Jul 212015

When the gold price has a big move the news agencies ring up traders for a comment. When I read these articles I’m looking for two things: why do traders think it happened and what do they think about gold going forward. Understanding these consensus narratives around gold is useful as they control large amounts of money and their views influence others.

Before I go on to discuss the comments, please note that narratives (see Ben Hunt) are not about truth, they are about what everyone thinks is the truth. For many finance professionals, the truth is less important (if at all) than being in the herd – most are not interested in the career risk of taking a position contra to the consensus view.

In terms of the why, here are some of the more sensible comments:

  • Ross Norman: They choose the optimal moment in the early morning and when Japan was closed for a holiday to get the biggest bang for the buck. It was clearly ‘short’ traders using leverage to trigger (technical) stops” he said. The price later regained some of its ground, allegedly as the profiteers cashed in jackpot gains on options that they also had. “It was a trade within a trade”. (link)
  • Marex Spectron: no coincidence that this happened in the quietest, thinnest period of the week … they deliberately want to move it in a big way (link)
  • “Traders”: Gold also fell in the Chinese derivatives market, which, traders said, added to the impression of an orchestrated attempt to push the price down, triggering others to sell their positions. (link)
  • Martin Armstrong: many rumors floating around from China off-loading because wrong storage figures were released, to a large spec investor who sold 6 tonnes and has taken a huge loss on a leveraged trade! (link)
  • “Traders and Analysts”: attributed the massive move to high-frequency trading algorithms as well as stop-loss selling. (link)
  • Societe Generale: It was just a bit of a bear raid and there was nobody on the other side to mop up the selling (link)
  • Chuck Butler: maybe the gold sale on the SGE was “margin influenced,” which would mean that large investors use gold as collateral on stock trades, and as the Chinese stock market has dropped the margin calls have come in (link)
  • “Market Participant”: The fact that it was done in Asian hours and in a loud, messy manner suggests it may be done by people not directly under European and US regulation (link)

The general view seems to be that it was a deliberate tactical move to push the price down, trigger stops, and try to get gold down to the technically important level of $1080, but with the real objective of making money on another derivative position. The last comment I find interesting as it implies that the activity was illegal, at least under Western regulations.

I have some sympathy with this “manipulative fund manager/HFT” theory. Gold has been technically weak for a long time and the professionals would have known that Chinese demand has been poor recently. Yes, you heard right, Chinese demand is crap. How do I know? Well, when the Perth Mint Treasurer tells me that he has instructed our refinery to make 400oz bars to ship to London because the lack of interest out of China for kilobars is so bad that the premium is below our cost, then I know that ain’t a good sign. I indicated Chinese demand wasn’t good here and while the permabulls weren’t telling you this (assuming they even knew what kilobar premiums were) the professionals would have known. So a perfect set up for them to try and break gold down. (FYI, Chinese demand has subsequently returned, so that is good, I’d rather not give London physical liquidity.)

On the conspiracy side, James Turk argued that “the US government did not like hearing China’s announcement on Friday about its 604-tonne increase in the official gold reserves of the Chinese central bank … was meant to embarrass China because it dared to announce an increase in its gold reserves. … It was meant to scare any remaining weak hands … also provided an opportunity for the bullion banks to cover short positions”. I tend to go with Jim Rickards that “China reveals enough gold to be respectable, but not enough to disrupt. Consistent with idea they want to join the #SDR club, not destroy it”. If anything, the announcement was so below market expectations and so low in terms of a percentage of China’s reserves that it sent a negative message, hardly something the US would be angry about.

One other small observation: the Telegraph said that “sellers dumped 7,600 contracts covering 24 tonnes on the Globex exchange in New York in a two-minute span after it opened late on Sunday night. A further 33 tonnes were sold at almost exactly the same time in Shanghai.” Looking at the SGE data, it seems that the 33 tonnes is a reference to the Au9999 contract. Firstly, as Koos notes, those figures are bilateral so actual volume was half of that. Secondly, that is just a total volume figure for the day so I wouldn’t call all that “selling” volume – last time I checked for every seller their has to be a buyer. I think the only valid way to characterise trading as “selling” would be off a detailed analysis of the bid and offer depth at a point in time and seeing how a trader took out all the bids, indicating a determined seller overwhelming buyers.

