Let’s establish three facts up front. One, the volume of
contracts traded was not “millions” (as at least one conspiracy theorist is
claiming). During the 1-minute window when the price of gold dropped from $1,254.10
to a low of $1,236.50 and recovered to $1,247, 18,031 August gold contracts
traded. There was negligible volume in the October and December contracts.
Two, the Earth is round. This did not occur while “everyone”
was sleeping (as at least one conspiracy theorist asserted). It happened when
Europe was open and the UK had come online, at 9:01am British Summer Time
(BST). China and Singapore were also open for business at that time.
Three, there was no single large futures trade that
“smashed” the price, but a large number of smaller trades, with the largest
trade being 296 contracts (close to 1 ton or $36 million). The chart below
shows milliseconds (1/1000th of a second) from 9:01:00 to 9:01:30 – 30 seconds.
At this timescale, a lot of the trading is computer to
computer, a fight between algorithms. We say fight, because the trading wasn’t
entirely one way. Some time slots show upticks in price.
So what did happen?
We do not believe that one should try to look at whether
spot or futures moved first, to determine which one is the driver of a price
move. The timing is very close, due to high-speed fiber optic lines connecting
market makers’ servers. And errors in timing, especially of a third party
observing from the outside, could be greater than the timing of the events
being measured.
We have a better way to answer this question. If the price
of spot is falling relative to futures, then we know there was selling of spot.
If the price of futures is falling relative to spot, then we know there was
selling of futures.
This spread, future price - spot price, is called the basis.
Here is a chart of the gold price overlaid with the August gold
basis, showing the London trading day (times are GMT, so the chart beginning at
7am is really 8am as the UK is on daylight savings right now). The crash
occurred at 8:01AM GMT, which is 9:01 BST.
We see a clear picture: as the price falls, so does the
basis. This move was led by selling of futures. No, not a massive conspiracy.
Indeed not massive at all.
And it should be noted that the basis did not move all that
much. 10 bps. This suggests that though the move may have been driven by
futures, there was plenty of selling of metal too.
Of course, if people were buying metal even holding the
price constant while some nefarious party was selling futures, such that
futures went down by $14, there would be nearly a $14 backwardation in the
August contract. That is over 1%, or about 6% annualized.
Now let’s look at the silver price along with the September
silver basis, which behaved differently.
A 25-cent drop in price and a 15 bps drop in the basis also
seem moderate. Futures sold off a bit, but the selling was by no means
exclusive to paper.
And then, an hour later, look at the basis action.
Someone—or many someones—is bidding up paper. Buying the dip. However, that had
no impact on price, so there was also
selling
of metal
. An hour after the buying began, it subsided. But then began anew.
And for the next 5 hours, we see sufficient buying of silver paper, that the
basis is pushed up above where it had started even though price peaked below
the start and then subsided another nickel.
This is what it looks like when exuberance in the futures
market meets selling of physical metal. Especially from around 13:30 GMT.
We call ‘em like we see ‘em.
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Keith Weiner is CEO of Monetary Metals, a precious metals fund company in Scottsdale, Arizona. He is a leading authority in the areas of gold, money, and credit and has made important contributions to the development of trading techniques founded upon the analysis of bid-ask spreads. He is founder of DiamondWare, a software company sold to Nortel in 2008, and he currently serves as president of the Gold Standard Institute USA.
Weiner attended university at Rensselaer Polytechnic Institute, and earned his PhD at the New Austrian School of Economics. He blogs about gold and the dollar, and his articles appear on Zero Hedge, Kitco, and other leading sites. As a leading authority and advocate for rational monetary policy, he has appeared on financial television, The Peter Schiff Show and as a speaker at FreedomFest. He lives with his wife near Phoenix, Arizona.
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The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.
