Funny How Gold is Never Manipulated to the Upside
Last Friday, November 10, 2017, approximately forty-thousand gold futures contracts were dumped on the market, resulting in a $10 drop in ten minutes. Every time this happens, and it does happen on occasion, the immediate explanation formulated by the collective consciousness is conspiratorial — gold is being manipulated to the downside. While it is likely that the relatively small gold market (small compared to the FOREX or debt markets) experiences manipulation attempts from-time-to-time, it is unlikely that the attempts are all in the down direction. The dearth of upside-manipulation accusations, makes us suspicious of all manipulation accusations. If we are to follow Occam’s razor, then we need to find less convoluted and nefarious explanations.
Let’s start with the indisputable fact that the gold market is flea-like in size when compared to other correlated markets; the dollar, the USD/JPY pair, Treasury rates, and TIPS. Because of its diminutive size, gold has no effect on the seriously-big markets. If gold was to make a big move in the absence of an equally big move in at least one of the big markets, then one might have reason to raise an eyebrow. But if gold makes a big move simultaneously with one or more of the big markets, then all rational eyebrows should stay firmly in place. Gold is the tail, and the tail can’t wag the dog. Gold responds to the big correlated markets, not the other-way-around.
Below is a 15-minute chart of gold and TIP (the Treasury Inflation Protected Securities ETF). Notice that inflation expectations (TIP) collapsed at the open, but gold held steady for one-and-a-half hours before the 40k contracts were unloaded. Some entity, maybe even a trading algorithm (although the time-lag was unusually long for a machine trade), reacted to the lower inflation expectations that were reflected in the TIP price — not the other-way-around. That is not what manipulation looks like.
Intimately connected to inflation, are the Treasury rates, especially the long-rates of 20+ years. TBF is the Proshares short 20+ Treasury ETF which increases in price as rates increase. The chart below shows the same 1.5-hour lag between rates gapping-up at the open, and gold getting dumped.
We do not know who did the selling, but we have a reasonably good idea of why they sold gold; it was likely a rational response to higher rates, and lower inflation expectations. We do understand, however, that mysterious manipulation of the gold price is a much more exciting explanation.
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