Steady As She Goes

The recent pullback in gold and silver have not fazed me in the least. I consider the pullback to be a buying opportunity for those who got caught watching the meteoric rise in gold (and to a lesser extent silver) over the past month and a half. I would not advise selling any of your physical holdings into this engineered decline.

As I predicted, (not really a prediction; more of an observation over time), both metals are performing especially poorly in the US Comex paper markets, but do reasonably well in all the other world markets. So far that pattern has held true. I firmly believe that if gold did not trade in the US markets, it would already be well north of $2,000 an ounce.

September Contract Expiry

One of the key factors that heavily influences the price of gold and silver (along with stocks and other commodities) is the date on which their options contracts expire. Options, in the form of puts and calls, often will drive the price of the underlying asset towards a solution that inflicts the maximum amount of monetary losses on the holders of these bets, a condition well-known to traders as “max pain”.

The contract expiry date for the September contract for gold was Thursday, August 25th, 2011. Note what has happened over the past two days leading into that expiry date:

Those are some steep red candles. And while I do not have access to the max pain threshold for gold, I would be surprised if it is not right around its Wednesday closing value, give or take a few bucks. Because our markets are no longer free nor fair, big players are free to sell options, rake in the money, and then ‘influence’ the price of gold to make those options expire without worth.  Based on their chronic inaction, the SEC and CFTC could care less, and are not up to the task of properly regulating these or any markets anymore, if they ever were.

However, we note that gold is still above its recent trendline (for now) and that it was steeply overbought on both the RSI and MACD indicators (purple circles and red line). So a pullback was inevitable at some point; I’m just noting that ‘some point’ often tends to coincide with options expiry, and in the US that moment is almost universally a downward moment for the price of gold.