The Silver Flash-Crash - "There's No Such Thing As A Bad Tick"

Tyler Durden's picture

Authored by Kevin Muir via The Macro Tourist blog,

It’s one of those periods when everything is conspiring against precious metals. For those of the bullish persuasion, this can be a difficult time. I have resorted to wearing my own self-imposed “cone of precious metal trading” in an attempt to stop me from buying too much, too early.

Let’s review why this environment is so problematic for gold and silver. The main reason is that the global backup in interest rates is about the worst thing you could ask for. Think about it for a second. Central Banks are signaling they want tighter monetary policy because they are worried about future inflation running too hot. They are in essence behaving marginally more prudently. For all those hard money advocates that have been railing against irresponsible Central Banks, they now have less to complain about. Gold has often been called the anti-Central Bank asset, and although many would argue Central Bank policies are still a long way from appropriate, trading is all about the direction of change, and there can be no denying that Central Banks are becoming more hawkish, not the other way round.

Central Banks are sending real rates higher. In the process, they are sucking money out of precious metals, and into short dated fixed income securities. Look at US 5 year TIPs yields - they are pushing to new highs.

In fact, given the relationship between US 5 year TIPs yields and gold, it looks like our little yellow friend could still be vulnerable to further declines.

Although this global backup in yields is the main factor weighing on precious metal prices, there is another more complicated dynamic at play.

And I think this relationship had something to do with last night’s silver flash crash.

Last night at 6 o’clock, someone wandered into the silver futures pit and sent silver down almost 11% almost instantaneously.

At first, I thought someone fat fingered it. But when the bounce was weak, it quickly became obvious that no one needed to buy back their error.

We had a saying on our old trading desk - “there is no such thing as a bad tick.” What we meant with that expression was that if the market allowed a seemingly violent tick to occur, it often indicated this was the path of least resistance. Many times that supposedly bad tick would be traded legitimately in the coming sessions.

It is my understanding the CME ruled yesterday’s silver flash crash excessive, and repriced all trades below $15.45 to this more fair price. Well ironically enough, although last night silver bounced back to $16, this morning in the aftermath of the flash crash, silver traded down below last night’s adjusted low, proving once again, there is no such thing as a bad tick.

But this doesn’t explain why someone would choose to sell a whack of silver futures at 6pm. It wasn’t like it was a badly traded 100 lot. More than 6,000 futures traded. Why on earth would anyone need to sell almost half a billion dollars of silver at the most illiquid time of the day? It almost makes me sympathetic to the tinfoil hat wearing precious metal bulls who are convinced governments are nefariously conspiring to keep gold and silver down.

However, I am an ardent subscriber to the Hanlon’s Razor theory of trading - never attribute to malice that which is adequately explained by stupidity. I don’t think governments are trying to keep precious metals low for some nefarious reason, but I do believe that they are involved.

And the following explanation might move me into the tinfoil hat crowd, but I have watched the strong relationship between the Yen and precious metals for too long to believe it is a coincidence. Somehow, and I am not sure of the exact details, the Japanese government is using precious metals as part of their monetary policy. Now they might be doing it through the Postal Service Pension plan (GPIF) - after all, they have openly admitted to the BoJ buying JGBs from the plan, and the postal service pension investing in foreign stocks with the proceeds. There might be some sort of similar arrangement with precious metals. Who knows? I certainly don’t, but I just don’t believe this tight relationship can be explained by chance:

I also think that government officials are the only ones price insensitive enough that they are willing to transact monstrous size at 6pm.

But here is the kicker as to why I believe this order somehow emanates out of Tokyo. The 6pm silver flash crash coincided with the opening of the Japanese bond market.

That in of itself is not that insightful. But yesterday with the global rout in bonds pressuring JGBs, the 10 year bond bumped up against the BoJ’s 0.10% ceiling. Don’t forget, whereas most Central Banks engage in quantitative easing where they commit to buying a certain amount of bonds at any price, the BoJ has moved to pegging the long end of the yield curve.

This means they have to theoretically buy an unlimited amount of bonds at that rate to ensure that part of the curve does not go any higher.

And sure enough, last night the BoJ wandered into the bond market and said, “11 basis points bid for whatever you want to do.”

This obviously sent the Yen lower, after all, this transaction increases the supply of Yen, so it is extremely Yen bearish. But more importantly, it was at this point that silver shit the bed.

Now maybe this is just one of the consequences of this elaborate financially intertwined science experiment of a new global economy. Maybe there was no silver order from Tokyo. Maybe it was just a domino effect.

But I somehow doubt it. Someone still needed to sell 6 thousand contracts. And not only that, they needed to sell them in the stupidest way. And when I am looking for culprits for stupid, Japanese government officials seem like the most likely candidates.

