Sharp Gold Decline Blamed On Large Sell Order, Technicals, Softer Euro

Technical chart oriented selling, weakness in outside markets and an apparent unusually large sell order are all being blamed the the tumble in gold futures on Wednesday. A couple of traders said the move did not appear to be tied to any fresh news.

By Allen Sykora
28 November 2012, 11:44 a.m.
Kitco

Technical-chart oriented selling, weakness in outside markets and an apparent unusually large sell order are all being blamed for the tumble in gold futures Wednesday.

Some look for bargain hunting to emerge at support near the session lows to maybe $20 to $30 below.

As of 11:18 EST, December gold was $28.60, or 1.7%, lower to $1,713.70 an ounce on the Comex division of the New York Mercantile Exchange. The contract slipped as far as $1,705.50, its lowest level since Nov. 15.

A couple of traders said the move did not appear to be tied to any fresh news.

“At this point, we’re viewing the move lower as technical,” said Dave Meger, director of metals trading with Vision Financial Markets. The declines accelerated as prices broke down below the $1,730 area, he said. This was around the top of an old price-consolidation range.

The move also occurred as the euro broke down below the $1.30 area, he continued. Gold and other metals often move inversely to the U.S. dollar.

“Everybody expected some kind of risk-on trade or bounce in the euro on the back of the Greek deal yesterday,” he said. “When that did not materialize and the euro was not able to sustain above $1.30, it slowly faded and took the metals with it yesterday and it culminated in significant weakness today.”

Several traders cited market chatter that a large seller apparently came into the market early in the morning.

“It was down $25 in a minute,” said one New York desk trader. “Somebody came in and whacked it. Nobody knows (who) except the people who did it…It was some hedge-fund type that just hit it. They probably set off stops. I’m sure they weren’t the entire volume.”

Silver and copper tumbled around the same time, he added.

A sell order of around 7,800 contracts came into the market around the New York open, said Sharps Pixley CEO Ross Norman. He said the most likely explanation is “this could be a short play, with the seller looking to trigger stops below the market at $1,730 and thus extend the move significantly lower and thus increase his profits.”

He pointed out this was not the type of selling usually undertaken for profit-taking ahead of year-end. “Dealers try and finesse big sell orders into the market to get the best (highest) price for the biggest volume they can and thereby optimize profit--that requires stealth.”

The activity appears related to options activity on Tuesday, when there was a large amount of buying of January puts from around $1,700 to $1,690, said Kevin Grady, president of Phoenix Futures and Options. “There is definitely a correlation there,” he said.

Tim Gardiner, managing director of global precious metals with TD Securities, concurred with Grady.

The 2 million troy ounce “sell order in gold that went through the Comex was perhaps something to do with the 1.1(million troy ounce) of $1,700 January Comex gold puts that were purchased yesterday. Regardless, the day was always shaping up to be a ‘risk off’ event as commodities are all down … the stock markets lower, and the U.S. (dollar) stronger. There is some look of a recovery now, but the longs that piled into gold last Friday are bruised and battered,” Gardiner said.

Grady also said some “weaker longs” may be exiting the futures market. This is recent buyers who cannot afford to have the price drop much or else their profit is wiped out or they end up with a loss.

Sean Lusk, precious-metals analyst with Ironbeam, also said there are rumors of a large order that may have been liquidation, with the decline triggering sell stops. He pointed out that the move occurred a day after options expiration and ahead of first-notice day for gold and silver on Friday, which could mean some unraveling of positions.

“There was no economic data at that time to precipitate the move,” he said. He later added: “Outside markets are weak, so it’s going to add to the pressure,” citing softer equities and crude oil. “A lot of this is off of worries about the fiscal cliff.”

Lusk put his nearby support for December gold around $1,700 to $1,698, then the October low, which was $1,672.50.

Lusk said he remains upbeat about gold for the longer term.

“Let’s see if these (support) levels hold,” he said. “Long term, I don’t think anything has changed….I think they are going to get a (fiscal cliff) deal done. It’s going to be a partial deal where they kick the can down the road. Central banks are still easing and providing more liquidity. The Fed is going to provide more liquidity. If they take it down to $1,700 or $1,698, I think it will represent a buying opportunity.”

Grady put nearby support around $1,705. If that fails, there could be further long liquidation that means a slide to around $1,685, he added. From there, however, he suggested the pullback could be used as a buying opportunity.

“There is definitely some buying underneath the market,” he said. “Right now, there is no panic with people saying ‘I need to buy the highs.’ Gold keeps coming (back) to them…Around those levels, I think you’re going to find buyers.

”The action I’ve seen over the last month or so is on these dips, there is strong buying. When the market looks worst is when people are buying. I don’t see any major change yet.”

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