Gyroscopic Investing

Some odd behavior on the gold futures market today - "one big order" on the CME Globex leads to short halt in gold trading:
  http://blogs.marketwatch.com/thetell/20 ... alt-nanex/

Thoughts?

mortalpawn wrote: Some odd behavior on the gold futures market today - "one big order" on the CME Globex leads to short halt in gold trading:
  http://blogs.marketwatch.com/thetell/20 ... alt-nanex/

Thoughts?

I have zero confidence in free markets, especially the gold market. I can't prove anything, but its in the governments best interest to keep gold under control. I have been so naive.

mortalpawn wrote: Some odd behavior on the gold futures market today - "one big order" on the CME Globex leads to short halt in gold trading:
  http://blogs.marketwatch.com/thetell/20 ... alt-nanex/

Thoughts?

They will keep gold under control until they can't.
That will be when they can no longer meet physical demand by stealing "allocated" gold from people's accounts (and central bank vaults).
And if anyone says that's ridiculous, I answer with this: "MF Global".

I'm not much of a conspiracy theorist, but I recall a similar incident (huge sell order) when gold took a big single day dive last Spring. 

I have no regrets on the PP 25% allocation in gold long term - I think the PP overall will do fine.  In fact on days like this its nice to have the other components to offset the big gold swing.  Also a great opportunity to buy some more with this month's savings!

I've had my suspicions in the past about government interference in the gold market, and to be honest I think there is probably some truth in it. Still, I'll not be reducing my 20-30% allocation in my portfolio and as mortalpawn has quite rightly pointed out, it's still a good time to continue on accumulating it. Thank god for the Fed!! ;-)

90% of the regulators for futures are on furlough. What you say today is blatant algo trading to manipulate the market. The process happened in about 200 ms, and shut down CME for 10 seconds. No sane person dumps 2 million ounces on the market at once unless its for manipulation purposes. Shorts were loaded slowly yesterday, slammed today, then bought back after the slam. It's as simple as that. The sad part is that even if the regulators were around, I doubt they would do anything about it.

Quite frankly it makes me ill to my stomach. Whats occurring is fraud, pure and simple, and no one as much as cares.

I was at my trade desk as it was occurring and it was sickening.

Larshus wrote: 90% of the regulators for futures are on furlough. What you say today is blatant algo trading to manipulate the market. The process happened in about 200 ms, and shut down CME for 10 seconds. No sane person dumps 2 million ounces on the market at once unless its for manipulation purposes. Shorts were loaded slowly yesterday, slammed today, then bought back after the slam. It's as simple as that. The sad part is that even if the regulators were around, I doubt they would do anything about it.

Quite frankly it makes me ill to my stomach. Whats occurring is fraud, pure and simple, and no one as much as cares.

I was at my trade desk as it was occurring and it was sickening.

Can you explain to me what it is you think is happening?  I don't understand.

Larshus wrote: 90% of the regulators for futures are on furlough. What you say today is blatant algo trading to manipulate the market. The process happened in about 200 ms, and shut down CME for 10 seconds. No sane person dumps 2 million ounces on the market at once unless its for manipulation purposes. Shorts were loaded slowly yesterday, slammed today, then bought back after the slam. It's as simple as that. The sad part is that even if the regulators were around, I doubt they would do anything about it.

Quite frankly it makes me ill to my stomach. Whats occurring is fraud, pure and simple, and no one as much as cares.

I was at my trade desk as it was occurring and it was sickening.

That level of market manipulation doesn't really affect long-term investors, right?  Like AdamA, I'm not even sure why this works, unless it's psychological or algorithmic.  In other words, does the huge dump then scare other investors into selling?  If so, why don't people see through the ruse?  I don't just mean inexperienced investors - they wouldn't have time to react anyways - I mean people like you who could actually participate in the sell off.

Stop loss orders are triggered on the downside and then buy limit orders to stabilize the price?

So I'll answer each piece part by part.

Lets say you have an unlimited amount of buying power (not cash, just buying power... and I know its impossible, just stick with me). Lets say you want to put that buying power to work. You look for a market that is fairly non liquid at a certain time. That means a market that has low volume and small amount of known buy or sell orders.

So what you do is over a period of time, say 24 hours you slowly start to load one side. In this case you use your buying power to sell short gold contracts. Each short contract eats up a bit of your buying power. You do it slowly over time so you don't push the market down very fast. The market will, of course drift lower during this process if the quantity is large enough. What you are doing is loading your position at the same time you are slowly weakening the market.

Now you stop and wait until you see the number of buy side orders drop off due to time of day, or some other trigger. This is also coupled with a reduction of volume. When this happens you put in a massive sell order. Typically you double your short position at this time. This is the equivalent of a nuke going off in a financial market. People (computers) immediately pull all the buy sides (All the liquidity INSTANTLY dries up) and the long stops get triggered (sold) putting even more pressure on the downside. The exchange halts so that people can figure out wtf just happened. It reopens and (hopefully) stabilizes.

At this point the market is now down substantially and you have a buttload of shorts that have made quite a paper profit. You slowly start to buy them back slowly pushing up the market.

If you look at a chart this whole process looks like a slanted down line over say 24 hours with a vertical drop, then a pause when the marker closes, then a check-mark like move partially up as positions are bought back and stabilized.

What you have just done is used size and buying power to manipulate a market for speculative purposes.... which is highly illegal in a futures market.

