Roughly 4 mln oz of gold traded Friday morning in New York, resulting in the biggest gold price decline in months, and the largest movement in the gold market in the past 60 days. The reasons behind the trades and their beneficiaries are unknown.
Kristian Rouz – Gold posted its biggest decline in three weeks on Friday despite market volatility at its lowest since 2001, and optimistic forward-looking projections. Some 4 mln ounces changed hands that morning, setting the entire market in motion, and lifting the prices on other haven assets.
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Around 11 am Friday, the Comex exchange in New York recorded 40,000 contracts, each for 100 ounces of gold, which traded within 10 minutes. This massive amount of trades resulted in a 1.1-percent decline in the bullion price, down to $1,274.20/oz. 10-year US Treasury yield settled at 2.40 percent, whilst 30-year yield stood at 2.88 percent as of late Friday, putting an increased upward pressure on the Federal Reserve’s interest rates, currently at 1.16 percent.
The gold market had been steady for the previous 60 days, as bullion failed to surpass the psychological threshold of $1,300/oz this year due to the Federal Reserve’s rate hikes, which support the demand for Treasury bonds as the primary haven asset.
Subsequently, investors started dumping gold, with the amount of bullion contracts exceeding 63,000 within the next half-hour.
The parties behind the original 40,000 contracts remain unknown, and the initial trades were likely paid at below settlement price, meaning the total worth of the deals might have been just below $8 bln.
“We didn’t see any headlines, any news to make gold drop $10, but it just did,” Miguel Perez-Santalla of Heraeus Metals New York said. “It’s going with someone who has a huge position that can trigger stops and make the market move in a direction.”
The trades might have been motivated by a recent report from the Swiss bank UBS AG, which said gold prices are unlikely to post further gains after a two-year rally. UBS analysts suppose the rising US Fed interest rates, the strengthening dollar, and the decline in macroeconomic risks both in the US and overseas are all the factors playing against gold.
“Growth dynamics are improving, and although the momentum this year is unlikely to be replicated in 2018, growth is likely to remain steady,” UBS strategist Joni Teves said. “Against this backdrop, it becomes difficult to justify a strong rally in gold prices. Yet we don’t think there is a compelling reason for a sell-off either.”
Despite such a cautious outlook, some gold traders might have concluded the downside factors would outweigh the factors supporting gold prices. Tighter monetary policies in the UK and the European Central Bank’s (ECB) decision to start wrapping up its bond-buying programme are the two most recent overseas developments, resulting in a greater investor appetite for higher-yielding equity markets, rather than gold.
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UBS analysts expect the dollar to rally against the yen – another global safe-have asset – and to weaken against the euro, meaning both the dollar and the euro are increasingly appealing as haven assets as well, particularly so in the near-term.
“Our analysis suggests that investors’ exposure to gold has not increased dramatically over the past couple of years despite gold’s gentle recovery from the end-2015 lows,” Teves says.
Gold has surged 12 percent this year, and UBS analysts expect the gold price to average at $1,285 in 2018.
In the past few months, the global gold market has seen several enigmatic bullion trades similar to that on Friday. In October, 2 mln ounces changed hands in 5 minutes, whilst in August, a similar amount of gold was traded within a minute – resulting, however, in an increase in the gold price. Back in June, some 1.8 mln oz changed hands within a minute.
Neither the sellers nor the buyers were explicitly named in any of these massive deals.