The Cork Board

[investor15]

'Bazooka at a knife fight' – the April 12 gold takedown –

The chances of the initial gold sale which precipitated the April 12 gold price crash as being 'legal' were infinitesimal. Gene Arensberg does the maths.

Author: Lawrence Williams
Posted: Friday , 31 May 2013
LONDON (MINEWEB) -

There have already been a number of post mortems on the extraordinary trading events which precipitated the huge crash in the gold price of mid-April. Indeed we have already published some ourselves on Mineweb, and perhaps it might be considered over-egging the pudding to look at yet another analysis of these events given they occurred now well over a month ago. However our attention has been drawn to a post by Gene Arensberg on his ‘Got Gold’ site (http://www.gotgoldreport.com/2013/05/so-much-for-position-limits-on-comex-gold.html ) which analyses the events in some detail, and draws the conclusion that the ‘attack’ on gold could not have been accomplished without hugely breaching COMEX position limits, and that the takedown was probably illegal under U.S. financial regulations. Despite this it is presumed highly unlikely that any authorities will take any action as a result given those authorities are largely seen to be in the control of the financial elite, who were in all probability responsible for the extraordinary sales of gold into the markets on that fateful day.

Of course the reasoning behind what definitely appears to be a very deliberate takedown of the markets will probably remain unknown. GATA and its adherents will undoubtedly believe that this was an orchestrated move by the U.S. Fed, and what are seen as its bullion banking allies, to suppress the price of gold and thus protect the perception of U.S. dollar strength at the expense of the beleaguered gold investor, who may be seen to have benefited too much from the yellow metal’s rising price over the previous 12 years.

Others will suggest that it was purely a piece of very costly financial manipulation to protect short position holders given that gold had appeared, up to that time, to be beginning a good recovery back towards its 2012 levels. This theory might well gain traction given that three of the biggest players, Credit Suisse, Societe Generale and Goldman Sachs had all come up with strong sell recommendations for gold immediately prior to April 12. Indeed Goldman Sachs had made an almost unprecedented recommendation to sell gold short only two days beforehand – a point noted strongly by Grant Williams in a recent presentation to a major CFA conference in Singapore (see Little respite for gold – yet).

What Arensberg has done though is go into the maths behind the initial sell orders said to have totalled some 124 tonnes which precipitated the initial price collapse. (Some 400 tonnes was believed to have been sold off later that day). The 124 tonnes appears to have been sold almost instantaneously and Arensberg notes “what we do know is that the volume spiked to an unprecedented level April 12 and Monday, April 15 and that initial sale triggered an avalanche of trading and trailing stops. The net effect was that the initial order was indeed large enough and sold into the market fast enough that it literally overwhelmed the gold futures market. Whoever it was used a bazooka at a knife fight. The selling panic that ensued will be talked about for generations.” with the caveat that at the time of writing that “We do not have the actual trade data which would include the actual orders and the sellers of those orders. Without that, this is pure speculation and subject to receiving that actual data.”

However, in looking at the maths behind the transactions Arensberg notes that the 124 tonnes would have amounted to around 40,000 COMEX contracts, while the position limit at that time of the month would have been 3,000 contracts for an individual trader. So, on Arensberg’s calculations he notes that “in order for the initial 124 tonne sale to have occurred “legally” it would have had to have been 14 traders, all with zero orders open, all acting simultaneously, all acting independently, in their own self-interest, without colluding with each other to “sell-for-effect” or conspiring to foment a price smash.” The chances of this happening are, to say the least, infinitesimal.

Yet the Commodities Futures Trading Commission (CFTC), the regulatory body supposed to oversee such dealings is seen to be making no attempt to investigate.

Arensberg poses the following questions: “Who was the large trader who decided to hammer the gold market with 40,000 contracts all at once? How did that trader manage to do so without running afoul of the CME Group position limits or the CFTC regulators? Was the initial trade by one, two or many traders? If by one or two, then there is no way in hell the trade was “legal” under the position limits. If by many traders all acting at once, then how is that possible without their conspiring in advance to do so? (We are talking about the initial smash trade here, not the ensuing stops triggered.)”

Lots of questions. No real answers.

Arensberg thus notes that “no one would sell that many gold contracts so fast unless it was with the express intent to drive the market lower and by doing so, trigger sell stops of many other traders - which is, of course, trading for effect, which is patently illegal. (And yes, we know it happens all the time, but there you go.)” and goes on to describe COMEX and CME rules and position limits as so much ‘sausage meat’ which can effectively be ignored by the major players with total impunity. (If interested in further details of Gene Arensberg's assessment do click on the link in the first paragraph and read his analysis in full.)

We commented in a previous article how much the scales are weighed against the small investor given the trading latitudes given to the major players with their high frequency trading algorithms and their seeming ability to ignore any supposed controls on their activity. In short the average investor, whether it be in the stock market, or in commodities, is at an enormous disadvantage and in general these markets move at the whim of the big guys. Occasionally they can be overwhelmed by market events – but even then the biggest sharks will probably still come out on top – it’s the middle range ones, and, of course, the small investor, who may lose their shirts unless they guess right.

iPad Version: Picture - Man works on phones at gold futures trading pit at New York Mercantile Exchange: REUTERS/Mike Segar

http://www.mineweb.com/mineweb/content/en/mineweb-gold-analysis?oid=192631&sn=Detail