Why Did Gold Dive at 8:25?- Trade Analysis

Gold

Did Someone (Else) Dump Their Gold Longs?

Tin Foil Hat Note: Flow Trader Front Run?

Call us jaded, but we think a smart (read, " A trader with a long customer calling to check on Gold") Bullion Dealer sold at 6:45ish betting someone was coming in to sell. Then when that client sold on the Comex open, they were there to cover. Note the volume spike coinciding with the Doji at the 8:30 lows. The scenario went like this many times in the past:

Long client calls bank, asks for OTC quote in size- Bank shows market for less size than needed by client
Bank trader fades him with a low ball market- guy's long, gold's lower, Don't think he's adding, let's see!
Client does nothing ("Screw it, I'll wait for the Comex open.")- telegraphing he was not a buyer
Bank Trader sells into the OTC and screen market carefully at first, then sells hard to put himself in the money pre Comex open.
On Open, Client either calls some bank to sell, or more likely uses screen. Either way, the first Bank is the buyer on the lows in the high volume green bar.

interactive chart HERE

Recap of the Open in Gold

Gold looks good today. We think this is especially significant as something of note happened at the Gold open of 8:25. With no news or events on the table, the Yen, Pound, and Gold went bonkers this morning. The Pound rallied to 1.2499 in spot. This alone is suspicious given the reported large open interest in exotic barrier options at 1.25 to the Dollar. If this were a solo move, it would suggest someone gunning for stops during deep markets. That is the wrong way to "spoof" a stop order. And noting the move in the Yen and Gold as well, this suggests an unwind of a big position. We also think the barrier option was protected by someone with deep pockets.

1.25- none shall pass this time..

A Note on Barrier Options

Barrier options are usually one of 2 types: Knock-out, and Knock-in. The Knock-out is an option that immediately expires if a certain price is touched. A Knock-In option is activated upon the barrier being touched. These options are used by professionals to express opinions like: "I think the market will rally, but not over 1.25". They are extremely hard to hedge and can roil markets if they are tripped. Risk becomes digital with instruments like this. The concept is like being short/long a back-spread in options on steroids. It is advisable to note what happens if the GBP touches 1.25 in spot in the near future

The GBP/Yen Was Most Affected

The Yen moved at the same time suggesting the trade was an unwind of these 2 currencies, or perhaps a hedge for bond risk on a large position

But why did Gold move at the same time?

Was this Gold Driven?-Trade Analysis

If someone was unwinding or hedging a position, why the move in Gold?

h/t @zerohedge

For a moment if we assume the trades are standalone, meaning they were not a hedge for some other position, the best way to make some sense of the reason is to dissect the risk of the position. The large volumes suggest an unwinding of an accumulated position because it was executed during liquid hours. The volumes strongly suggest an almost forced liquidation. We think that whoever did this sees what we see; namely a very eventful December, with a Fed meeting, the Italian referendum, and more Brexit closure. That may explain the "why now", but it does not explain the "why?".

GBP/Yen Unwind?

Experienced traders at a CT macro fund think someone just took off a Brexit related trade. The French election is catalyst for their decision to be flat going into December. Also, many funds close book during November. The problem we have with that is how is Gold a hedge for anything if this is an unwinding of an existing Brexit related position?

Buying GBP and selling Yen - someone is no longer bearish on the Pound, and had thought the Yen was the most to benefit from the pounds previous fall? Makes sense, short the pound, avoid Dollar risk.
Gold as risk mitigator- they were long Gold as a partial hedge against some GBP/USD risk? Why be short dollars via gold if this is Brexit related? This makes little sense on first analysis. There are better ways to play this if our assumptions are right.

Overall it seems like some EU risk is being unwound or hedged. But, If they were short GBP as an expression of Brexit happening, being long Gold would be like shorting the dollar, a Texas hedge. No, we think that a far simpler explanation is in order , as our friends at zerohedge describe. The core position traded was Gold. The trade's time is the "tell".

Gold Wasn't the Hedge, it was the Position

Someone in the UK was likely long Gold in Yen terms. They unwound their Gold and converted the Yen back to their domestic currency. And given the empirical evidence available to us:

Crispin Odey is long Gold- and we are sure copy-cat funds are as well in the UK
Gold liquidity "opens" at 8:25
Soros recently sold his GLD position, which can signal others to get out before the rest of the "followers" step on it
End of Year is coming or is now depending on a Fund's bylaws
December is a very risky month this year
Asian gold liquidity is increasing, and Gold/Yen is very active.
The French election, regardless of the outcome is a reminder of the uncertainty ahead
if you are getting redemptions, or want to book profits, smart to do it before Thanksgiving while US liquidity is still present.

The Last Longs are Selling, The Short MOMO Funds are Getting In

Until further info comes up, like open interest and other moves in markets during the same time frame tomorrow, we are going with this being a Gold driven move. A Gold long sold, subject to further info. Just more reason to sell rallies and not buy dips in metals if you are a trader now.

One Caveat: If WE think this way, so are a lot of others. Therefore shorts may be starting to pile into Gold as well. And during the thinly traded days of Thanksgiving and Christmas, you may see a nice light-volume spoofed rally. Today's action post the 8:25 puke may be a clue So, while you may be saddened at Gold's weakening, enjoy someone else's misery if the market does spike while you are eating your Turkey, Lamb, Ham. Consider it a holiday gift if it happens.

Conclusion: Be flat as a trader now. Buy dips at Comex open as investor

Vlanci

Good Luck