Jul 202015
 

I was just settling in to write an article on the increase in China’s gold reserves when at 9:30am the gold price got smashed. Initial news reports seemed to put the blame on the Chinese market, with statements such as “bullion fell to as low as $1,088.05 an ounce … shortly after the Shanghai Gold Exchange opened trading” and “According to ANZ, the sudden collapse in gold prices earlier in Asia was due to 5 tonnes of bullion being dumped on the Chinese market” but it started on Comex.

Nanex tweeted this picture which shows the first 4 seconds of the drop in the Comex August futures contract (GCQ2015). Note that it starts just after 9:29am Perth time.

nanex

Below is a 1 second time interval chart of the August futures contract from Reuters. The area in the red circle is the 4 seconds of the Nanex chart above, which puts the move into context.

gcq5ann

The two green stars are 20 second trading halts. After the first halt the price opened up (the diagonal line) but then got smashed again after which another halt was imposed. This halt seems to have given people time to get their head around the drop and then step in for some bargain hunting and the price recovered above $1105.

Note that all this happened in the space of 1 minute and a lot of the detail that one sees on a Reuters tick-by-tick feed is lost by most traders using lower resolution charting/trading systems. The chart below comes from the CME website and you can see how it just shows the move as one bar.

gcq2015

Note that the volume traded in this one minute was 7,164 contracts, which at 100 ounces a contract is about 22 tonnes. ANZ reported that “half an hour after the market opened we saw 5 tonnes of gold sold through the Shanghai gold exchange, which is way above normal levels.” Reuters report that “more than 1 million lots were traded on a key contract on the Shanghai Gold Exchange”, which is equal to 10 tonnes.

The chart below shows 1 second intervals for the SGE and spot (over the counter) markets.

spot

You can see that traders on the SGE reacted after the Comex price move and bullion banks did not update their spot quotes until 9:30 and a half minutes, 1.5 minutes after the initial Comex drop. This delay would be due to the fact that a bank is committed to deal on its bids and offers on an exchange whereas Reuters over the counter spot quotes are not actionable like an exchange (see here) so they are going to update the exchange quotes first.

Reuters’ article provided the following quote/”explanations”:

  • “It looks like someone was taking advantage of the low liquidity environment at the moment. It’s a bit of speculative selling going on,” said Thianpiriya [ANZ analyst]
  • There were stop-loss orders around the $1,131 an ounce level, said a Sydney-based trader, reflected in a spike in volumes on Comex futures.
  • “I just feel there’s a big push to get gold below $1,100 and then we bounced very quickly,” said a trader in Hong Kong.

While gold subsequently recovered to USD 1115, it is still down $15 from Friday, so objective achieved, we assume. With record short positions it doesn’t look like we have bottomed yet and are still waiting for the uptrend signal.