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 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”.