On to the narratives around gold after this price smash. Here are a selection:

  • Singapore-based trader: “We do see a lot of people in China selling gold to get fast cash to go back into the equity market” (link)
  • Phillip Securities: “It looks like the end of an era for gold, China has been grappling with oversupply after importing a record volume in 2013.” (link)
  • Societe Generale: “We have breached significant support levels, we know U.S. rate hikes are coming, there is no inflation and there is no catalyst to hold gold when other markets are doing better” (link)
  • Momentum Holdings Ltd: “With low global inflation and an improving U.S. economy, I doubt we’ll see big economic shocks, which is not good for gold” (link)
  • KBC Asset Management: “Gold is a hedge against everything that can go wrong. But at the moment it appears that not a lot is going wrong. We have an Iran deal, a Greece deal and we have good news from European and U.S. economies. There is no real reason for us to invest in gold and gold companies.” (link)
  • Deutsche Bank: “the “fair value” for gold is around $750. … “All the ducks are now aligned for a gold slide: real interest rates are rising, the dollar is getting stronger and the risk premium on equities is going down” (link)

So no change in the “improving US economy” and “Fed raise rates” story, indeed I feel that market participants see this price smash as confirmation of this narrative. That is not good for gold as it will give them confidence to test gold again. I’m not as confident as they are that everything is looking rosy and all the problems have been solved so I find myself agreeing with Adrian Ash that just like in 1999, this is a case of “peak hubris of policy-makers thinking they had abolished the boom-bust cycle” and that “gold continues to do what it does, rising when you need it and slipping when the financial world thinks it’s just a useless commodity”.

FYI Russian translation of this article Как подается крах цены на золото.

  • Zhanglan

    “Fluctuations” – it looks like the Asians just “Flucked You Americans” too!

    • http://churchofsmoke.org/ Jose

      I don’t believe the Chinese would deliberately throw money away to cause fluctuations.

      • Zhanglan

        Fluctuations can be kinda fun if it involves a pair of Japanese identical twins

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  • http://churchofsmoke.org/ Jose

    The gold smash is a setup by the Federal Reserve for them to use as one of the excuses not to raise interest rates. When the scam ends, it will end badly.

  • Guy Christopher

    I’m just not worried. When perma-deniers like Bron (and prominent others) suddenly begin to write like they understand the real world of government vs gold, which has a transparently recent history of about a hundred years, then things are looking up.

  • Dale Holmgren

    There are two ways to play the long position: wait until you think it’s hit bottom, then buy, or buy and hold. Since I’ve been wrong for 4 years on where the bottom is, I’m just going to buy and hold. I don’t need the money now anyway, and in my view there is a very good chance that when gold goes up, it will go up overnight, so that you will not have a chance to catch the big gain unless you have held the position the entire time.

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  • kaiser sousa

    Washington, February 19, 1969.



    February-March 1969


    International Monetary System


    Conversations on monetary reform with the French pose special dangers:

    1. The basic French attitude towards the international monetary system is fundamentally different from ours. Their persistent underlying objective has been (a) a substantial increase in the price of gold, large amounts of which are in French hoards, and (b) the imposition of very stern discipline on the U.S. through severe limitations on the future of the dollar as a reserve currency.
    Recent hints to U.S. officials of French views on reform maintain these two elements.
    2. Certain elements in the French
    regime especially eager to see a rise in the official price of gold will
    deliberately stir speculation to
    their advantage. Great care must be taken in any allusions to monetary “reform”, as the French will tend to associate “reform” with an increase in the official gold price. If at all possible, attempts may be made to imply your endorsement of such an approach in any Communique.
    Leaks to the French press designed to promote this objective following your talks are likely unless the U.S. team is alert with denials.

    3. We believe there is some danger that the French might undertake at some time in the future, possibly this year, a large unilateral devaluation of the franc aimed at disruption of the monetary system and achieving a higher price of gold. They may hint at the desirability of some package deal with the United States to avoid such disruptive action on their part. Any such proposal should be approached very
    cautiously, even though some elements might be acceptable.

    4. In general, it is important to refer details for future discussion, while preserving our subsequent bargaining position by maintaining a firm position on gold price.”

    Relations of the United States, 1969–1976, Foreign Economic Policy;
    International Monetary Policy, 1969–1972, Document 116

  • DiggerUK

    When is it going to be accepted that sellers always want the best price for their merchandise. Once that simple law of the market place is understood, all those shouting conspiracy just sound daft. What they do with the cash from their sale is their business.

    Sellers will look at the most opportune time to sell to achieve the best price, if early in the morning does it…….then guess what is going to happen every so often. Most people think alike, including traders, and more importantly so do the computers.
    How close traders take their business too, and over the lines between legal and illegal, is a matter between them and their compliance officers.

    And my prize for the daftest conspiracy argument, is the one that says the USA crashed the price because the Chinese announced increased gold reserves……..thereby making it cheaper for them to buy more. Plot missing, or what.

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