Another Bullion Flash Crash Testing Traders

After-hours surges and plunges that have whipsawed gold and silver prices over the past two weeks are unnerving traders.

Silver futures sank as much as 10%, as more than 25 million ounces of the precious metal traded within a minute just after 7am in Singapore Friday. Last week, gold fell below its 200-day moving average after 1.8 million ounces were transacted in a minute at 4am in New York. A day later, gold spiked after a similar trade involving more than 800,000 ounces, Bloomberg reported.

Such moves, which occurred at times when liquidity in these markets is generally lowest, are giving traders an additional headache at a time when investor sentiment is already turning bearish. Hedge funds are retreating, while exchange-traded fund investors are pulling out of gold, pushing the precious metal to the lowest in almost four months.

“All fundamental factors aside, it does tremendous technical damage to the market,” Bill O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey, said by telephone. “There should be some effort to study this and come to some solution that will make for a more orderly trading pattern. This type of activity is not good for a fair playing field.”

Gold has lost about $47 since the session before that 1.8 million ounce-trade that many blamed on a 'fat-finger', or erroneous trade. While O’Neill believes that trade may have been done in error, he said the precious metal struggled to bounce back from its low on June 26 because the transaction pushed the price below the 200-day moving average, triggering automated sell orders set by algorithmic traders, thereby sustaining the slump.

In the case of Friday’s silver plunge, the unusual increase in volatility triggered the so-called 'velocity logic' a safeguard set in place by CME Group (an American financial market company), pausing the market for 10 seconds, spokesman Chris Grams said in an email.

“Our markets worked as designed,” Grams said. The pause allowed “liquidity to come back into the market. Per our rule book, prices were adjusted in the September and December silver futures contracts and several mini futures contracts.”

Velocity Logic

Silver futures for September delivery pared their losses to settle 3.5% lower at $15.425 an ounce in New York, after tumbling to as low as $14.34 before the CME safeguard was triggered.

In the case of gold, the CME said no such temporary halt were ordered for gold on June 26, when prices fell as much as 1.6%, or $19.90 an ounce.

The last time velocity logic was triggered for gold was in January 2014 in New York, after the metal fell more than $30 an ounce in about a minute. Prices fell as much as 2.1% that day, in trading of more than 8,000 contracts.

The volume surge may have already raised red flags for the Commodity Futures Trading Commission, which regulates the precious metals futures market, according to Bob Haberkorn, a senior market strategist at RJO Futures in Chicago.

“These so-called 'flash crashes' that occur periodically are frustrating to traders caught on the wrong side of the downdraft,” Jim Wyckoff, senior analyst at Kitco Metals Inc., a research company in Montreal, said in report. “It also makes many market watchers question the viability of futures markets, which are supposed to create more liquidity and better price discovery.”

In China and India

The price of precious metals fell in the week between July 2 and 7 as demand in two of the biggest consumers of gold—China and India—lost steam.

While consumers in India held off after advancing purchases ahead of a new tax policy effective this month, fresh buys in China too remained sluggish despite a slide in global spot prices.

An increase in taxes on gold sales in India from 1.2% to 3% could curb short-term demand from the world’s number two consumer of the metal, World Gold Council said. Faltering appetite in a country where gold is used in everything from investment to wedding gifts could further drag global prices.