Just when many gold-market participants and observers thought it safe to wade back into the long side of the market, the metal has taken another dive.
Having begun 2013 near $1,650, gold prices are now off about 15 percent for the year to date and some 25 percent from its all-time high just over $1,920 in September 2011. A number of writers have already declared the end of gold’s decade-long bull-market run. And, even some of the most outspoken gold bulls are worried that the yellow metal has lost its mojo.
Having failed to build upon the nascent upward momentum and unable to move back to the $1500 an ounce neighborhood, gold has again fallen victim to institutional selling in the “dark pools” where over-the-counter dealer and interbank selling goes unseen.
What Happened
Don’t under-estimate the influence of dark pools where “invisible” institutional trading can — in a flash — knock gold to the mat, leaving most gold-market participants and observers wondering what happened.
Indeed, much of this activity in the interbank and dealer market goes unreported — but buy-sell transactions and “high-frequcncy” trading in these dark pools, often at crucial chart points, can be overwhelming and is intended to trigger bigger waves of buying or selling (these days mostly selling) and big profits for those institutional trading desks that know how to play the game.
The gold market is especially vulnerable to trading in the dark pools because it offers a relatively small playing field compared to equities, bonds, currencies — and the flow of funds, in or out, can have relatively big price effect.
Triggers
Moreover, gold’s mini “flash crash” on Friday morning did not occur in isolation from other markets. Many other commodities, including the energy complex, have also fallen sharply in recent days. So too have many of the major currencies. The yen, Swiss franc, euro, Aussie, and Canadian dollar are all off sharply. The other side of the coin is a stronger dollar — and this often correlates with gold-price weakness.
These broad market developments, along with gold’s loss of upward momentum, may have triggered the computer models that increasingly govern trading by some of the big institutional traders and speculators.
With gold markets sometimes overwhelmed by “machine trading” in the dark pools of liquidity . . . and with the cost of large-scale trading next to nothing (thanks to the Fed’s near zero interest rate policies) . . . and with Friday’s action creating another technically damaging blow, the near-term outlook remains uncertain.
That said, the long-term fundamentals and physical-market developments are more bullish than ever — or at least more bullish than we’ve seen in many years — and sooner or later these must rule the day.
