Traders suspicious of bear raid in gold amid low liquidity

Section:

Gold Bugs Squashed by Aggressive Selling

Henry Sanderson, Neil Hume, and David Sheppard
Financial Times, London
Monday, July 20, 2015

Gold sank to its lowest level in five years after heavy selling in early Asian trading hours saw a billion dollars' worth of the precious metal dumped on the market in a matter of minutes, in a sign funds were aggressively targeting bullion as its outlook deteriorates.

Gold hit a low of $1,088 a troy ounce -- a level last seen in March 2010 -- after a flurry of selling across a US futures exchange and the Shanghai Gold Exchange sparked talk of a another concerted raid in metals markets by Chinese hedge funds.

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The precious metal, which has a centuries-old reputation as a store of value in times of crisis, has failed to find support this year from either the eurozone debt crisis or the recent rout in China’s stock market. Instead, it has been buffeted by a strengthening US dollar and expectations that the US Federal Reserve will raise interest rates later this year.

Gold has now given up almost 50 percent of the gains it made during its 12-year bull run between 1999-2011, when prices rose from about $250 a troy ounce to more than $1,920.

The selling on Monday came after China’s central bank revealed late last week that it had made much smaller purchases of gold reserves than the market had estimated, adding just 600 tonnes of gold since 2009. The news dealt another blow to the so-called gold bugs who flocked to the metal during the past decade.

Ivan Szpakowski, analyst at Citi, said this was considerably lower than market expectations, which were almost triple that amount.

Traders and analysts said, however, that the nature and timing of the selling suggested there was more at play than investors responding to a slight strengthening in the US dollar or lower central bank purchases.

"There is to my mind no coincidence that this happened in the quietest, thinnest period of the week," said David Govett, head of precious metals at Marex Spectron in London. "Anyone who trades gold knows not to put any volume into the market at this time, unless they deliberately want to move it in a big way."

Monday's selloff follows large redemptions from a leading exchange-traded gold fund. On Friday, the SPDR -- the largest gold ETF -- reported outflows of 11 tonnes, the biggest one day outflow in a year.

Victor Thianpiriya, commodity strategist at ANZ in Singapore, said: "As this was one of the major catalysts for the price selloff in 2013, market participants should be watching developments from here very closely."

Earlier on Monday, there was an unusual spike in volumes on Comex, the US precious metals exchange, where 7,600 lots of the August 2015 futures contract -- with a nominal value of almost $860 million -- traded just before 1.30 a.m. (BST).

The selling was almost instantly mirrored more than 7,000 miles away on the Shanghai Gold Exchange, where five physical tonnes of the metal, worth about $160 million, were sold in the space of just two minutes. Five tonnes is nearly a fifth of average daily turnover on the exchange.

Traders said the sharp drop had similarities to so-called "bear raids" by Chinese funds in copper in January, which drove the price of the base metal down to a six-year low. That also occurred during Asian trading hours, when many US and European traders were in bed.

Gold also fell in the Chinese derivatives market, which, traders said, added to the impression of an orchestrated attempt to push the price down, triggering others to sell their positions.

"The fact that it was done in Asian hours and in a loud, messy manner suggests it may be done by people not directly under European and US regulation," said one market participant.

Gold has now retraced almost half of its rally from near $250 a troy ounce in 1999 -- known in the market as "Brown's bottom" after the then UK Chancellor Gordon's Brown decision to announce the sale of approximately half the UK’s gold reserves -- to its peak of about $1,920 in 2011.

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