However, putting away my cockamamie theories, I want to point out one important indisputable fact. The BoJ has committed to pegging their 10 year rate to 0%. If the global bond bear market gathers speed to the downside (higher yields), then the Japanese will increasingly find themselves having to defend this peg. As they defend it, this will increase the money supply, which will ultimately be inflationary. That might force more JGB holders to sell, creating a self reinforcing vicious circle. The Japanese have relinquished control of their money supply. If credit is demanded, they are forced to provide it in unlimited quantities.

Over the short run, this might cause precious metals to go even lower, and stocks might gain as the BoJ’s printed money finds its way into risky assets. Yet eventually this will become a dangerous game to play and I suspect it will prove an unstable equilibrium.

Last night, talking it over with my trader pal Ari Pine, he told me that he thinks a likely candidate for the next flash crash might be the Japanese Yen. I can’t say I disagree. All the ingredients are in place.

Think about buying some volatility in non-equity instruments. Stocks are a sideshow for the real disturbances in the financial system. Central Banks have been suppressing bond volatility for so long, and as the financial system weans itself off the constant quantitative easing of the past decade, there are going to be some large moves. Silver volatility was relatively inexpensive yesterday. Today, after the flash crash, it’s not as cheap. Some day soon, we might be looking back at Yen vol, or US long bond vol, or gold vol after the next flash crash, and be kicking ourselves that we didn’t buy it when we could.

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roisaber's picture

It's not silver. 

bamawatson's picture

pithy, succinct, incisive, accurate

Buckaroo Banzai's picture

> There might be some sort of similar arrangement with precious metals.

So, the BoJ is dumping silver in order to soak up yen, and allow the Postal Service Pension Plan to buy silver cheap?

If the primary goal is to just dump something in order to soak up yen, why not sell equities? In their currently overvalued state, selling them will soak up a lot of yen.

It seems like a stupid idea to flash-crash a wildly undervalued asset into a thin market, when you could sell a huge amount of an overvalued asset into a wide and deep market, and get way more yen for it.

What am I missing?

PhilofOz's picture

Those are interesting charts, even a look at lead shows a decent drop in stocks..... are they moving over to the "just in time" system?

If not that, isn't it a bad sign for silver with so much of it being a by-product of lead/zinc mining, as production appears to need to be ramped up heaps?

Reichstag Fire Dept.'s picture

What are you missing?

I think that the "market" is neither wide nor deep...or they would do it.

Ahmeexnal's picture

Relax kids. Super detective BART CHILTON spent years investigating this alleged "silver rigging". He found nothing, zero, nada.  THERE IS NO SILVER MANIPULATION. Bart Chilton said so.  You can rest assured there is no manipulation in any markets. 

Give Me Some Truth's picture

Re: Bart Chilton's alleged investigation.

Has anyone seen any of the work product from this "five-year" investigation? Who did investigators actually talk to and what questions did they ask? What answers did they get? What data did they look at? Etc.

I saw a brief press release that said "no rigging." End of Story. 

Shouldn't there be volumes of information/responses/reports somewhere?

One can investigate the investigators. At least I think you can. Theoretically you can. Not that anyone has or will.

 

 

any_mouse's picture

Chilton is a pretty boy. Like the caricature of a blonde woman, there for looks, not to actually do anything.

stacking12321's picture

if i recall, chilton said no "actionable" evidence of silver market manipulation.

so what does "actionable" mean?

the casual reader of chilton's words in the newspaper would probably assume it means not enough evidence to act.

those of us a little more aware of the situation, realize that it means he's not at liberty to act against powerful interests that committed the crime, he might jeopardize the highly leveraged tbtf banks and their derivatives by doing so.

any_mouse's picture

Like Comey's "nothing to prosecute".

BAU in the Banana Republic of United States.

Give Me Some Truth's picture

Someone - Zero Hedge? - needs to file a Freedom of Information request to obtain ALL of the data, records, transcripts from this alleged investigation. Were there depositions given under oath? Let's see who the investigators actually talked to and what questions were asked and what answers were given. Also, we would learn who the investigators did NOT question or talk to (was anyone from the Fed, Treasury, CIA interviewed and asked about these agency's possible involvement in "managing" these markets).

Anyone want to bet that such information will NOT be made available. But one could ask to see it anyway. The fact such documents will NOT be made available would be revealing in and of itself and should be reported. 

Fake News. Yes. Definitely

Fake Investigations. Yes.

Heck, it would actually be "real news" if an investigation was proven to be a farce/sham, right?

