How a China-US one-two punch floored gold price
On Thursday, gold regained some of its footing after hitting its lowest level since March 2010 at the start of the week.
Futures contracts in New York with August delivery dates exchanged hands for $1,094 an ounce in early afternoon trade, up a couple of dollars from yesterday's close.
If the metal holds onto these levels it would be the firs positive trading day in 11 sessions following a 6% decline and the worst losing streak for gold since September 1996.
Gold's weakness has been blamed on a number of factors including looming interest rate rises in the US, disappointment over Chinese central bank purchases, a temporary resolution to the Greek debt crisis, weakness across the commodities sector and a stronger dollar.
But this week's surprising slide probably has more to do with futures speculation than any change in fundamentals for the metal.
Large gold futures investors such as hedge funds have slashed net long positions – bets on a rising price – to the lowest since 2006 when the Commodity Futures Trading Commission first started to collect the data. So-called managed money are also holding record shorts
Gold was knocked out on Monday in what seemed an almost concerted cross-continental effort to push the price through support levels that the metal has bounced off numerous times before.
A new note from the World Gold Council explains what happened when nearly $2 billion of bullion were dumped in a matter of minutes:
On Monday the gold price fell sharply during Asian trading hours with the price declining from a $1,134 close on Friday to an intra-day low of $1,086 an ounce – a 4.3% plunge. The price quickly rebounded and ended the day above $1,100/oz.
This fall was precipitated by significant trades on the Globex platform on COMEX and the Shanghai Gold Exchange (SGE). Trading data reveals that 4.7 tonnes (t) was off-loaded on the SGE at 2.29am BST – this is an exceptionally large amount in a short space of time. Normally little more than 40t trades in a day. At around the same time volumes spiked on COMEX. Both trades were made during periods of low market liquidity.
That 4.7 tonne sell order compares to an average on the SGE of just 96 kilograms a minute. The WGC says that short-term speculative trading in thin markets – "amplified by leverage" – has become a common trade in recent years.
Monday's dramatic decline in gold also mirrors similar trades in other metals in China recently including sharp falls in nickel and copper.
Image of electronic billboard in Yu Gardens Shanghai by Christopher