMEX forwards inched up 705 contracts to 52,289 lots open, which is a still very low 10.69% of total open contracts. If the hedgers knew a gold plunge was coming, they sure didn t tip their hand with a surge in long forwards. (In other words, they did NOT see a big plunge coming and did not position for one well in advance as they have in the past.)

Although the LCNS was in near record territory and had been for some time, it didn t jump higher at all ahead of Tuesday s big gold fall. Indeed, relative to the total open interest the combined collective commercial net short position actually declined a little just ahead of the sell down from 50.46% to 48.90% of all COMEX gold contracts.

So if the COMEX commercials saw this gold pullback coming, they sure didn t take additional advantage of it ahead of time by piling on the short side.

Indeed, the LCNS peaked on February 19 at 252,740 contracts net short and 51.60% of the total open contracts when gold was in the $920s. As the metal moved over $100 the ounce higher the LCNS got smaller, not larger.

What is kind of interesting about that is that the COMEX commercials are sometimes accused of engineering, orchestrating, and manipulating price moves in the metals markets by some conspiracy minded analysts. Ostensibly that would of course be in order to make money from the fall in price they caused.

If the COMEX commercials caused this latest gold plunge, why didn t they pile on the short side in a really big way just ahead of it? They certainly could have, but as we can see they didn t.

There are some pretty savvy long time traders which correspond with this report that think that because the COMEX commercials didn t pile on the short side ahead of this latest pullback, the pullback itself is going to be very brief and may even be already over. We ll see. As this is being written, gold has recovered back up into the lower $930s.

Gold ETFs. Over the past week gold holdings at streetTRACKS Gold Shares, the largest gold exchange traded fund [NYSE:GLD], did show a net weekly reduction of 16.27 to 637.13 tonnes, but GLD started the week with an addition of 10.43 tonnes and metal holdings peaked at 663.83 tonnes, so the authorized market participants of the largest gold ETF found it necessary to shrink the float (to keep pace with selling action) and to reduce gold holdings by 26.7 tonnes during the rush lower for gold. As of Monday s figures that s equal to $18.96 billion U.S. dollars worth of gold bars held by a custodian in London for the trust.

Gold holdings for the U.K. equivalent to GLD, LyxOR Gold Bullion Securities Limited, showed a 1.11 tonne add to 115.71 tonnes of gold held. Barclay s iShares COMEX Gold Trust [AMEX:IAU] gold holdings increased a relatively large 4.61 to 67.13 tonnes of gold metal held for its investors.

Because of the modest (relative to the drop in gold) reduction in gold holdings by GLD all of the gold ETFs sponsored by the World Gold Council booked a net reduction of 14.4 to 801.4 tonnes of allocated gold metal. As of Monday s figures, that was worth $23.8 billion.

Considering the very large pullback for gold metal, a net reduction of just over 14 tonnes in the WGC ETFs just doen t seem like all that much, does it?

Silver ETF: Metal holdings for Barclay s iShares Silver Trust [AMEX:SLV], the U.S. silver ETF, added 107.86 to 5,578.95 tonnes of silver metal held for its investors over the past week. That was as silver was bludgeoned for a $3.89 net loss for the calendar week ending Thursday, March 20, a jaw clenching 18.8% for the holiday shortened week on the cash market.

As silver underwent a significant sell down the authorized market participants for the U.S. silver ETF evidently didn t even need to reduce the float or to sell a single ounce of silver. To the contrary. What that means is that the trading for SLV shares remained pretty much in buying/selling balance even during the harsh selling which occurred last week.

What it also means is that longer term very large holders who have bought into SLV for silver exposure didn t panic during last week s significant dip. They re evidently holding for now, which is no surprise given silver s ultra bullish long term fundamentals. Isn t it a little hard to believe a strong sell down if it doesn t include negative money flow from the biggest silver ETF?

Silver COT: Remember that the big surge down didn t really get underway until late Tuesday 3/18, the cutoff day for COT reporting and didn t even breach $19 until Wednesday, so COT data doesn t reflect conditions after the rifle shot lower. Silver actually peaked on the Monday before COT cutoff day intra day at $21.34 before very spirited profit taking clipped it back to a last trade of $20.23.

By COT reporting Tuesday selling pressure had overwhelmed latent buying pressure and the metal tested as low as $19.57 before a minor rally attempt failed and a Tuesday last trade of $19.682 (a scary one day swing lower of $1.66 peak to close). That s how we got to the closing price that last week s COT data relates to. Week on week the price looks flat, but that doesn t tell the very volatile story. On Tuesday the sell down was already underway for silver.

With that in mind, as silver traded near flat, up just $0.02 from COT reporting Tuesday to Tuesday (from $19.66 to $19.68) the large commercial COMEX silver traders (LCs) increased their collective net short positioning (LCNS) by a teensy 286 to 71,188 contracts of net short exposure. Not more than noise in the figures. Meanwhile the total open interest on the COMEX fell 1,621 to 160,860 COMEX 5,000 ounce contracts.

Interestingly, for the record both the commercial net short interest and the total COMEX open interest peaked on February 19, with silver then at $17.25. As the metal zoomed upwards another $4.00 or 23% over the following four weeks the commercial net short positions actually FELL from 75,790 to 71,188 contracts net short, a drop of 4,602 or about 6%. During the same four reporting week period the total COMEX open interest for silver also declined from 189,151 to 160,860 open 5,000 ounce contracts, a drop of 28,297 contracts or 15%.

What is interesting about that is that while the total open interest fell 15% the commercial net short positioning declined less than half of that percentage wise, so their actual net short position as a percentage of the total open interest increased a little. It increased a little, but not a lot.

If the large, well funded bullion banks and hedgers who dominate the commercial category on the COMEX engineered the most recent plunge in silver prices, then why didn t they take more advantage of it prior to the event?

One would think that if they had the stroke to determine when and how much of a pullback they were going to thrust into the market, they would have done a better job of positioning ahead of time.They not only didn t increase their net short positioning ahead of the hot money get out pullback, they were actually REDUCING their net short positioning ahead of it a little.

The data is pretty clear. If the commercials were responsible for the latest silver swoon then they should be embarrassed for not doing a better job of capitalizing on it. They should also be mortified that they allowed the market to nearly double in just seven months.

The all conspiracy all the time market watchers should consider declaring victory instead of continuing to weave increasingly hard to believe tales of this cartel or that cabal intent on evil price suppression. Instead, they ought to focus on the incredibly bullish fundamentals for the white metal and the recent real surge in buying interest by a growing percentage of the population which will certainly have much more effect than any imagined price suppressing action by a few large market players.

That growing percentage of the population that is buying silver again would prefer to think that the market they are buying into isn t rigged. It isn t, you know. Not really. And, as the percentage of the population that becomes interested in owning silver balloons a little later in this silver super cycle, odds are that the U.S. dollar price of the white metal will return to a more historic relationship with its yellow cousin. Which is to say this report is looking for silver prices that are multiples of Monday s $17 and change close in time. Got silver?