 

SybilDefense's picture

Why is it that we do not know who sold these 6,000 contracts yet when I try to withdraw $5,000 cash of my own money from my bank I have to fill out a form stating I'm not a money laundering terrorist. Same if I buy $10k in PMs... Must be reported.  Not that forced transparancy would halt the selloff, as I'm sure they would simply create 6000 sep accounts to sell 1 contract each in unison, hampering the forensics.  Assuming of course tptb had the desire to at least appear honest.  BS squared

Give Me Some Truth's picture

Re: "no actionable evidence" of silver manipulation. I too remember that wording from the press release.

Okay then, what about the "non-actionable evidence" of rigging? Was there any of that? If we saw the entire body of the "Investigation" maybe we could find out. And we could learn why certain "evidence" is deemed to be non "actionable." Why is this? We don't know. Although it seems that a real journalistic organization would want to know this too.

No follow-up. No common-sense questions. No skepticism. No interest in "transparency." No effort to present all the information and just let people make up their own minds.

I'll say again, "fake news' is not just BS press reports. It's the stories the press could investigate and write about but chooses not to. After the "results" of the "silver investigation" were released, no MSM organization displayed any curiousity about the meat of the investigation or made any effort to confirm that a real investigation took place.

Would an "independent investigation" produce the exact same results? We don't know. There hasn't been one. No one is interested in "going there."

Of course in such a world any manipulators can get away with bloody murder. They know this. I've written above that the "Powers that Be" manipulate markets because they feel that they MUST do this. But they also do it because they know they CAN. The Fourth Estate abdicating its "watch dog" role makes this possible.

"They" feel they MUST rig markets. And they know they CAN. No negative consequences whatsoever. Those who can do whatever they want ... will. Absolute power corrupts absolutely. 

As Rocky might say, "Absolutely."

// 

 

stacking12321's picture

Well said.

But I won't be looking to government for any solutions or relief - that will come when we turn our backs on government and learn to provide our own solutions.

The central planners's picture

That is the guy we need to "investigate" that shady Seth Rich assesination.

SybilDefense's picture

Bart Chilton = Tip_Top

www.12k from mommy's basement.com

any_mouse's picture

A guess would be that screwing around with Silver prices does not offend any national or corporate interests. (And is actually encouraged by such interests as Central Banks.)

Where as dumping a fuck ton of shares of an APPL or an AMZN could piss off some major players.

Yog Soggoth's picture

Making a move is exposure to others. I wonder if there is knowledge of a plan that others in the market do not know about. Who are Japan's allies? Hitler, Mussulini and Me! I hope that cleared it up for everyone.

T-NUTZ's picture

"when I am looking for culprits for stupid, Japanese government officials seem like the most likely candidates."

 

Classic.

frank further's picture

Replace Japanese with gubmint of your choice.  Still stupid.

Canadian Dirtlump's picture

It's become unbearably annoying to watch this bullshit. I've bought more silver this month than I have in the last 2 years including today. Too bad the shit I picked up earlier fell out of the back of my truck. Oh well. It was cheap anyways.

 

I have to think we're inching towards a positive event for us mongoloid stackers. I mean I have to think that or I'd be forced to drown myself in a deep fryer out of unbridled despair.

jmack's picture

you are screwed,    If it closes below $15.30, it will go to below $10, and might test below $8.50.  And I dont see a v bottom being put in.

Pinto Currency's picture

Metals markets are a digital farce and can't be understood in terms of fiat pricing.
Its about the metal.

jmack's picture

Really, do you buy your silver with silver?

Agstacker's picture

Good luck trying to find actual physical silver to buy at $8.50.

jmack's picture

duh, but if the paper market is 8.50, you can certainly get some for 9.50, or 10.50 or 11, whatever the physical premium is at that level, it will always be a certain offset from paper.  So stop being moronic about the facts.

The Wizard's picture

Maybe they believe alchemy can be used to convert the paper silver to real silver.

Yog Soggoth's picture

Hold on, I think you got something there! Silver looking paint is cheaper than actual silver and still sets off a metal detector. Your hired!

yogibear's picture

Would love to see someone buying t $100 billion of paper silver and demanding delivery.

johngaltfla's picture

Many, including Gartman, blamed Venezuela for the flash crash in gold a few weeks ago that started the long move to the downside.

Keep in mind a huge, er YUGE, holder of physical gold in London, Dubai, and Hong Kong is also cash starved (as ZH has documented) and is now liquidating holdings:

Qatar.

Ka-Boom. Buy it while it's on sale ladies, because once the GOP fucks up our economy and the shooting starts, there won't enough tungsten, er, physical to go around.

any_mouse's picture

As if the Dems don't fuck up the economy.

