By Lawrence Williams
October 18, 2013
Massive daily paper gold trades are responsible for moving the gold market upwards or downwards (mostly the latter) virtually every day now creating major instability in the gold markets.
This month has seen a very strange series of gold trades on the futures markets, occurring almost daily, which has had the effect of imposing huge spikes, up and down, but mostly down, on the spot gold price. Reuters’ Frank Tang has put together an illuminating graphic illustrating this, showing the numbers of contracts traded daily and the corresponding movement in the gold price – see below:
(The full Reuters article can be read here)
What is apparent from the graphic is that there seem to be massive, almost instantaneous trading volumes every day of over 5,000 contracts (5,000 contracts is half a million ounces) so far this month, all at about the same time and all seemingly designed to move the gold price up or down – with the real massive contract trades on October 1st, and 10th – both well over 20,000 contracts (well over 2 million ounces, or around $2.6 billion) traded – all in a matter of minutes (or less).
To put this in perspective, global new mined gold output is in the order of 90 million ounces a year, so a 2 million ounce trade represents over 2% of global annual mined gold all traded on the futures market in a matter of seconds. No-one has anywhere near that amount of physical gold, apart from the big Central Banks, so the trades are by entities trading gold they do not have in a manner designed primarily to trigger stop loss sales by other gold holders and thus drive the prices downwards – or, on occasion, when the trades are buys, rather than sells, drive the overall markets upwards. These trades are mostly made when markets are thin to exacerbate the impact.
This is blithely put down by the market as the side-effects of electronic trading where big algorithmic buys or sells on the futures markets – which bear absolutely no relation to physical gold held or traded – are placed with the express intention of moving the markets either up or down (mostly the latter of late).
But, as each downward move is followed by an uptick – also generated by high levels of purchases – obscene amounts of money can be made by those initiating the trades by selling at the high points and buying back at the lows.
Organisations like GATA firmly believe that Central Banks – and particularly the U.S. Fed – offer at least tacit support to this because most of these big algorithmic trades have been instrumental in driving the gold price lower, which suits their purpose in effectively supporting the U.S. dollar, with gold seen as the ultimate standard against which the ‘value’ of the dollar is based.
Others, however, see it just as an attribute of electronic trading, an attitude which seems to condone overt manipulation of the gold market for the benefit of the mega rich few. If this is not actually illegal, it should be!
But someone with enormously deep pockets does have to be there to support these massive trades, because the risks could be enormous if the market turns against them. This may even have happened yesterday where the futures trade volumes, in this instance driving the gold price upwards, showed a rather different pattern, suggesting a very big element of this – the second wave of trades you can see in the graphic – was through some rather desperate short covering. But, I’m not a trading market expert so perhaps there’s another answer. Those who follow the intricacies of the COMEX markets more closely will no doubt come up with their own reasoning behind the double high trades blip seen in the chart.
But, looking at gold market triggers, demand for physical seems to be holding up in the East and the flows from West to East continue. Indian purchase premiums are at record levels, as are Chinese imports. The big gold ETFSs are still bleeding gold – helping support this movement pattern. It will be interesting to see whether the latest gold markets pattern and the U.S. government semi-impasse over the debt ceiling – all due to be repeated in a couple of months time unless the Republican Party capitulates as it is, rightly or wrongly, seen as being on the wrong side of the argument – will see this ETF outflow diminish or reverse. Tapering seems to be off the Fed’s agenda until at least the first quarter of next year. All these could be gold supportive, but as seen in the chart above, the gold market is not a level playing field for investors with these massive algorithmic trades seemingly able to move the price at will. We shall see.