Gold Price Drop of 6 Nov: Drilling Down
The price of gold dropped abruptly Friday morning (Arizona time). How much of a drop? $10.30, as measured by the bid on the December future. How abruptly? That move happened in under a second.
At first, the price of gold in the spot market did not react. This caused what looks like a massive backwardation (recall that the cobasis = Spot(bid) – Future(ask)—if the future drops relative to spot, that is backwardation). See the graph of price overlaid with the Dec cobasis.
The cobasis briefly hits a peak around 11% (from its “normal” level, currently in temporary backwardation, around 0.5%).
The whole cobasis spike is over 79 seconds later. The spot price is finally updated and the giant apparition of backwardation is banished.
We are not London bullion market insiders. However, we would bet an ounce of fine gold against a soggy dollar bill that this backwardation was not actionable. That is, it represents a delay in updating a quote rather than an offer to let you decarry your gold and pocket nearly $17 an ounce (we would love to hear stories to the contrary).
There are enough serious problems with the dollar, and the gold market is hardly in a state that could be called normal. So let’s not make this molehill into a mountain. One commentator asserted that the spot market did not “believe” the futures price.
The fact is that the event began in the futures market. It propagated to the spot market subsequently. Attributing motives is just guessing. Attributing it to manipulation is just making up ghost stories around the campfire.
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A very useful and well-thought-out insight. Keep Stackin’ :-)
Very interesting! I’m game for keeping it a molehill, but some campfire ghost stories come off quite credible, especially from an Occam’s razor perspective.
Very interesting, Keith.
Could you drill deeper and explain based on your collected GC data :
– did you collect all data in the time frame (including millisecond HFT orders) ? If so, it is possible to zoom on the drop ?
– on which market did the drop in futures price occured FIRST (comex, london (??), shfe…)
– details about the order(s) in this future market who make(s) this drop in price : number of contracts bidded/asked, market maker ?
it’s like somebody quickly came to their senses or they would have had to move those 400 oz bars.
Having worked extensively on an institutional desk, I can tell you that it’s highly unusual for this massive dumping of gold to take place. When a seller has a big order, they always get better prices by metering the sell orders in slowly. It’s common knowledge, although exceptions occur in panic situations like Lehman Brothers.
So these days when a big seller dumps a billion dollars worth of gold basically “at market” yeah… I’m suspicious too. Their intention, it would seem, is to take out all the bids quickly and break the market below previous support.
I don’t attribute this necessarily to conspiracy, although by definition, a conspiracy is simply when two or more people plan to do something illegal. It ain’t that hard to see conspiracy all around us in the political world. If not actual conspiracy then certainly gangster type of behavior — collusion — where Rico laws might be applied.
Who’s that guy on ZeroHedge (from Nanex?) … he’s documented quite extensively market manipulation type of behavior. While it’s my personal belief that market manipulation is impossible over the long term, it seems apparent that it happens all the time on a short term basis. Even our own FED has an S&P account (.25 per contract!) that’s been used for a lot more than “Plunge Protection”.
Why, then, is it so hard for some to believe that conspiracies exist? Clearly “two or more people are planning illegal activity” every day in this country!
Hi, good to hear from someone closer on the inside to market moving trades. My thought is that these drops are caused by European bank(ers) in the game to take profit on currency moves. If they have a long gold position in Euros and the Euro suddenly goes down against the dollar, they can sell the gold for more Euros, until equilibirium is reached. Of course they could have done the same with dollars.
Because these moves happen together, it seems the currency is driving the gold selling and giving Euro bankers an opportunity to raise capital in Euros – which is accomplished.
What do you think?
legal tender is the conspiracy, it happened long ago and is with us today. i think what you are describing is collusion. a whipsawing collusion like beating a pinata to get dollars (or credit). could that be going on? probably. is it the tail or the dog? which should we be concerned with?
Yes, collusion… good word. Probably better word than conspiracy.
To answer your question, ‘what should we be concerned with’… Wow, big subject…
In the big picture (to me) it’s the political environment, which creates the basis for our monetary environment, our freedoms and so much of what affects us today.
In one sense the money part is easy… and since this is Monetary-Metals let’s talk money:
Every central bank in the history of the world has but one job — to redistribute money through debt and the destruction of the currency. They also facilitate the growth of government. Because if govt. couldn’t borrow and spend more than tax receipts, it couldn’t grow.
