There has been much speculation about the causes of the 24 tonne gold sale on COMEX yesterday, but closer inspection provides some clues... and more importantly what it tells us about the market outlook for 2013.
The sale looks like a carefully crafted trade prepped and successfully executed by a well-known $14 billion U.S. fund. Prior to the sale there had been an unusually large purchase of gold puts — a leveraged options play that profits from a downward spike in prices. There had also been some early selling on the overnight electronic platform presumably to test the waters before the big guns fired a devastating salvo. If you are going to bet, bet big.
The short sell on the NY opening at 08:20 had the desired effect on prices, especially as the $1,730 level was breached where it triggered stops (a bit like the "collect $200" in Monopoly), which had the desired effect of cascading the decline that developed its own momentum. Think World Trade Centre.
The motivation (other than profit) for the trade is clear. It is a bet that the U.S. fiscal cliff will be averted and that the Democrats and Republicans will find common ground in their polarized positions on revenue raising between tax increases and austerity cuts. It is also arguably a bet that the U.S. will be out of the mire well before both Europe and Emerging Nations with the dollar positive environment being — by extension — gold negative. In other words, while looking for a fiscal cliff we actually found a gold cliff.
If you know something of a man from how he behaves under adversity then the same can be said of markets. Gold did not flounder nor did it bounce back with vigor to former levels — it just responded positively. That is to say it performed a classic 50% retracement (prices fell from $1,742 to $1,705 and now find itself mid-way at $1,735) — a good indicator of simply positive sentiment. No more than that.
Gold now finds itself in a slightly uncomfortable position in which it is having one of those Goldilocks moments — neither too hot, nor too cold — and is seeking, or lacking clear direction. Yesterday’s move was a successful wheeze and traders will feel pumped by its success. More worryingly it may give an indication to where the risks lie for gold looking ahead to 2013. That is to say that if the U.S. economy IS the first to show signs of recovery next year, then the dollar-friendly environment could well take the shine off gold for a further year. This is not a bearish forecast but may call into question whether the 17% year-on-year compounded rises we have seen for a decade can be sustained or perhaps replaced by more modest gains. Some bulls now seem to see single digit growth as a bear market.
Yesterday’s sell-off seems to fulfill that trading maxim — "if you are going to panic, then panic first."