How one short seller's 'shock & awe' crushed gold with a 400 tonne trade

In a blog post Ross Norman, ex-trader for NM Rothschild and Credit Suisse and owner of bullion brokers Sharps Pixley, describes how gold was slammed down on Friday – a fall which set up Monday's meltdown.

Norman argues with some conviction the decline was sparked by a concerted effort by a large fund or bank (not named) on the Comex market in New York which channeled trades through the Merrill Lynch floor team.

The trades that broke gold's back came in two short bursts, but constituted some 15% of annual gold production – too much for the market to absorb.

The first futures trade on Friday was for 3.4 million ounces or 100 tonnes which saw gold crash through the all-important technical level of $1,540 which was "not only the low of 2012, it was also seen by many as the level which confirmed the ongoing bull run which dates back to 2000."

Then two hours later a massive 10 million ounces or 300 tonnes were sold within just 30 minutes:

This was clearly not a case of disappointed longs leaving the market – it had the hallmarks of a concerted 'short sale', which by driving prices sharply lower in a display of 'shock & awe' – would seek to gain further momentum by prompting others to also sell as their positions as they hit their maximum acceptable losses or so-called 'stopped-out' in market parlance.


How one short seller's 'shock and awe' crushed gold with a 400 tonne trade

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 $1b. The rationale for the trade was clear – excessively bullish forecasts by many banks in Q4 seemed unsupported by follow through buying. The modest short selling in Jan 2013 had prompted little response from the longs – raising questions about their real commitment. By forcing the market lower the Fund sought to prompt a cascade or avalanche of additional selling, proving the lie ; predictably some newswires were premature in announcing the death of the gold bull run doing, in effect, the dirty work of the shorters in driving the market lower still.

This now leaves the gold market in an interesting conundrum – the shorter is now nursing a large gold position and, like the longs also exposed – that is to say the market is polarised between longs and shorts and they cannot both be right. Either the gold bulls – like in a game of tug-of-war – pull back and prompt the shorters to panic and buy back – or they do nothing, in which case the endless stories about the "end of gold" will see a steady further erosion in prices.  At the end of the day it is a question of who has got the biggest guns – the shorts have made their play – let's see if there is any response from the longs to defend their position.

Continue reading at Sharps Pixley.