Now we assumed infinite buying power. That doesn't exist. but what does exist is you can use your OTHER assets you own as a pledge against what you are trying to buy. couple that with the fact that futures contracts have a fraction of their value as a margin maintenance requirement and that power is magnified. exponentially. so the reality is that any large bank has the ability to do this most anytime they think the time is right providing they don't get caught by the regulators.

The sad reality is that this is almost a weekly occurrence at this point. Today was a massive one, but there have been much larger smaller raids as the stops are banged. (this processes on a smaller scale is called discovering the stops, or in slang banging the stops)

Now to the long term effect. In a perfect free market there would be no long term effect. Because markets are not really 100% free there can be a bias due to the event. The small raids recover to nearly where they were pretty fast, the large ones typically take much longer.

Now the question is why don't people see through the ruse? they do. the problem is that a lot of people actually use the futures markets for what they are INTENDED for, and that means hedging inventory risk and other non speculative uses. These people can only take so much financial pain before they get stopped out.

Futures markets were initially never intended to be primarily speculative. That's how they are used today however. for instance if you actually had to DELIVER the 2 million ounces that got banged you could never do it.. hence its a purely speculative trade.

I maintain a hedge book. during this process I released part of my hedge, thus speculating. I was betting with the algo that was banging. As soon as bottom  was probed, and a small amount was gained back I put back the partial I took off. Thus making a bit of money.

I know of other traders (by phone afterwards and at the office when we were talking about the action) that did the same with their hedge book, or put positions on if they were currently not in the market.

Whats sad is everyone is looking waiting for this to happen now and they jump on. Its not supposed to be this way. It never was this way in the past. Most traders are hesitant to take any long term positions because of the algo volatility. We would much rather wait for someone to make a move and jump on and ride it.

My advice? Don't trade paper. Its damn near impossible now. Buy physical and hold it. Don't own the etf, don't own futures for non speculative purposes. For the PP buy physical and make sure YOU have access to it. This house of cards will one day get really ugly and I wouldn't want to own paper when it does.

Larshus wrote: My advice? Don't trade paper. Its damn near impossible now. Buy physical and hold it. Don't own the etf, don't own futures for non speculative purposes. For the PP buy physical and make sure YOU have access to it. This house of cards will one day get really ugly and I wouldn't want to own paper when it does.

For those of us who have most of our investments in a 401k or IRA, we can't really do the PP without using paper gold.  I do have some physical gold, but most is paper by necessity.  What do you think is the lesser evil:  use paper gold or not do the PP?

I'd shift my 401k and IRA to hold stocks, bonds, cash. I'd try and hold as much physical outside of them as I could.

I'd own the ETF as long as I was working on reducing the ETF into physical on an ongoing basis. I guess I'm saying the current risk of ETF default is low. But that could change at a moments notice.

stuper1 wrote:

Larshus wrote: My advice? Don't trade paper. Its damn near impossible now. Buy physical and hold it. Don't own the etf, don't own futures for non speculative purposes. For the PP buy physical and make sure YOU have access to it. This house of cards will one day get really ugly and I wouldn't want to own paper when it does.

For those of us who have most of our investments in a 401k or IRA, we can't really do the PP without using paper gold.  I do have some physical gold, but most is paper by necessity.  What do you think is the lesser evil:  use paper gold or not do the PP?

I don't think gold is as risky long term as the cash and LTBs but it's probably safer to own the paper gold than just owning more stocks and bonds.

At these ridiculously low valuations, the paper stocks of the miners are nearly as safe as the paper gold of the ETFs with a lot more upside, in my opinion. I'm not advocating the stocks persay, but how much further can they go even with more of a gold sell-off? They are at historically low valuations.

I'd be more scared of the GLD and other ETFs not actually having enough gold in the vaults in the event of prices really spiking vs. getting ripped off on the shares of the companies with gold in the ground. 

Kshartle wrote:

stuper1 wrote:

Larshus wrote: My advice? Don't trade paper. Its damn near impossible now. Buy physical and hold it. Don't own the etf, don't own futures for non speculative purposes. For the PP buy physical and make sure YOU have access to it. This house of cards will one day get really ugly and I wouldn't want to own paper when it does.

For those of us who have most of our investments in a 401k or IRA, we can't really do the PP without using paper gold.  I do have some physical gold, but most is paper by necessity.  What do you think is the lesser evil:  use paper gold or not do the PP?

I don't think gold is as risky long term as the cash and LTBs but it's probably safer to own the paper gold than just owning more stocks and bonds.

At these ridiculously low valuations, the paper stocks of the miners are nearly as safe as the paper gold of the ETFs with a lot more upside, in my opinion. I'm not advocating the stocks persay, but how much further can they go even with more of a gold sell-off? They are at historically low valuations.

I'd be more scared of the GLD and other ETFs not actually having enough gold in the vaults in the event of prices really spiking vs. getting ripped off on the shares of the companies with gold in the ground.

If gold becomes the basis of a new world financial system (which I believe is the end game), you would expect the greatest returns from holding miners. However, it seems to me very likely that the miners would be nationalized in that situation.

Logic says miners have more bang for the buck. Heck GDX looks cheap and GDXJ is yielding.. what something over 8% (Not at my trade desk.. at home for the weekend).

the problem is that when gold becomes the most desirable, and the miners looks to gain the most, the least stable countries look to nationalize the mines. We've seen this happen in the past for gold, and energy. So you do have the added risk of nationalization.

I think the miners are great for a speculative portfolio, but I would not replace the physical in the PP with them... or if i did i wouldn't hold more than 10-20% of the 25% of gold position in them.