is much debate within the precious metals industry regarding the alleged
suppression, or at least manipulation to an extent, by either central banks
or the proprietary trading divisions of large banks, or a combination of the
In April the US Commodity Futures Trading Commission CFTC fined Hedge
Fund Moore Capital for manipulation of the New York platinum and palladium
futures market, as the firm was found to be “banging the close”,
which involves entering orders in a manner designed to inflate the closing
price, which other various derivatives contracts could be based on. So that
is irrefutable evidence that the precious metals futures market is, at least
to some extent, being manipulated. However a large concentration of this
debate is based not on platinum and palladium, but on gold and silver, and
Numerous hypothesises have
been put forward as to the motive behind alleged suppression of the gold,
ranging from a central bank conspiracy to keep gold prices low, to large
trading banks simply exploiting their market dominance for easy profits, or
even a combination of the two with the central banks and large bullion trading
operations working together in some kind for cartel to keep gold prices low.
This article does not intend
to discuss the merits of these theories, however plausible or implausible
various parties believe them to be. Instead we will focus on finding out if a
discrepancy exists and if it does, can one take advantage of it and use it
for profitable trading strategies.
Firstly we would like to
recommend an excellent article by Adrian Douglas, editor of Market Force
Analysis and a GATA board member entitled “Gold Market is not
“Fixed”, it’s Rigged” which goes into great detail on
the statistics behind the difference between how gold trades between the AM
and PM fix, and how it trades from the PM to AM fix. The very fact that there
appears to be a significance difference sets our alarm bells ringing. Whether
gold trades in New York, London, Tokyo or Timbuktu, gold is still gold and so
one would expect that it would trade in a similar fashion across these
timeframes over a long period of time.
If we take the change in the gold price from the AM to PM fix
(intraday gold) compare it to the change in the gold price from the PM to AM
fix (overnight gold), we can see the startling difference between the two
periods of trading.
We will demonstrate this by
showing what would have happened if one had theoretically invested in the
intraday gold market from 2001 to present. Starting in 2001 with an indexed
based at 100, the chart below shows what would have happened to that
investment of 100 if it had been used to purchase gold at the AM fix and sell
gold at the PM fix, replicating the daily percentage performance of gold in
the intraday market.
As the chart above shows, the performance is dismal. For example a
hypothetical gold investment fund starting with $100m in 2001, and using it
to buy gold at the AM fix and sell it at the PM fix would now be left with
just $40million, a 60% loss in just under ten years. Over the same time
period gold prices have risen over 350%.
From this we can infer that
in fact it was possible to make money shorting gold everyday for the last
decade. If a hedge fund were to have sold gold at the AM fix and covered that
short position at the PM fix, for each day of this terrific bull market run
in gold, that fund would have doubled their starting capital.
This appears to be a remarkable result, as one would presume that
shorting gold everyday during a period where the yellow metal has risen 350%
would have devastated any portfolio, not caused a 107.5% increase.
Those who do not believe in
theories of gold price suppression, often cite the fact that gold prices are
at an all time high as a major piece of evidence to discredit any suggestions
of price suppression. After all how can the price be being suppressed if
prices are sky rocketing?
Well the answer to that
question is that if the gold traders at the large banks accused of such
manipulation are just trading during the intraday market between the AM to PM
fix, they are not too concerned about how gold trades overnight (provided
they are not holding positions overnight of course). What matters is how gold
trades during this intraday period, and if more often than not gold is
falling during this time, and more often than not the banks are short gold
during this period, then they are making money regardless of the overnight
It would appear that subtle
manipulation is more likely that blatant price suppression.
So the question on the mind
of many gold bulls might be; how do I remove this downward manipulation
during the intraday period? Even if I do not believe in manipulation,
suppression or any other conspiracy theories, how do I eliminate this
statistical fact that gold is underperforming during the intraday period?
The answer is to buy gold at the PM fix and sell it the following day at the
AM fix, or more simply put, just be long gold overnight.
The graph above shows how rewarding this strategy would have been,
with a return of 947% in less than ten years, a return 2.7 times greater than
the 350% that would have been made simply buying gold in 2001 holding until
With many investors and
traders looking for the best way to lever their gold returns, from pouring
over drill results to identify the best gold stocks to experimenting with
leveraged gold ETFs and ETNs, a more simple solution could be simply to only
have long exposure to gold overnight.
For the more cavalier
traders, going long gold overnight and then short gold for the intraday
period, makes for an even more profitable strategy.
Consider a hedge fund starting in 2001 with $100m, with the strategy
of being long gold from the PM to AM fix, and short gold from the AM to PM
fix. That hedge fund would be worth $2.16billion today, before any fees and
This should be enough to
catch any investor’s attention. Even without shorting gold during the
intraday period, limiting exposure to gold to just the overnight period
enhances returns enough to justify using this as a basis for a trading
As stated at the beginning of
this article, our focus is not what or who is causing this discrepancy nor
any potential motives for such a discrepancy, but what action to take in
order to profit from it.
In addition to incorporating
these patterns into our trading strategy at SK Options Trading,
we are also looking into the feasibility of launching some form of fund to
take advantage of the opportunities discussed in this article. As part of
this feasibility study we are looking to gauge investor interest and so would
welcome any comments, suggestions or ideas that people may wish to
contribute, simply email firstname.lastname@example.org
Stay on your toes volatility
will be the order of the day and have a good one.
Mr. Kirtley manages www.skoptiontrading.com and
offers real time trading signals to subscribers. You can click here for more information.