Yesterday, there was a flash crash in the gold market. What happened and what does it mean?
Monday was a very interesting day for the gold market, as the price of gold plunged almost $20 after 1.8 million ounces of the yellow metal were sold in one minute. Gold futures fell as much as 1.6 percent to $1,236.50 an ounce on the Comex at the Asian close. The drop was unexpected as no new fundamentals justified it. On the contrary, orders for U.S. durable goods fell 1.1 percent in May, the second monthly decline in a row, while the Chicago Fed National Activity Index tumbled to -0.26. And the volume in New York spiked to 1.8 million ounces, an unprecedented level not reached even after the Brexit vote or Trump’s victory in the presidential election.
Hence, the plunge was a mystery. It could be a technical sell or central bank intervention. Or somebody just wanted to exit from the market. But why would he or she want to sell gold during limited participation? Hence, the fat finger order is taking the blame. But some analysts remained skeptical – this had to be a double fat finger, as silver also plunged. And why did the precious metals prices not rebound after an erroneous order hit the market (see the chart below)?
Chart 1: Price of gold over the last three days.
The truth is that no one has a clue what really happened. It could be a fat finger, but someone could take a shot or pull out to satisfy a margin call. Anyway, from the fundamental point of view, nothing changed, so one could reasonably expect a return to the pre-crash price, especially that gold showed resilience, given the volume of sales. However, the yellow metal has already been in a downward trend since the recent FOMC meeting, so a full rebound should not happen. Stay tuned!
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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.