Roller Coaster COMEX Tycoons are Manipulating the Gold Price
US stocks are crashing so the prices of ‘safe-haven’ assets like gold should be going up. Except they are not.
Purchasing gold is the tried and tested solution to a global market meltdown and it worked just fine last time. During the worst month of the 2008 financial crisis the correlation between daily returns on the S&P 500 and gold was minus 41%. That is, when US stocks go down gold goes up.
But during the past month, indeed the worst month for the US stock market since 2008, gold’s correlation with the S&P 500 has been plus 20% (see our article on this for more detail).
Figure 1 shows the S&P 500 index in blue (right-hand scale) and the gold spot price in yellow (left-hand scale). The only periods when the S&P 500 stopped falling coincided with sharp falls in the gold which were, typically, timed just a few hours before markets closed for the weekend. In just a few hours of frenetic futures trading on Friday 28 February, the spot price of gold fell by more than 5%. It recovered on 3 March, jumping up 3% between 09:36 and 12:21 CDT. But the subsequent rally was short-lived. On 12 March (the worst day on global financial markets since 1987) it fell by more than 4.5% and on Friday 13 March it fell by another, whopping 3.86%.
What can explain this bizarre and a-typical behaviour of the gold price? Here are some of the usual excuses:
“Investors are so fearful, they’d rather hold onto cash” — Adam Koos, President of Libertas Wealth Management Group [1]
“We attribute this to forced selling aimed at offsetting losses elsewhere and covering so-called margin calls” — Carsten Fritsch, analyst at Commerzbank [2]
We don’t believe either of those reasons.
Excessively Large Single Trades
Single trades that are so large as to move prices contravene the laws about market abuse in the US (and in other countries, such as the EU Market Abuse Directive).[3] They should be broken into small trades and executed in an orderly and optimal fashion to lessen their impact on prices. Any trades of this type should be reported to regulators and they should impose strict fines.[4]
Figure 2 zooms in on CME’s COMEX gold futures prices.[5] We have selected this market because it was long ago established as being the price leader of all gold markets.[6] The figure depicts minute-level close trading price on the prompt (April) futures, between 27 February and 5 March 2020. The initial price drop on 28 February happened after a coordinated sell-off with 19,849 contracts for April and June futures exchanging between 07:26 and 07.31 CDT. About 2 hours later some excessively large single trades on April and June futures were executed milliseconds apart: 2 sets of block trades of 2499 contracts and 1 block of 222 contracts (2499 contracts are worth c.a. $450 million). Given that these block trades accounted for about a quarter of the total trading volume on 28 February, it isn’t surprising that the spot price of gold dropped $80, from $1650 to $1570 — almost 5%.[7]
On March 3 another spike in market activity occurred, but this time in large buy orders which were nevertheless executed according to the rules on market discipline. At 10:01 CDT the trading volume on the April contract jumped from its normal level of a few hundred contracts per minute to 10,056 contracts at $1,614 (worth $1.6 billion). This was followed by a 2.5% price jump up, in exceptionally heavy trading for 30 minutes. The gold bulls returned, pushing its price back up to $1,700 by 9 March.
But bears are particularly effective at moving prices on Friday afternoons. As can be seen in Figure 1, the gold price dropped again during the afternoon of 13 March and continued to do so after S&P 500 closed, resulting in total daily fall of more than 3%. Gold had its worst week in seven years.
Evidence of Market Abuse?
A nearly identical manipulation has been documented by Paul Craig Roberts and Dave Kranzler.[8] These authors claim that the Federal Reserve instructed its bullion dealer’s to sell over 4,900 gold contracts on the Globex system in a 2-minute period from 02:40 to 02:41 EST resulting in a $24 decline in the price of gold. The evolution of the spot price thereafter displayed an almost identical pattern to the one shown in Figure 2.
Why were these orders not executed in an optimal manner? Normal conduct is for any large order to be broken into smaller parts, in order to minimize its impact on the market price. But these very large orders are deliberately aiming at quite the opposite effect.
According to the Market Abuse Directive the type of painting the tape on COMEX futures that we have depicted in this article is a manipulative act, but nevertheless it is common behaviour. If this were happening in the UK we could request that the FCA investigates the potential for suspicious trading activity.[9] But because it is in the US one might whistle blow to the CFTC.[10]
Carol Alexander & Artur Lindmaa
@CryptoMarketRisk, QFIN, University of Sussex.
[1] https://www.marketwatch.com/story/why-golds-plunge-proves-its-a-safe-haven-asset-2020-03-12
[2] https://www.ft.com/content/4b23a140-59d3-11ea-a528-dd0f971febbc
[3] https://www.handbook.fca.org.uk/handbook/MAR/1/6.html?date=2016-03-07
[4] For instance, in 2018 the CFTC ordered UBS to pay $15 million as a penalty for manipulation of gold and silver futures on COMEX.
[5] https://www.cmegroup.com/trading/why-futures/welcome-to-comex-gold-futures.html
[6] Hauptfleisch, M., Putniņš, T.J. and Lucey, B., 2016. Who sets the price of gold? London or New York. Journal of Futures Markets, 36(6), pp.564–586. https://onlinelibrary.wiley.com/doi/abs/10.1002/fut.21775
[7] See table below:
[8] P. C. Roberts & D. Kranzler’s article in 2014 (https://www.paulcraigroberts.org/2014/01/17/hows-whys-gold-price-manipulation/) offers detailed explanations on how gold bullion dealers routinely manipulate the price of gold on the Federal Reserve’s orders
[9] https://www.fca.org.uk/markets/market-abuse
[10] https://uk.reuters.com/article/us-usa-cftc-enforcement/cftc-enforcement-fines-fees-jump-in-2019-even-as-activity-civil-penalties-fall-idUKKBN1XZ2BF
