A Surprise Rally: Was JPMorgan Covering?

Gold was up about five bucks four hours after trading began in the Far East on Wednesday morning. From that point, the price didn't do much until 9:00 a.m. in London, when it began to rise in stair-step fashion. This rally lasted until around 10:45 a.m. in New York... then gold basically traded sideways for the rest of the New York session.

The silver price rose about two bits between the Far East open and the New York open at 8:20 a.m. local time. Then a rally of substance got underway that lasted until minutes before 1:00 p.m. in the New York afternoon. By the time the dust settled, the silver price was up a buck.

Without a doubt, this was a short covering rally in both metals... and JPMorgan was doing the buying. As I said yesterday, they are leaving no stone unturned [even in light volume trading days] to cover as many shorts as they can. Their buying was driving prices upwards yesterday. In a note to clients yesterday morning about Monday's COT report... and before the real price move in silver started... Ted Butler said that the price action over the last week or so "offers further proof that JPMorgan has been manipulating the price of silver... and has not been involved in a legitimate hedging operation. There would be no rush to buy back and cover shorts if this was a legitimate silver hedge." Ted wasn't writing about what happened yesterday... but he might as well have been.

The world's reserve currency had a very interesting day on Tuesday. The dollar lost 35 basis points shortly after trading began in the Far East on Tuesday morning... and then lost another 40 basis points between 3:00 and 6:40 a.m. Eastern time. From that low, the dollar rose 85 points... reaching its zenith at 11:30 a.m. in New York... then traded sideways for the rest of the day.

I don't see any trace of the dramatic dollar moves in either the gold or silver charts from yesterday.

The precious metal stocks gapped up... and stayed up. After gold's rally topped out at 10:45 a.m... the stocks [along with the metal] traded sideways for the rest of the day... with the HUI closing up 2.61%. As a group, the silver stocks did much better than that. If both gold and silver hold [or add to] their Tuesday gains going into this morning's open, we should see some pretty big pops in the prices of most of the junior silver companies once Toronto starts trading again after the Christmas holiday.

Here are two graphs that you've seen before... both courtesy of Nick Laird over at sharelnyx.com. The first is the PM Funds Index... and, as Nick said in his covering e-mail... "These two charts look well rested and ready to head higher." I couldn't agree more.

And here's the Silver Seven Stock Index...

The CME's Delivery Report on Tuesday showed that 111 gold and 49 silver contracts were posted for delivery on Thursday. In gold, JPMorgan was the big issuer out of its client account... and Deutsche Bank was the biggest stopper/receiver from its proprietary [house] trading account. In silver, JPMorgan was the big issuer... and, as usual, The Bank of Nova Scotia was the biggest stopper. The report is worth looking at... and is linked here.

The GLD ETF reported another withdrawal again yesterday... this time it was a smallish 29,284 ounces. The amount of gold contained in GLD has not changed significantly for seven straight months. In the same period of time, SLV has added about 54 million ounces.

There was no sales report from the U.S. Mint.

Because of the inclement weather in the New York area on Monday, the good folks over at the Comex-approved depositories had two days worth of data for us yesterday... Thursday, December 23rd and Monday, December 27th. During those two days, they reported a decline in silver inventories of 623,301 troy ounces. Comex warehouse stocks are now down to under 105 million ounces... and it's been many years since its been that low. The warehouse activities are linked here... and are also worth a look.

I have one housekeeping item to take care of at this point... and that has to do with Monday's Commitment of Traders report. I reported in this column yesterday that the Commercial net short position in gold had declined by 2,381 contracts during the prior week. That was a gross error on my part, as I subtracted two numbers instead of adding them. The actual number should have been 16,327 contracts... or 1,637,270 ounces, instead of the 238,381 ounces I reported. So, despite the rather tepid pre-holiday price action, the bullion banks [read JPMorgan] really covered a lot of short positions in gold during the early part of December.

¤ Critical Reads

The UK inflation genie is out of the bottle

It was a very slow news day yesterday... and I could only scrape together five stories that I thought worthy of your time.

The first story is one I dug up over at The Telegraph. It's from the Sunday edition... and the headline reads "The UK inflation genie is out of the bottle"... As 2010 draws to a close, it's becoming ever clearer that the UK's economic prognosis is not good. This is a problem facing virtually every country on the planet at the moment. This is a long story, but worthy of your time... and the link is here.

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Allstate sues Countrywide over toxic investments

This just in from reader Scott Pluschau. It's a story posted over at financeyahoo.com that bears the headline "Allstate sues Countrywide over toxic investments". $700 million in toxic mortgage-backed securities that the insurer bought beginning in 2005, rapidly declined in value soon after. The link is here.

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China Cuts Export Quotas for Rare Earths by 35%

The next story is a Bloomberg piece from yesterday that bears the headline "China Cuts Export Quotas for Rare Earths by 35%"... threatening to extend a global shortage of the minerals needed for smartphones, hybrid cars and guided missiles. China, which accounts for more than 90% of world supplies, slashed export quotas by 72% in the second half of 2010, sparking a surge in prices. I'd say this is a must read... and the link is here.

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Franklin Mint Owner 'Duped' Into Buying Company, Suit Says

Here's another Bloomberg story that I ran across late yesterday evening... and I must admit that I was rather surprised by the headline... it reads "Franklin Mint Owner 'Duped' Into Buying Company, Suit Says". The link is here.

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Preference for Gold Savings Among Turks Surges, Hurriyet Says

Lastly today, is this Bloomberg piece filed from Istanbul earlier this morning. The headline reads "Preference for Gold Savings Among Turks Surges, Hurriyet Says". It's only a couple of paragraphs... and should be read. I thank Russian reader Alex Lvov for sharing it with us... and the link is here.

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I estimate that the 2 through 8 largest[silver]shorts [aside from JPM] are still net short in excess of 32,000 contracts. That a quantity [160 million oz... or $160 million per each dollar move in silver] that could easily turn into a serious financial problem at some point. I'm trying not to overstate the danger to these shorts... and bullish implications to [the] price... but it's hard. - Silver Analyst Ted Butler, 28 December 2010

Yesterday's price action was very impressive. The dollar's activity had no impact... and the a.m. and p.m. fixes from London weren't there to interfere with trading... but they will be today.

The CME's preliminary volume data for Tuesday's trading was a shocker when it was released in the wee hours of this morning. It showed big gold volume... around 105,000 contracts net of all roll-overs. Silver volume was much more sedate... around 38,000 contracts net. The preliminary changes in open interest numbers aren't very reassuring... and could actually show big increases when the final figures are released later this morning. We'll see.

But, whatever the numbers are, they will certainly be in the next Commitment of Traders report, which won't be published until Monday, January 3rd.

Gold and silver prices didn't do much in Far East trading during their Wednesday... and prices still aren't doing much of anything now that the London trading day has begun. Volume is incredibly light... with emphasis on the word 'incredibly'.

But, after what happened on Tuesday, all bets are off that the 2010 fiscal year in the precious metal markets will go quietly into the night.

Tomorrow's column will be my last one for the week, the month... and the year. I might have a very short commentary on the 31st if the market action warrants it on the 30th... and if it does, then I can pretty much guarantee that it won't be posted on the Casey Research website until later that morning.

See you tomorrow.