What’s Really Going on in the Gold Markets?

Key Points:

• Gold experiences another “Flash Crash” as 1.5billion sold in 60 seconds.

• Long term fundamentals remain robust.

• Upside remains intact for medium and long term positions.

The past 48 hours have been an interesting period for Gold as the metal has again seemingly fallen sharply following the liquidation of a $1.5 Billion futures position over the course of 60 seconds. Subsequently, the metal was literally hammered lower as the strong selling hit and Gold finished the session around the $1323.80 mark with a loss of around 1.1%.

At this stage, the identity of the seller is still unclear although you could not be faulted for looking at the relatively short list of usual suspects. Although, this is but a blip in prices for the commodity, it focuses some scrutiny on a market that has become increasingly difficult to trade via normal means.

In particular, the fairness of the COMEX exchange probably needs the additional level ofscrutiny given that the amount of Gold derivatives floating around has become the stuff of legends. Subsequently, you would be forgiven for wondering just how they would satisfy delivery if there was suddenly a glut of requests.

In addition, the timing could potentially be somewhat revealing given that the Federal Reserve key members are currently in Jackson Hole discussing broader risks to the economy and how they could respond to a downturn given the historically low level of rates. It’s almost a given that a range of dovish statements will exit that venue starting on Friday when Janet Yellen is set to talk.

This would subsequently, be a period where Gold would be expected to rally, as it is currently doing in physical markets. However, derivative pricing for Gold remains relatively opaque and we are instead watching declining prices based on “selling” volume that just happen to coincide with a key central bank meeting.

Ultimately, the phrase that you can’t keep a good man down comes to mind when I think of gold derivative prices currently. The metal is highly correlated to expansion in the underlying money supply (and inflation) and that isn’t going away any time soon. Sure, some pundits might suggest that these two metrics have “uncoupled” but what they are actually seeing is an abject lack of inflation…currently. Eventually the inflationary pressures will have to return given the vast amounts of QE used since the GFC. Subsequently, any one holding vast tranches of gold shorts are likely to get burned in the long run.