Maybe the purpose of the FED could be expressed differently…. but central bank activities always lead to the boom/bust cycle and ultimately the complete destruction of an unbacked currency. So never worry about what the FED will do. They will inflate. They will steal the value of your labor and your savings, just as night follows day. That’s what they always do.
Ok, maybe you should worry about that one.
By the way, anybody who complains about this stuff — U.S. debt, the FED, fiat currencies, etc… is likely already on the FBI watch list. That order came down a few years ago. The FBI probably works with the NSA but i’m sure they have their own intelligence too. In other words, people like us (even though harmless) meet the alleged qualification of the FBI’s “domestic terrorist” list. No wonder people renouncing their U.S. citizenship is at an all time high.
Back to worrying. I would worry that in the 1960’s 28% of government income went to entitlements…. welfare, food stamps, social security, etc. That 28% is now 68%. Not a typo.
The business of the country is redistribution (68%) with some debt service and defense spending thrown in for good measure.
Is that the legitimate function of government? No. To quote the Constitution it’s to “protect” the general welfare… not ‘provide’ it. So I definitely see a problem with this trend, especially when the biggest entitlements are based on ponzi finance and are totally unsustainable.
I would also worry that the government spends roughly $8,000/per child under 15 (about 8 cents of every dollar) while they spend $44,000/year on seniors… or almost .57 cents of every dollar, some of whom don’t even need it.
That’s a special problem because 23% of all children are now born into poverty. Point is, the young people in this country will be growing up in a different world completely, with a completely different outlook, many without fathers, a home life or a moral structure. This cannot be good. And I would worry about where you live and what schools your kids go to.
I would also worry about the debt…but not in the way you think. I’m not so much concerned about the 19 trillion in debt you hear about every day, no. Sure it’s bad… and it takes interest rates near zero to finance it. That’s why rates can’t go up (at least not much) … there’s no way even the interest can be paid with rates at higher levels. 1%, sure. But not 2 or 3% higher, no way.
So no, I wouldn’t worry much about that (the 19 trillion) because we can muddle along for many years like this. What I would worry about (is that regard) is the baby boom generation retiring by the thousands every day. I believe the number is 11,000/day… i’ll have to check that one. Point is, they’re being replaced by only 2,500/workers per day. Definitely a problem. I mean, who will pay the taxes so finance all these entitlements?
You see, if all our current Boomers DO get their Social Security checks (reasonable assumption) sometime between 2030 and 2040 that 19 trillion debt will be an inconceivable 207 trillion in debt. That’s not a type there either… 207 trillion. Clearly there’s no way we can muddle through with THAT kind of debt… something’s going to happen. Something big. And it will happen long before 2030 as markets see the inevitable.
Anyway, those were the numbers and general perspective of one of the world’s most successful investors — Stan Drunkenmiller. I’ll try to find the link… great interview. And my numbers are only estimates… i’m sure i got a couple wrong even if the concepts were right.
Other than that, there’s nothing to worry about!
No doubts about the math, so the only question is how will it go down? Also, factor in the millennials out numbering the boomers, and they are likely to vote to stick oldsters in a barracks type environment (a skinny bed and a locker), and feed them cheap GMO gruel until bulging neck tumors take them out. Health care is more costly than SS, so you would be a fool to think they will give out expensive bypasses to old parasites. They will probably think the boomers well deserve it for allowing the government off the gold standard, not even considering some boomers were only 11 yrs. old and couldn’t vote back in 71. At the very least there will definitely be means testing. Those who have an IRA, or a pension that pays to a certain low level won’t get any SS, you know kind of like Medicaid (got to be flat broke to get it). It isn’t going to be pretty, and there is such a massive incentive to opt out of the system, and into the anonymity of monetary metals for storing some wealth, which makes it sickening to witness the massive sheople ignorance, because the math is just not that hard!
If your evidence for the timing is good enough to say “this started in the futures market and moved to the spot market”, then it certainly does support the idea that the co-basis move was “actionable”. Not just actionable but watched closely enough by some algorithm that made a killing that day and earned 11% on an astute trade.
To enable that trade, some spot gold (perhaps even physical gold) had to have become available, since spot trades must have taken out quite a few bids (although 8:31:19 AM EST could also be a sparsely bid time of day…) Though it appears the seller(s) were not pacing themselves to obtain the best price, they did execute their spot sell to maximum effect, and possibly bought back without moving their bid up having cleared the deck and head faked other algos that were watching the support trend. Those spot sells and buy back permit them to walk off with the whole 11% backwardation profit on the event (perhaps that’s their commission).
