Gold Pumped Instead of Dumped

Gold popped more than 2% overnight while stocks in the US and Europe fell.

Wait a minute! Gold up and stocks down? What’s going on here then?

Well, apparently someone dropped a whopping buy order on the Comex exchange, where gold futures trade. 3000 contracts traded in one second, sending the price up $10 and halting the exchange for 10 seconds. At 100 troy ounces a contract, that amounts to 300,000 ounces and around US$372 million. All trading at precisely 8:07:45 US time.

Normally traders stagger big orders to avoid upsetting the market price. If the 3000 contracts traded over the space of a few hours, that would’ve gotten the buyer a much lower price. So why would a buyer throw in such a big order?

Well this surge in volume and the resulting market shutdown is nothing new for the gold market. It’s happened three times this year, says the blog Nanex. But this is the first time the order was a ‘buy’. Gold usually gets slammed down by a whopping sell order instead. So is this a big sea change, or just another market manipulation?

Who knows? But our bet is on market manipulation for now. It might seem like a pleasant surprise for weary gold owners to see the price surge. But the whole point of gold is that it is like a barometer of monetary instability. It’s insurance against central bank irresponsibility, as newsletter writer James Grant likes to say. With gold getting pumped and dumped in the futures market, where very little physical gold actually changes hands, that indicator is going haywire. Which is convenient for those trying to mask the dangers of printing billions of dollars, yen and pounds.

Perhaps there is more to gold’s move though. The jump came amidst good news out of the US job market, which makes the Federal Reserve’s December tapering more likely. That makes the increase in price all the more odd. Until now, gold fell each time there was enough good news to make a reduction in QE more likely. After all, money printing pushes up prices, including gold, right?

That thinking might be wrong. We’ve got an inkling of what the next narrative for a bull market in gold is going to be. If the recovery gains traction, banks might actually begin lending out all those excess reserves they’ve been parking at the Federal Reserve. That lending is the moment when the monetary base, which the Fed controls with QE, becomes money in the economy. And it’s the point inflation can actually break out. So the next balancing act for the Fed will be to reduce its stimulus at a pace that matches the banks’ lending boom. And do it without blowing up the assets it has been buying as part of QE, namely government bonds and mortgage backed securities. Maybe gold will price in the risk of the Fed not tapering fast enough. More on that idea tomorrow.


Nick Hubble+
for The Markets and Money Australia

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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