All last week I expected the bullion banks to pull the pin on both gold and silver because of options expiry yesterday.

Instead of working both metals over for a period of days, they did it in one fell swoop. Once the Comex opened in New York, there was an avalanche of selling. And once the 50-day moving averages were broken, tech funds sell stops were triggered and that was that. But they didn’t get gold below $900. The US$ was rising and the oil price was falling long before the bullion banks started selling on the NYMEX, so that’s no excuse.

Silver, of course, suffered the same fate…but the waterfall decline was prettier and steeper. I give them a 9.2/10 on that one. My criteria for any score over 9.5 is a drop of at least a dollar, and it has to be a nearly vertical line…and the straighter the better. My scoring criteria is based on a personally modified set of rules used by the Olympic high diving judges…which I keep in the fridge beside by bottles of blue and red pills.

Open interest for Friday’s trading were as follows. Gold o.i. fell 1,692 contracts and silver tacked on a surprising 2,421 contracts. I don’t know what to make of that. If it all gets reported today, the open interest numbers for yesterday should be quite impressive. Yesterday was not only options expiry for gold, it was the cut-off day for the Commitment of Traders report for this Friday. Will it all get reported then? Don’t bet on it.

Here is what James Turk over at goldmoney.com said this past Sunday in his private newsletter to his clients on what was about to happen in the precious metals market on the Tuesday opening…

OPTION EXPIRY: The following quote is from Letter No. 423 published on April 28th. “Readers will recall from years back how we could regularly count on the gold price falling into option expiry. Most options are written by the gold cartel, given their aim to be short and profit from the contango (the difference between the spot and future months). So at option expiry the gold cartel would drive the gold and silver price lower…so that as many calls as possible would expire out of the money, meaning that the gold cartel would earn the full premium on the options they had written. Therefore it was not chance that the precious metals collapsed again last week just as options were expiring, making sure thousands of calls expired out of the money.

“I’m revisiting this point to remind everyone that this week is expiry for the all-important June options, which have a large open interest. The open interest for Comex gold calls with strike prices from 900 to 930 is 13,905 contracts, representing 1.39 million ounces of gold. As a rule of thumb, I assume that the outstanding options in the over-the-counter market are 10-times greater than the quantity of options on the Comex.

“Right now (based on Friday’s close) the calls on the Comex have an aggregate market value of $21.2 million. If gold closes on expiry at $900 or less, that value completely disappears (as would of course the value of OTC options at those same strike prices also disappear), which is a powerful incentive for the writers of these options to force the gold price lower on expiry. So I expect to see a test of wills this week.

“Will the gold cartel once again be successful in driving gold lower during option expiry? Or will the market overpower the gold cartel? It should be an interesting battle. I don’t know who will win, but we should plan for a gold cartel victory. After all, the results from recent years suggest that they are batting around 0.750 in driving down the gold price at the end of the month, so it is likely they will do so again.”

There were dozens of stories over the weekend worth mentioning, but I can’t mention them all, so I won’t mention any. However, you may find this Bloomberg story about the Titanic of great interest…and amusement! The story is entitled “Titanic Model, With Deck Chairs, Attracts Million-Dollar Bids”. The link is here.

For today’s main offering, I present silver analyst Ted Butler’s latest weekly commentary on the silver market…including his take on yesterday’s slaughter on the Comex. His essay (which is a must read) is entitled “A Few Thoughts on Silver” and is linked here.

Our finances will never be brought into order until Congress is compelled to do so. Making our money redeemable in gold will create this compulsion. - Howard Buffett, father of Warren Buffet - May 4, 1948

What a day yesterday was! Horrific news in all directions! The Dow rolled over into negative territory and…at precisely 12:00 noon…”gentle hands” were there to make sure it stayed positive on the day. If you feeling like you’re living in the movie “Matrix”…you would be right about that. Score one for the PPT.

See you tomorrow.

Casey Research correspondent-at-large Ed Steer is a keen observer of the financial scene and a board member of GATA.org.

Source: And Then There’s This…Wednesday, May 28th, 2008