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Gold 'flash crash' sparks a whodunnit?

The price of the precious metal fell by 2.25% yesterday after a giant 23 tonne sell order sparks rumours of a 'fat finger' trade.

Gold 'flash crash' sparks a whodunnit?

Gold sold off sharply yesterday after a massive 24 tonne sell order pushed the price down 2.25% sparking rumours of a ‘fat finger’ trade.

Although the precious metal recovered some of its losses to close down just over 1.5% on the day, its largest one-day fall in nearly a month, the sheer number of contracts exchanged – some 7,800 in that single order – sent the rumour mill into overdrive.

‘If the selling was year-end profit-taking then it was inept,’ said Ross Norman, chief executive of bullion brokers Sharps Pixley. ‘Dealers try and finesse big sell orders into the market to get the best (highest) price for the biggest volume they can and thereby optimize profit - that requires stealth.

‘If on the other hand it was a "fat finger" episode as has been suggested with a broker said to be looking to roll his December gold futures contract then it was even more inept.’

Norman said it was more likely to have been a short play or algorithm-based trading as the sharp move down flies in the face of the current fundamentals with concern growing about the lack of agreement between the Democrats and the Republicans on balancing tax rises and spending cuts to address the fiscal cliff.

‘The US reaches its law-enshrined debt ceiling of $16.4 trillion early to mid-February 2012,’ Norman said. ‘That promises fireworks again as it did in August 2011 when gold hit an all-time high of $1,922 as the market stares into the abyss of a possible US debt default.’

‘Against the current economic backdrop, a short seller would have to be quite brave. In short, we will not know the identity or the reason for the sale for a while. Longer term gold investors should not however be deterred - the rationale for buying gold is as favourable as ever and a degree of patience required.’

Carsten Fritsch, an analyst at Commerzbank, said a computerized sell order was to blame: 'Yesterday’s events are impressive proof that computer-controlled trading systems can bring about massive price fluctuations without any particular trigger being necessary. These are rarely lasting in nature, however.'

The precious metal has recovered some of yesterday’s decline in early morning trading today, up 0.23% at $1,720.30 per troy ounce.

8 comments so far. Why not have your say?

Elliott via mobile

Nov 29, 2012 at 18:05

If the US defaults and goes over the' cliff ', surely the dollar will no longer be seen as a safe haven? If this occurs than gold will rally hard as the dollar depreciates and people panic? If a timely deal is done and the debt extends with minimal imposed measures - then markets will rally along with gold and most other asset classes?

Win win for gold in the short term, unless Europe collapses and we enter another period of sustained deflation ?

Let me know what you think?

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joe stalin

Nov 29, 2012 at 18:33

I hardly think 2.25% constitutes a crash. Markets are being driven by every nuance at the moment as algo's look for words such as deal ,compromise etc the markets rallied hard on the back of positive murmerings perhaps the progarmmer behind this computer's algo was n't that versed in the nuances of the English language ,proving once again that computers are only as clever as those that programmed them. English lessons anyone?

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Nov 29, 2012 at 19:27

Not sure why this is being picked up. 'Fat fingers' are not uncommon in the gold and silver markets - $100 dollars last Dec 12th! Several 40-50 dollar falls through the year. Whenever gold threatens $1800, or silver $35, or they want to buy back some COMEX shorts cheap, there will be a 'fat finger' event. In reality of course it is just plain old price manipulation - an idea which is now becoming more mainstream.

I sold my Fresnillo shares on Tuesday as it was options expiry and I expected a fall, though I had to wait til Wednesday to buy then back. Sold them again today [Thursday] - these guys don't give up so I expect to see silver below $33 in the next week [or tomorrow!] and gold under $1700.

As acceptance of price manipulation becomes more mainstream it starts to lose its effect - chartists were dream suckers - just adjust the price below the 50 dma or 200 dma and they will do the rest. Now there is the possibility that the COMEX shorters will be overrun, but probably not. I hope not as I want to buy back my Fresnillo shares - I feel really uncomfortable being in cash considering the global financial situation!

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owen patton

Nov 29, 2012 at 20:32

just read the cot reports and you will find all the short selling is done by j.p. morgan they do the feds dirty work . this is why these banks get bailed out.

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Chris B (Slough UK)

Nov 29, 2012 at 22:51

Another typical manipulated move. One of the consequences of holding the price of precious metals down, will in my opinion, likely be the collapse of a number of miners! As a direct consequence and along with the depression, many have seriously poor and sinking balance sheets. Lonmin is a fine example of this. Always can't believe the 5 year chart view! I also wonder if the collapse of Lonmin will drag down Xstrata (big stake in Lonmin) and Glencore down as well; and possibly others to follow?

By thinking they can make their currencies appear stronger (ahem) than they are, by forcing precious metals down, the bubbles they created have inversely proportional, if not greater negative consequences. Too much heavy handed tinkering and the obvious manipulation will lead to disaster in the end. QE will prove to be 'one' of the biggest mistake of the 21st century. It will probably take a while yet, but when it all breaks down, it will happen very quickly as everyone throws their cards in.

In the end no amount of QE will suffice, and governments attempts to squeeze their people ever further will not only be fruitless, but they will be pointless and will meet with ever growing backlashes as we have seen in Greece. When governments happily throw away billions (a billion still a vast amount of money by any measure) then as Mr. Micawber said: 'result misery'.

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J Thomas

Nov 29, 2012 at 22:53

The only way to make gold and silver pay as a really worthwhile investment is to treat it as a long term hobby and buy the physical metal. Buy a few hundred gold sovereigns and keep them 20-30 years, you will always make a good return selling them on to collectors.

You must remember that gold is merely a store of wealth, and that wealth is based on its scarcity value, as there is only a finite amount on Planet Earth.

Gold does tend to keep pace with inflation, and will power ahead when fiat currencies lose confidence, yet when interest rates are relatively high gold can stagnate for decades.

It really belongs in the same asset class as fine art, Central Banks would be as well buying up Picasso and Rembrandt for their scarcity value, indeed many did and still do, and only a tiny fraction of the gold and fine art plundered from Banks during WW2 has ever been returned to its rightful owners.

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Nov 30, 2012 at 04:10

@ Elliott:

'If the US defaults and goes over the' cliff ', surely the dollar will no longer be seen as a safe haven? If this occurs than gold will rally hard as the dollar depreciates and people panic?'

Wrong! If US goes over the cliff / gets downgraded etc, US dollar / treasuries are the first to rally on safe haven demand, and gold / other PM will fall on dollar strength / risk aversion. Your argument is flawed A because you miss the importance of liquidity, B you ignore Fed's bond buying effect.

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Dec 01, 2012 at 17:22

I love only Gold.....

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