On Sunday, gold plunged about 4 percent in a matter of minutes in Asian trading. What did happen? Was it manipulation, a panic selling, or something else?
In the early Asian trading, the price of gold suddenly fell 4.2 percent to $1,088.05, the lowest level since March 2010. While gold later recovered some of the losses (to around $1,100.00), it still traded solidly lower on a day-to-day basis. What caused the biggest intraday decline in two years?
Well, nobody knows for sure. What we do know is that there were large trades going through at times of low liquidity (due to a holiday in Japan). Indeed, somebody sold almost 5 tons of gold, worth around $2.7 billion on the Shanghai exchange, or the equivalent to one-fifth of a whole day’s trade in a normal session, causing gold to plunge by around $50 in just a few minutes, and dragging down other precious metals with it. This unusual move in the price of gold (see the chart below) has triggered speculation that the reason behind it was high-frequency trading or manipulation.
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Chart 1: Gold prices from July 17 to July 20
Source: kitco.com
We do not preclude any options, but investors should remember that gold perma-bulls always explain price increases by fundamentals, while price decreases by manipulation or an algorithm run amok. However, there is usually a long list of technical and fundamental factors which can explain the apparently strange price move. Indeed, the sad truth is that gold had been falling for a few days (or for a few years, considering the bigger picture), which had made its technical situation really weak. Thus, in a sense, the crash simply continued a trend. In other words, the technical factors have been favoring lower prices for weeks, so yesterday's slide is not that surprising
In addition, the current bigger macroeconomic picture is rather negative for gold. The U.S. dollar is gaining, the Greek debt-crisis was temporarily resolved, there is no immediate threat of inflation and markets are expecting that the Fed will finally hike interest rates.
Therefore, in such an environment, any news is bearish news. Therefore, the Friday PBOC’s announcement on its official gold holdings could prompt some long investors to throw in the towel. However, the gold’s slide started on Friday, when prices dropped to a five-year low and exerted some further downward pressure. In other words, it is possible that some sort of forced selling took place (for example, some Chinese investor could sell their gold to meet margin calls on underwater equity positions), which automatically activated stop-loss orders and triggered further declines.
Summing up, on Sunday gold plunged 4.2 percent, to the lowest level since March 2010 and in a matter of minutes. That crash prompted some analysts to point out manipulation as the reason behind the sudden drop. However, technical and fundamental factors alone can explain the weakness in the gold market, without resorting to fat fingers, high-frequency trading and handling of gold prices.
If you enjoyed the above analysis, we invite you to check out our other services. We focus on the fundamental analysis in our monthly Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals (and today’s extensive issue not only provides the roadmap for the next months and weeks, but also includes our plan to take advantage of the situation and increasing the already-huge profits).
Thank you.
Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor
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