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Metals Crash During Monday Open

Metals Crash During Monday Open

A very volatile start to week as both gold and silver were smashed into the open on Monday morning. Silver dropped almost $2 USD an ounce and gold more than $50 USD an ounce in what was called a ‘flash crash’ during a time where market liquidity was significantly lacking.

So why the dramatic move in precious metal prices? And what does it mean moving forward?

We will answer these questions in this week’s update as we delve into the event in detail and the possible reasons behind it.

Firstly, for those new to precious metals markets, both gold and silver will trade continuously from our time (Sydney) Monday morning (circa 7am -8am depending on daylight savings) through to early Saturday morning as the US market closes for the week. Then there is a pause to trading over the weekend where both prices are essentially flat, until the market opens again Monday morning during the Sydney/Asia session.

We often see some large moves on Friday night, as it is quite common to get a significant news event which occurs during the US trading session on Friday. Important events which often move metals prices include economic numbers on inflation, employment or interest rate decisions. You can follow what economic data releases are coming up by using an economic calendar like the one here.

The Monday morning open is usually a period of less volatility, as you don’t tend to get any significant economic data releases over a weekend. The only times you usually see a volatile open is when you get some major non-economic news event that occurs over the weekend, such as a geopolitical event large enough to move markets (an escalation of war for example).

So, to last week’s number. Last Friday, the number that everyone was paying close attention to was the Non-Farm Payrolls number in the US, which basically gives a good snap shot of how many jobs were added in the US in the previous month (July). The number was announced at 10.30PM Sydney time, which was 8.30am in New York. General rule of thumb is, if this number beats expectations, that is a sign that the US economy is stronger than initially thought, which potentially has the knock-on effect of convincing the Federal Reserve that it may be time to start slowing down on economic stimulus (bad for gold) or raising interest rates sooner (seen as bad for gold also). Although it is only one months’ worth of data, markets tend to overreact to almost everything, so it is seen to be important.

The number indeed came out much higher than expected, with the US adding 943,000 new jobs VS an anticipated 870,000. As to be expected, gold and silver both pulled back as soon as the number was printed, with gold dropping through $1,800 USD to settle and stabilize around $1,760, and silver fell through $25 USD to settle at circa $24.20. No surprises there, given the employment numbers beat expectations by a significant margin. The chart below shows the initial sell off on the news, and then later the complete capitulation which occurred Monday morning.

 

 

The sell off on Friday night to $1,760 makes complete sense. What doesn’t make as much sense is the Monday morning flash crash in metals, which was a much larger move. Could it be that there are that many lazy traders who weren’t paying attention to the Non-Farm Payrolls (NFP) number, only to read about it in the press over the weekend, and then to panic-sell the open during a known period of low liquidity? Very unlikely.

The NFP number in the US is one of the most important when it comes to precious metals prices in the very short-term, so even the most novice of traders would surely be aware of it and following closely. There is also a full day to react to it in the US, so the market had plenty of time to digest the number before the New York close, our time Saturday morning.

Why the flash crash Monday morning?

We can only speculate, however, there are a few reasons as to why this event was possible to play out in the way that it did. It comes down to stop-loss levels and we will explain what could have happened here.

Many traders (especially those using leverage) will often have stop losses at certain key levels, whereby their positions will be closed out automatically if that level is breached. Trouble is, a lot of traders will place these stop loss triggers at predictable points, which are often just below key technical levels. One of these levels could be the recent trendline of support which dates all the way back to 2019. In the daily chart below you can see gold has respected and bounced off this trendline every time in recent years, apart from Monday morning. Even with the Friday sell-off in gold, the market remained above this key level.

When zoomed in, we can see where this trendline sits on a shorter time frame. This would be a very obvious technical level, and lead to many traders putting stop losses in place just below this level, to essentially give up on a long position if the market moves below, leading to automatic selling volume in somewhat of a snowballing effect. The candle stick chart below shows each block (candle) as a single day, with Friday closing ever so slightly above the trendline. How many stop losses were just below this trendline at various points under $1,755 is unknown, but you could make an educated guess that it would be a very significant number.

“With liquidity at zero to non-existent (on Monday), it is clear that when gold moved through $1,750 an ounce, it set off a cascading negative feedback loop of stop-loss selling into a market with no bids,” said Jeffrey Halley, a senior market analyst at OANDA.