The thing is that the price on Reuters or Bloomberg is not actionable, it is a feed from banks but it is not an exchange which means they are liable for those price. I would bet that the traders in the banks first priority in such sudden market price moves is to adjust the prices on the futures market, then the bank’s proprietary trading platforms their client use, then update their ETF quotes, then get around to changing Reuters or Bloomberg, hence the delay. FYI, often pricing on bank trading platforms are different to what is quoted on Reuters because the platform price can be adjusted for the volume of order you are entering (the changing spread is algo driven off a “base” spot I guess the traders enter/monitor) whereas the price the bank feeds to Retuers is a general indicative rate.
It would be interesting to look at the granular price quotes on GLD at this time, not sure if Keith has access to that data, as those would be actionable – did the GLD market makers quickly adjust their prices or just pull all quotes until they could establish what was going on?
you won’t learn any of that in a business college…
Indeed. My whole point sits under the caveat “if your evidence is good enough to say…”. Whatever “this” event is, it did roll from futures to spot market in discernable time. I find it hard to believe that information feeds have substantial human friction in this day and age. Consider the time of day is market open, when many studies have found liquidity to be sub-optimal at best. Then consider the opportunity presented by widely differing order volumes in the quote stack of one future (lower) vs the spot (higher). If the future(ask) looks easier to move downward than the spot(bid) due to those order volumes, a long term gold holder who wanted to run a profitable decarry finds himself in a position to first reprice the future, next stock up on the return contracts for his order volume, then sell spot(bid) to arbitrage away the the higher volume. It’s a decarry trade deep into an artifical “temporary!” backwardation.
Not saying that’s the story here. But I know Keith was the first to name our present age as one of “temporary backwardation”, and here we have an interesting species of such a beast, perhaps identifying an arbitrage opportunity that relies on all those deeper data clues others here have mentioned.
jham – what do they teach in business college? Probably how to pay your taxes timely…
they hew closely to the stock market with the CAPM which is basically the equation of a line y=mx+b. then they use calculus in advanced portfolio theory to come up with a beta for each stock. secondary bond market never mentioned. who new it was bigger than all the equity markets? money and banking they delve deeply into the federal reserve act. basically all you get out of that is, they meet, if they want to shrink the money supply they sell bonds and expand it they buy bonds. or vice versa i don’t remember. accounting is interesting. the profession is built upon a statement of concepts. discrete economic entities, periodicity, and the clincher: monetary unit. if that thing is not stable, what becomes of a financial statement? blindness. mismanagement. the very heavy tax courses lean on the benevolent intentions of congress behind every regulation. knowing the code as i do i don’t believe any of it has ever been written by the peoples’ representatives. it has somehow been put forward and they approved it. so business college serves its purpose of keeping people ignorant.
… Or maybe it isn’t one malefactor at work, but only an inefficient distribution of fewer supporting bids under the future than under the spot so that a steady, but high, rate of selling in both markets exposes the same “gap” in the two bid stacks (perhaps across some technical barrier), but separates them in time because spot had higher volumes bid above the gap that just took that much longer to clear.
Here’s how I think Keith can settle the bet he makes:
What were the spreads on the future and on the spot during the event?
If it shows two narrow peaks, then there was simply a highly illiquid market that was bipolar across the $10 gap. I see that as soon as the spot starts to sell off, liquidity returns to the futures market and an earlier seller of futures can suddenly buy back at a nice short term profit without driving the future ask back up. Why would that be? The spot bid beginning to clear signals that the backwardation signal is being answered. Did a block of gold earmarked for future settlement get moved up in time? Is the lower future ask pricing-in more risk premium? Did an overnight shipment arrive at some bullion bank and hit the market in the NY early hours? Is this how the bank’s insider trade structured the new auction entries it provoked? If you were intentionally trying to drive up the dollar would the market react like this? Clearly the price hit says yes-you sell a lot the price of gold drops. But the hope for gold standard advocates is that in the details of the selling a systematic profit presents itself to us “gold vigilantes” and our action becomes friction in their nefarious plans. This is the question, are the markets involved free enough so these events become actionable equally to all players? If so, how can we profit from the opposition’s abuse of such tactics?