On the heels of some very unusual trading in the gold pits, one of the greats in the business just asked WTF is going on at the COMEX?
On The Clock
By Trey Reik, Senior Portfolio Manager, Sprott USA
April 2 (King World News) – We view the 1.63% decline in spot gold last week (from $1,313.70 to $1,292.30) as a bit of quarter-end window dressing by motivated market participants.
On the bright side, the April contract and quarter-end marks are now squarely in the rear-view mirror. If our analysis is correct, spot gold should now be free to respond more in sync with improving fundamentals…
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Traders Focused on $1,300
Trading in precious-metal markets last week seemed heavily influenced by calendar-related items.
1. First, the week marked the end of the roll period to a new front-month COMEX futures contract, in this case from April 2019 (GCJ9) to June 2019 (GCM9) futures.
2. Second, 3/26/19 was a monthly expiration date for COMEX options.
3. Third, 3/29/19 constituted the quarter-end mark for trillions-of-dollars-worth of over-the-counter options, contracts and derivatives for market participants ranging from hedge funds to the Bank for International Settlements.
During such a heavy week for option and derivative activity, it is not unusual for the price of any commodity to gravitate towards the price level of its maximum contract exposure. In viewing the five-day price graph of spot gold, in Figure 1, it seems clear that high-volume traders in paper gold markets were focused on the $1,300 price level during the waning days of March.
Figure 1. Gold Spot Price (3/25/2019 – 3/29/2019)
A hallmark of free capital markets is that traders have latitude to execute their orders in any fashion permissible by rules of the relevant exchange. There is certainly no requirement for market participants to execute purchase or sale orders in a manner which minimizes costs or maximizes proceeds. However, in a sophisticated market such as trading highly-levered, precious-metal futures contracts, large orders are generally executed with sensitivity to limit prices and outstanding stop orders on dealer books. Therefore, whenever a large sell order is executed in a manner appearing to fly in the face of common sense in maximizing proceeds, legitimate questions can be posed as to the true intent of the seller—was the execution method designed to maximize proceeds, or to pressure market equilibrium? Because true intent can never be surmised, traders have coined the phrase “flash crash” to describe sharp price declines caused by inordinately high volume bursts.
“Flash Crash” on Thursday?
Along these lines, tenor for precious metals markets heading into March month-end may have been set on Thursday morning, 3/27/19. At 9:37 am, 7,000 COMEX gold contracts were sold at-the-market in the space of one minute. This means that 700,000 ounces (or 21.77 tonnes), with a notional value of $921 million was dropped into COMEX (electronic) pits without price limitation. While spot gold did decline roughly $7.00 during the “flash crash,” it finished the day in orderly trading above $1,300 (at $1,309.57).
Perhaps in recognition that a far more concerted effort would be required to achieve a month-end mark below $1,300, volume in COMEX gold futures on Friday (3/28/19) exploded to 528,626 contracts, or roughly $69.0 billion in notional value. For context, the World Gold Council reports that average daily trading volume for COMEX gold futures totaled just $28 billion in February 2019 and $36 billion YTD 2019. Related to the massive 3/28/19 trading volume was an outstanding-interest drop of 48,565 (9.62%) for the day, almost all of which was related to a 93.3% collapse in remaining April (front month) outstanding interest (OI). The fact that such a large percentage of remaining April OI was liquidated without traditional roll into June contracts only heightens the pointed nature of trading last week.
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