Wednesday 16th April 2014

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Bear attack

What people are saying about gold’s sudden sell-off

by Greg Klein

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Just last Thursday, some headlines still forecast bullish news for gold. That changed suddenly on Friday and, by Monday, even more dramatically yet. Here’s a roundup of explanations, blame and even some optimism expressed on April 15.

“Fundamental explanations” don’t cut it

The Globe and Mail dutifully blamed the usual suspects before quoting Julian Jessop of Capital Economics. He pointed to “aggressive selling by speculative traders, rather than any change in the long-term or fundamental drivers.”

What people are saying about gold’s sudden sell-off

The G&M stated, “The ‘fundamental explanations’ for the plunge that are being tossed around simply don’t hold up, [Jessop] said, citing the fact that it’s not yet known whether Cyprus will in fact sell [its gold] and that the latest economic readings in the United States don’t signal a pullback by the Federal Reserve on its stimulus measures.”

“The hallmarks of a concerted short sale”

Ross Norman of the Sharps Pixley bullion brokerage noted that Friday began with “a monumental 3.4 million ounces (100 tonnes) of gold selling of the June futures contract … in what proved to be only an opening shot. The selling took gold to the technically very important level of $1,540,” which was last year’s low and “in many traders’ minds it stood as a formidable support level—the line in the sand.”

The initial sell-off was, he wrote, “rumoured to have been routed through Merrill Lynch’s floor team.” Two hours later came “a further 10 million ounces of selling (300 tonnes) over the following 30 minutes of trading. This was clearly not a case of disappointed longs leaving the market—it had the hallmarks of a concerted short sale….” The ploy pressured others to join the dumping frenzy.

Norman also stated, “The value of the 400 tonnes of gold sold is approximately $20 billion but, because it is margined, this short bet would require them to stump up just $1 billion.”

“Now so much depends on the algorithm”

Kitco News asked three veterans of the 1980 plunge for comparisons. Their responses show much has changed since then, at least in tactics.

Once dumping starts, electronic trading creates its own momentum, explained Peter Thomas, VP of INTL FCStone Precious Metals North America. “There’s no one to stop it as it goes into a freefall,” he told Kitco. “The computer lights up all red and the selling goes on until the computer changes colour. Now so much depends on the algorithm.”

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