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Capitulation in the Bullion Markets?

If sentiment is any indication, the bullion markets look to be bottoming. Metals investors bought with enthusiasm for most of the time since the 2011 peak in prices. They put up with years of declining prices, often looking at dips as a buying opportunity. But the most recent price smash is more than some bullion investors can stomach, and they are headed for the door.

Customers are selling physical metal in much larger quantities than normal. One prominent precious metals dealer reports customer sell orders outstripping buy orders by 30%.

Our experience is not that extreme. Over the past two weeks, orders to sell are one-third the amount of customer buy orders. That isn’t exactly panic selling. But compared to the years in which customers sold just 1-2% of the amount being purchased, the current activity nevertheless represents a sea change.

Buy, Hold, Sell

Investors are beyond frustrated with the broken and rigged price discovery in metals. The most recent selloff is just the latest example of bullion banks using hot money to knock down prices.

Open interest in silver futures made a new all-time high in the days before the market began to slide. Bankers and other commercial traders took out record numbers of short positions.

They offered up fresh contracts for any and all comers – unconstrained by having to back their paper with physical bars.

In their playground, virtually no one asks or cares that futures exchange vaults generally contain less than an ounce of actual silver for every 100 ounces promised on paper. Yet that is where spot prices are set.

Now the hot money is beating a hasty retreat out of silver and gold. Bankers are covering their shorts with a handsome profit.

Meanwhile, physical bullion investors are beyond aggravated. Fundamentals such as physical supply and demand, unpayable levels of government debt, central bankers going hog-wild around the world, and geopolitical upheaval seem irrelevant. They wonder if this ridiculous scheme for price discovery might never end.

There is no telling how long the charade can go on. For some, it has been longer than they can bear. A good many metals investors are throwing in the towel on fundamentals and trying to join the paper party instead.

Their capitulation may be signaling a bottom going in. It’s perverse, but markets are notorious for luring people into making bad choices.

Dumping metals here, when prices are near recent lows, and converting to dollars, stocks or bonds priced near their highs only makes sense if you need cash or if you think today’s artificial markets will last indefinitely. The latter is a bad bet. At some point, suddenly, fundamentals will matter once again.

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