Shorts could be behind gold price flash crash

The fear trade

The gold price climbed back above the $1,240 an ounce level by lunchtime on Monday after a brief plunge of more than $30 an ounce in morning trade in New York dealings.

Gold for delivery in February, the most active contract on the Comex division of the New York Mercantile Exchange, dropped from $1,245 to $1,215 within a minute after a massive trade of around 12,000 lots were executed.

The order which represents 1.2 million ounces triggered a 10-second halt in trading. Initially it appeared to be a “fat finger” (pressing the wrong button) trade, but the CME Group which runs Comex said in an email to Reuters Hedgeworld “all trades stand and our technology performed as designed.”

Ross Norman, ex-trader for NM Rothschild and Credit Suisse and owner of bullion brokers Sharps Pixley, told MarketWatch the move “looks to be shorts defending their substantial positions.”

Short positions – bets that the price will go down – held by large investors or so-called managed money climbed to a record to 82,765 lots or 8,276,500 ounces in the week to December 24 according to the delayed Commodity Futures Trading Commission data released last week.

So many big players short of gold could translate into further upside for the metal as commercial traders and hedge funds are forced to cover their positions should gold go higher from here.

Norman made the case in April last year that the dramatic $200 an ounce drop in the gold price over two sessions that month was sparked by a short seller’s ‘shock & awe’ 400 tonne trade.

Shorts could be behind gold price flash crash