Friday October 10, 2013 11:14 AM
(Updating earlier story with additional comments from analysts)
(Kitco News) - A sharp sell-off in gold futures early Friday occurred on a sudden spike in volume, suggesting a large seller entered the market, although sell stops were also activated, traders said.
Some observers are describing the decline as largely technical in nature, while others say a fundamental catalyst for the price weakness is news reports suggesting that that President Obama and Republican leaders are making at least some progress on an agreement to extend the debt ceiling beyond the Oct. 17 date when the Treasury has said it will run out of borrowing authority.
December gold on the Comex division of the New York Mercantile Exchange opened the day only moderately lower. That changed at 8:42 a.m. EDT when December gold suddenly dropped $20 in a single minute.
As of 10:40 a.m. EDT, December gold was down $33.60 to $1,263.30 an ounce. December silver was 72.6 cents lower at $21.17 an ounce.
Afshin Nabavi, head of trading with MKS (Switzerland) SA, cited ideas in the marketplace of a possible resolution of a political stalemate in Washington D.C. This would take away some of the immediate safe-haven demand.
"There was a lot of selling when $1,280 broke," he said. "We are hearing of 2 million ounces that went through the futures market in a period of like 10 or 15 minutes. There was a mixture of (sell) stops and lack of liquidity."
Sell stops are pre-placed orders activated when certain chart points are hit.
Jim Comiskey, senior account executive with Archer Financial Services, also cited market chatter of 2 million ounces in a short period of time. "To put that in context, that's a 20,000-lot order in the futures market, since it's a 100-ounce contract," he said. "That's huge….there are very few people who can throw size like that around."
A New York desk trader also cited a spike in volume.
"A large amount of selling hit the market all of a sudden in both gold and silver," he said. "The volume spiked and it (gold) tanked $25. The only people who know are the ones who did it….It's probably some hedge fund.
"The minute before, the volume was 367 lots. And the next minute, it was 7,993. There was some follow-up volume that was quite large. We see these things every once in a while. These hedge fund guys just come in and crush a market."
TD Securities said it suspects the size of the large sell order itself may have been around 800,000 ounces, coming a day after an apparent 600,000-ounce order hit the Comex market.
Sell stops appeared to be activated when gold fell through the area around $1,285 to $1,288, Comiskey said. More were hit below $1,280, he added. "This is pretty much of a technical move here," Comiskey said, but adding that there also could have seen some early-Friday book squaring ahead of the weekend.
Technical chart analysts on Thursday had told Kitco News that said stops were building in the area around the Oct. 2 low of $1,276.90 an ounce and the Aug. 7 low of $1,271.80. On the tumble, December gold fell as far as $1,259.60, its lowest level since July 10.
"Once we broke through $1,300, the market was in big trouble," said Bill O'Neill, one of the principals with LOGIC Advisors. "We hit stops all of the way down. Then we broke through the $1,270 area, which was an important level. I don't see a lot of support in the market, frankly, until around $1,225 at this point."
Below this, the next major chart level will be the low hit early this summer, said Daniel Pavilonis, senior commodities broker with RJO Futures. The December contract bottomed at $1,182.60 on June 28.
O'Neill said the "handwriting was on the wall" since gold had not been rallying during recent crises, whether they be geopolitical or the worries about the chaos in Washington D.C.
"The market is attracting no speculative interest," he said. "We've been seeing ETF (exchange-traded-fund) sales again, although not at the pace from earlier in the year….There is really no fund interest to buy."
He also pointed out that the pace of central-bank buying seems to be slower than what it was a year ago. Crude oil is also softer, he added.
Tim Gardiner, managing director of global precious metals with TD Securities, pointed out that the London p.m. fixing of $1,265.50 was the lowest since July 10.
"For now, gold is in the hands of the speculators and given the lack of participation this week, down is the path of least resistance," he said. "Asia has been buying gold on this sell-off, and we hope to see a re-emergence of physical demand next week."
After the early-Friday flurry, the gold market is back to monitoring headlines about the partial U.S. government shutdown over the lack of a continuing resolution on the budget, as well as the approaching debt-ceiling limit, Comiskey said.
"If they continue to push the envelope to the Oct. 17 deadline…gold and silver could catch bids on a safe-haven basis," Comiskey said.
News reports suggested one of the possible outcomes of the talks is a short-term extension of the debt ceiling by six weeks.
"That said, this does not actually resolve the budget crisis, and the new debt ceiling would doubtless also be reached again in the second half of November," said Commerzbank in a research note. 'Amidst this ongoing uncertainty, our economists believe it is increasingly unlikely that the U.S. Federal Reserve will begin scaling back its bond purchases before this year is out. Were the situation in the U.S. to escalate again, the Fed might even resort to further expansionary monetary policy measures. This should lend support to the gold price.
"In the short term, however, the desire to sell is still clearly predominant, as evidenced among other things by outflows of 1.8 tons from the SPDR Gold Trust."
Read the latest news in gold and precious metals markets at Kitco News.
By Allen Sykora of Kitco News email@example.com
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.