Figure it out.

Do you like a right curving or left curving dick in your ass?

Government fucks up anything and everything.

Spend. Tax. Create Debt.

The major project of GOV is WAR.

WAR is GOV.

War, what is it good for?

Absolutely nothin' [good].

crazybob369's picture

Problem is, if you read the fine print, the exchanges have the option of settling in cash. So, you can demand all you want, but they'll just say: Tough shit! Here are your contracts  settled at you local currency. Have a nice day!

0hedgehog's picture

That's true and false. They don't give average Joe trader any metals because they are saving and shipping it to China. They are granted delivery and are soaking it up at these prices.

 

Year old story but it does continue to this day...

 

https://secularinvestor.com/china-buying-silver/111671/

omniversling's picture

It's AI tuning. Another data mining and modelling excersise. 'Mastering the Human Domain'. Don't overlook the announcement of the US Command as part of NDAA2012 that the whole world is now considered 'US Battlespace'. 'Singularity' is when the entire show is controlled top down. DJ Welsh at level9news.com presented good research here:

http://caravantomidnight.com/caravan-to-midnight-episode-309-dj/
http://caravantomidnight.com/caravan-to-midnight-episode-326-dj/

Anything on a connected network now feeds the bot. Very interesting interview with Max Egan on the rollout of 5G: https://www.youtube.com/watch?v=ABRLIQSo-J4

 

debtor of last resort's picture

The price of silver is priceless. Bitchez.

Soul Glow's picture

Silver, sought by kings and pirates for thousands of years, yet now utterly valueless.  How did this happen?  The greatest heist of all time was the bankers convincing the average person that the fiat currrency system has value.

Lost in translation's picture

Quote-worthy, that's a great one!

Bay of Pigs's picture

This author has his head in his ass about silver. A worthless read from an unenlightened stooge.

Hope you are doung well Mr. LH! Aloha!

tmosley's picture

Another content and argument-free comment brought to you by Bay of Pigs.

When your feels are more important than the truth or your future, read comments by Bay of Pigs! They won't make you reappraise the situation, no matter how much new information comes to light!

Bay of Pigs, for all your cognative bias needs!

Give Me Some Truth's picture

Re: "The greatest heist of all time was convincing the average person that the fiat currency system has value ..."

Right on. They also convinced the average person that "real money" has no value. It only has value for "kooks" and "bugs."

For them to do everything they've done (and continue to do) this change in thinking HAD to take place. It's taken much effort - and many co-conspirators including journalists and regulators willing to do or say nothing - but this goal has - amazingly - been accomplished. 

Now that they've killed sentiment for monetary metals, all they have to do is keep it dead.

crazybob369's picture

It has value as long as enough idiots believe it does. Then, it won't. Remember, no fiat currency in history has ever survived. Not a single one. Doubt the dollar will be the first.

0hedgehog's picture

And they're so easy to convince! I say follow the money, and the "money" is buying up the metals, so are sovereign nations and central banks! Citizens are buying it as well, just not U.S. citizens, they've been trained away from real money to invisible money, (fiat/cryptos), this is not coincidence. The time seems to be coming when for a period at least, the only ones with money to spend will be holding precious metal.

omniversling's picture

 

PM price suppression and 'bad press' are THE priority tools in the kit of the moneychangers.

 

Metals are the remnant of a banking system that had a tangible and physical medium of exchange. From shells, to PM coins to fiat. Next step is digits. 1s and 0s. PMs will be brutalised into mash to bring forward 'the peoples' perception that cryptos have 'virtue and value'. Baitcon. A further step in the flipping of 'reality' on it's back. What was good is now bad, what was bad is now good, what was wealth is now debt, debt is wealth, debt is good...

If siver was really so valueless why would JPM have hoarded 105.6m oz? (some reports of 350m oz)

 

"War is Peace. Freedom is Slavery Ignorance is Strength"- George Orwell/Eric Blair

 

"We'll know our disinformation program is complete when everything the public believes is false" 

William Casey (March 13, 1913 – May 6, 1987)
Director of CIA 1981 - 1987

Lost in translation's picture

Even looking at 6 months I thought I was seeing things...

http://quotes.ino.com/charting/index.html?s=NYMEX_SI.U17.E&t=&a=&w=&v=d6

After losing all of my Ag at Lake Powell, I became complacent about paying attention, I guess.

AlexCharting's picture

Why defiantly buy silver on the way down, when you can defiantly buy it near the bottom?

any_mouse's picture

Know the bottom? It's when you capitulate and sell your holdings.

Pretend you are holding a fuck ton.

Buy real when you give up on the pretend.