This sort of scenario where we have a combination of a very obvious key level in the market where stop loss triggers would be predictable, plus a time of the week where there is little to no liquidity has combined to have what would be either a natural event of a stop loss ‘flash crash’, or one that was somewhat coordinated.

We won’t jump to conclusions here, as we do not know for sure, but it is quite often that those with enough fire power can move markets deliberately when these environments present themselves. Many large banks have been caught in the act of coordinating together to dump a large sell order to knock out all the stop losses quickly, only to buy back the metal at much lower prices. It’s called ‘stop hunting’ and can lead to some high volatility events which create opportunities.

Business Insider reported on speculation that there was a $4billion futures order to sell the Monday morning open, however this is largely backed by rumors at this stage and it may be more likely that the combination of all stop loss triggers put together equaled that amount in dollar terms.

Regardless of what it was exactly that lead to such a sharp selloff and recovery soon after, there is no doubt an opportunity for those who were looking to either add or start a position in precious metals. These sharp moves in price happen both ways, and you can just as easily see sharp moves to the upside after key technical levels are broken. It doesn’t change a thing from a long-term perspective, and as seen in the daily chart below, the days in which we have significant volatility and long ‘wicks’ on a daily candle, often signal a significant medium term high or low for markets. Silver is below and those who were quick enough to take advantage of the unusual event should have a higher probability of having bought during a significant low in the market.

What you want avoid is buying during times where there is no selling liquidity and the market is spiking higher on good news, as indicated by the red lines in the silver chart below. Often the best times to buy are during these events as highlighted in green below.

These events are usually short lived and the market returns to relative calm shortly thereafter, in most cases. Even for those speculating that the move was deliberate, in that case the seller who dumps X number of ounces short, has only one way to close the position and that is the buy the same number of ounces back.

Watch out for many news articles from mainstream press this week talking about how bearish precious metals are, as journalists tend to only ever comment on what has happened in the past, not what will happen the future. They also tend to be most bullish at market tops, and most bearish at market bottoms, so as a contrarian indicator, we would be surprised to see metals move lower after such a high volatility event, and expect metals prices to recover higher in coming weeks form here. Ignore the noise, as the event is merely a blip in the longer-term picture and one that will be forgotten about in a few months’ time.

A very volatile start to week as both gold and silver were smashed into the open on Monday morning. Silver dropped almost $2 USD an ounce and gold more than $50 USD an ounce in what was called a ‘flash crash’ during a time where market liquidity was significantly lacking.

Until next week,

John Feeney

Guardian Gold Sydney

If you have any feedback or questions about this report, you can contact John Feeney direct at johnf@guardianvaults.com.au

Or on Twitter @JohnFeeney10

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Disclaimers: Guardian Vaults Holdings Pty Ltd, Registered Office, Scottish House, 100 William Street, Melbourne, Victoria, 3000. ACN 138618176 (“Guardian Vaults”) All rights reserved. Any reproduction, copying, or redistribution, in whole or in part, is prohibited without written permission from the publisher and/or the author. Information contained herein is believed to be reliable, but its accuracy cannot be guaranteed. It is not designed to meet your personal situation. Guardian Vaults, its officers, agents, representatives and employees do not hold an Australian Financial Services License (AFSL), are not an authorised representative of an AFSL and otherwise are not qualified to provide you with advice of any kind in relation to financial products. If you require advice about a financial product, you should contact a properly licensed or authorised financial advisor. The information is indicative and general in nature only and is prepared for information purposes only and does not purport to contain all matters relevant to any particular investment. Subject to any terms implied by law and which cannot be excluded, Guardian Vaults, shall not be liable for any errors, omissions, defects or misrepresentations (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (direct or indirect) suffered by persons who use or rely on such information. The opinions expressed herein are those of the publisher and/or the author and may not be representative of the opinions of Guardian Vaults, its officers, agents, representatives and employees. Such information does not take into account the particular circumstances, investment objectives and needs for investment of any person, or purport to be comprehensive or constitute investment or financial product advice and should not be relied upon as such. Past performance is not indicative of future results. Due to various factors, including changing market conditions and/or laws the content may no longer be reflective of current opinions or positions. You should seek professional advice before you decide to invest or consider any action based on the information provided. If you do not agree with any of the above disclaimers, you should immediately cease viewing or making use of any of the information provided.