Insights

Sprott Gold Bulletin

On the Clock

We view the 1.63% decline in spot gold last week (from $1,313.70 to $1,292.30) as a bit of quarter-end window dressing by motivated market participants.

On the bright side, the April contract and quarter-end marks are now squarely in the rear-view mirror. If our analysis is correct, spot gold should now be free to respond more in sync with improving fundamentals. 

Traders Focused on $1,300

Trading in precious-metal markets last week seemed heavily influenced by calendar-related items.

  1. First, the week marked the end of the roll period to a new front-month COMEX futures contract, in this case from April 2019 (GCJ9) to June 2019 (GCM9) futures.
  2. Second, 3/26/19 was a monthly expiration date for COMEX options.
  3. Third, 3/29/19 constituted the quarter-end mark for trillions-of-dollars-worth of over-the-counter options, contracts and derivatives for market participants ranging from hedge funds to the Bank for International Settlements.

During such a heavy week for option and derivative activity, it is not unusual for the price of any commodity to gravitate towards the price level of its maximum contract exposure. In viewing the five-day price graph of spot gold, in Figure 1, it seems clear that high-volume traders in paper gold markets were focused on the $1,300 price level during the waning days of March.

Figure 1. Gold Spot Price (3/25/2019 - 3/29/2019)

chart

Source: Bloomberg.

A hallmark of free capital markets is that traders have latitude to execute their orders in any fashion permissible by rules of the relevant exchange. There is certainly no requirement for market participants to execute purchase or sale orders in a manner which minimizes costs or maximizes proceeds. However, in a sophisticated market such as trading highly-levered, precious-metal futures contracts, large orders are generally executed with sensitivity to limit prices and outstanding stop orders on dealer books. Therefore, whenever a large sell order is executed in a manner appearing to fly in the face of common sense in maximizing proceeds, legitimate questions can be posed as to the true intent of the seller—was the execution method designed to maximize proceeds, or to pressure market equilibrium? Because true intent can never be surmised, traders have coined the phrase “flash crash” to describe sharp price declines caused by inordinately high volume bursts. 

"Flash Crash" on Thursday?

Along these lines, tenor for precious metals markets heading into March month-end may have been set on Thursday morning, 3/27/19. At 9:37 am, 7,000 COMEX gold contracts were sold at-the-market in the space of one minute. This means that 700,000 ounces (or 21.77 tonnes), with a notional value of $921 million was dropped into COMEX (electronic) pits without price limitation. While spot gold did decline roughly $7.00 during the “flash crash,” it finished the day in orderly trading above $1,300 (at $1,309.57).

Perhaps in recognition that a far more concerted effort would be required to achieve a month-end mark below $1,300, volume in COMEX gold futures on Friday (3/28/19) exploded to 528,626 contracts, or roughly $69.0 billion in notional value. For context, the World Gold Council reports that average daily trading volume for COMEX gold futures totaled just $28 billion in February 2019 and $36 billion YTD 2019. Related to the massive 3/28/19 trading volume was an outstanding-interest drop of 48,565 (9.62%) for the day, almost all of which was related to a 93.3% collapse in remaining April (front month) outstanding interest (OI). The fact that such a large percentage of remaining April OI was liquidated without traditional roll into June contracts only heightens the pointed nature of trading last week.

 

 

Spot Gold Price
As of Friday Close, 3/29/2019
Closing Price 1 Week %
$1,292.30 -1.63%

Sign-Up Now: 
Insights from Sprott

More on Gold

Important Disclosure

This content is intended solely for the use of Sprott Asset Management USA, Inc. for use with investors and interested parties. Investments, commentary and statements are unique and may not be reflective of investments and commentary in other strategies managed by Sprott Asset Management USA, Inc., Sprott Asset Management LP, Sprott Inc., or any other Sprott entity or affiliate. Opinions expressed in this presentation are those of the presenter and may vary widely from opinions of other Sprott affiliated Portfolio Managers or investment professionals.

This content may not be reproduced in any form, or referred to in any other publication, without acknowledgment that it was produced by Sprott Asset Management LP and a reference to sprott.com. The opinions, estimates and projections (“information”) contained within this content are solely those of Sprott Asset Management LP (“SAM LP”) and are subject to change without notice. SAM LP makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, SAM LP assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. SAM LP is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Sprott Asset Management LP. These views are not to be considered as investment advice nor should they be considered a recommendation to buy or sell. SAM LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. SAM LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, SAM LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.

SAM LP is the investment manager to the Sprott Physical Bullion Trusts (the “Trusts”). Important information about the Trusts, including the investment objectives and strategies, purchase options, applicable management fees, and expenses, is contained in the prospectus. Please read the document carefully before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication does not constitute an offer to sell or solicitation to purchase securities of the Trusts.

The risks associated with investing in a Trust depend on the securities and assets in which the Trust invests, based upon the Trust’s particular objectives. There is no assurance that any Trust will achieve its investment objective, and its net asset value, yield and investment return will fluctuate from time to time with market conditions. There is no guarantee that the full amount of your original investment in a Trust will be returned to you. The Trusts are not insured by the Canada Deposit Insurance Corporation or any other government deposit insurer. Please read a Trust’s prospectus before investing.

The information contained herein does not constitute an offer or solicitation to anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada or the United States should contact their financial advisor to determine whether securities of the Funds may be lawfully sold in their jurisdiction.

The information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.

Important Message

You are now leaving Sprott.com and entering a linked website. Sprott has partnered with ALPS in offering Sprott ETFs. For fact sheets, marketing materials, prospectuses, performance, expense information and other details about the ETFs, you will be directed to the ALPS/Sprott website at SprottETFs.com.

Continue to Sprott Exchange Traded Funds

Important Message

You are now leaving Sprott.com and entering a linked website. Sprott Asset Management is a sub-advisor for several mutual funds on behalf of Ninepoint Partners. For details on these funds, you will be directed to the Ninepoint Partners website at ninepoint.com.

Continue to Ninepoint Partners