Sun, Jul 09, 2017 page14

• ‘Flash crashes’ in gold, silver unnerve investors as market viability questioned

  ‘TECHNICAL DAMAGE’: Gold prices fell after 1.8 million ounces were sold in a minute last week, while on Friday 25 million ounces of silver were traded just as quickly

  • Bloomberg
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  After-hours surges and plunges that have whipsawed gold and silver prices over the past two weeks are unnerving traders.

  Silver futures on Friday sank as much as 10 percent, as more than 25 million ounces of the precious metal traded within a minute just after 7am in Singapore.

  On June 26, gold fell below its 200-day moving average after 1.8 million ounces were transacted in a minute at 4am in New York. A day later, gold spiked after a similar trade involving more than 800,000 ounces.

  

  A machine engraves the word “Russia” on a silver bar at the JSC Krastsvetmet non-ferrous metals plant in Krasnoyarsk, Russia, on March 3.

  Photo: Bloomberg

  Such moves, which occurred at times when liquidity in the markets is generally lowest, are giving traders an additional headache at a time when investor sentiment is already turning bearish.

  Hedge funds are retreating, while exchange-traded fund investors are pulling out of gold, pushing the precious metal to the lowest in almost four months.

  “All fundamental factors aside, it does tremendous technical damage to the market,” Bill O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey, said by telephone. “There should be some effort to study this and come to some solution that will make for a more orderly trading pattern. This type of activity is not good for a fair playing field.”

  Gold has lost about US$47 since the session before that 1.8 million ounce-trade that many blamed on a “fat finger,” or erroneous trade.

  AUTOMATED ORDERS

  While O’Neill believes that trade might have been done in error, he said the precious metal struggled to bounce back from its low on June 26, because the transaction pushed the price below the 200-day moving average, triggering automated sell orders set by algorithmic traders, thereby sustaining the slump.

  Gold futures for August delivery on Friday fell 1.1 percent to settle at US$1,209.70 an ounce at 1:40pm on the Comex in New York. The metal has lost 2.6 percent this week in the longest weekly slump since December.

  Gold futures initially pared losses after a better-than-expected US payrolls report , which showed US hiring picked up last month while wage gains disappointed yet again.

  The hiring gain and slower wage growth presents a puzzling mix for policymakers.

  “Overall, gold is trading on the beat of the non-farm number and it’s just making people think that the [US Federal Reserve] will continue to be hawkish,” Ryan McKay, a commodity strategist at TD Securities in Toronto, said in a telephone interview.

  In the case of Friday’s silver plunge, the unusual increase in volatility triggered the so-called “velocity logic,” a safeguard set in place by CME Group, pausing the market for 10 seconds, spokesman Chris Grams said in an e-mail.

  “Our markets worked as designed,” Grams said. The pause allowed “liquidity to come back into the market. Per our rule book, prices were adjusted in the September and December silver futures contracts and several mini-futures contracts.”

  Silver futures for September delivery pared their losses to settle 3.5 percent lower at US$15.425 an ounce at 1:36pm in New York, after tumbling to as low as US$14.34 before the CME safeguard was triggered. The precious metal fell 7 percent this week.

  In the case of gold, the CME said no such temporary halt were ordered for gold on June 26, when prices fell as much as 1.6 percent, or US$19.90 an ounce.

  The last time velocity logic was triggered for gold was in January 2014 at 10:14am in New York, after the metal fell more than US$30 an ounce in about a minute. Prices fell as much as 2.1 percent that day, in trading of more than 8,000 contracts.

  RED FLAGS

  The volume surge might have already raised red flags for the Commodity Futures Trading Commission (CFTC), which regulates the precious metals futures market, according to Bob Haberkorn, a senior market strategist at RJO Futures LLC in Chicago.

  “Regulators look at anything that has sudden, sharp and long moves,” George Gero, a managing director at RBC Wealth Management in New York, said. “That’s their normal job.”

  CFTC public affairs deputy director Donna Faulk-White said the commission does not comment on, or even acknowledge the existence of, any possible investigations.

  “These so-called ‘flash crashes’ that occur periodically are frustrating to traders caught on the wrong side of the downdraft,” Jim Wyckoff, senior analyst at Kitco Metals Inc, a research company in Montreal, said in a report. “It also makes many market watchers question the viability of futures markets, which are supposed to create more liquidity and better price discovery.”
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