New York sell orders in thin trade trigger Shanghai gold rout

In early Asian trading hours on Monday, when typically only tens of contracts of gold are traded, investors dumped more than $500 million worth of bullion in New York in four seconds, triggering the market's biggest rout in years.

The sell-off began when one or more massive sell orders hit the price of gold on the CME Group's Comex futures in New York a tenth of a second after 9:29 a.m. in Shanghai, triggering turnover of almost 5,000 lots of gold in a blink of an eye.

That equates to 13 tonnes of gold, more than typically trades in hours during this time of day, and the selling knocked the price almost $20 to $1,100 an ounce during those four seconds. It marked the first leg of a dramatic 60-second sell-off that saw prices sink more than four per cent to five-year lows.

The rout astonished even veteran traders and followed months of calm ensured by competing forces, from the Greek debt crisis, the stronger dollar and expectations of a US interest rate increase.

"I was stunned that 8,000 lots moved the market by $50," said Tai Wong, director of base and precious metals trading for BMO Capital Markets in New York. "It was an illiquid time, but nevertheless the impact was outsized to say the least."

Within seconds of the New York sell-off, turnover picked up in the Far East where morning trading on the Shanghai Gold Exchange had just started, though prices did not immediately reflect the selling pressure.

Many dealers, rattled by the recent stock market crash in China, which knocked commodities prices lower, were quick to blame Chinese funds for the selling.

But a Reuters analysis of trade data from New York and Shanghai exchanges shows that it was New York which recorded far heavier volumes and a bigger downdraft on prices.

While Chinese investors participate in the US market, it was not immediately clear who the sellers were.

"Whoever wanted to sell and get out, got out. It looks like a big hedge fund or producer decided to move an order," said Doug Cifu, chief executive of Virtu Financial Inc, an electronic market maker.

The selling triggered stop loss orders, pushing prices through technical support levels and leaving bullion teetering on the brink of $1,000 an ounce.

The trade statistics also underscore the US market's role as the centre of liquidity for global bullion trading, even as secretive Chinese funds have caused big swings in base metals prices this year. To be sure, low liquidity in both markets accelerated the drop.

It was late Sunday evening in New York and 2:30 a.m. in London. Japan was closed for a national holiday, removing a big chunk of liquidity from the Tokyo commodity exchange, TOCOM, where average daily turnover is about 23 tonnes, a sizeable portion of the average global daily turnover.

By the end of the New York trading session on Monday evening, prices had recouped about half of the lost ground.

But while the sell-off only lasted a minute, the depth of the rout and the weak rebound signaled long-term damage to bullion sentiment. "The magnitude of the drop showed low interest in the gold market even at current levels was exacerbated by a toxic combo of a potential Fed rate hike and a regulatory environment reducing trading interest," said Wong.

60 seconds
The episode was the biggest in a string of sell-offs during Asian hours that have plagued the illiquid market in the past few years and stirred memories of the 2013 rout that wiped hundreds of dollars off the price of gold. And it only took one minute. First, CME circuit-breakers stopped trading after the main contract sunk $20 in just four seconds to prevent cascading stop orders that could exaggerate price movements in illiquid markets.

When trading resumed, another 1,554 lots changed hands over the course of nine seconds, pushing prices down a further $29, or 2.7 per cent, to hit five-year lows of $1,080 an ounce at 9:29:32, triggering the second circuit breaker.

As of 10:46 p.m. eastern daylight time, spot gold traded at $1,096.4 an ounce, down 0.5 per cent, teetering close to Monday's lows, suggesting there is more pain to come.

"Although the (gold) complex attempted such a reversal on Monday, the effort was rather halfhearted, leading us to conclude that we are not out of the woods just yet," said INTL FCStone analyst Edward Meir.