Gold Price Top Indicated by Record Trading Volume

By: Miles_Banner

Last week we saw unusually high volumes of short sellers in the COMEX futures market. On Friday, 4 th December, we saw the biggest volume of sellers in the SPDR (GLD) ETF in its 5 year history. In four working days, between the 3 rd – 8 th December, Gold has had a sharp sell off, dropping more than $100. Together, these show the volatility of investment demand and draw into question whether this is a top for the gold price…

The SPDR Gold Shares (GLD) ETF is the second largest ETF in the world. Today the SPDR holds 1,116.25 tonnes of gold bullion. That’s more than the central banks of Russia, China and India [See the official central bank holdings here].

The size of the ETF means it weighs in with a heavy influence on the gold price. Commodity based ETFs are a fairly recent investment vehicle. Because of their easy access to commodity prices their popularities have risen sharply in their short lifetime. As they have risen so has the effect of investors who use them. Today traders in the GLD ETF can have a major influence on the price of gold which is why we turn our heads when they have such huge volumes (volume = number of shares traded during a period).

The normal day volume of trade is approximately 20m. On Friday that number had reached 79m.

Something similar was being reflected in the world’s largest futures and options exchange, the CME Group. On Friday it experienced record trading volumes for FX products. And in the Comex Gold Futures for February 2010 you can also see large spikes in volume (the grey underlying pattern in the chart below).

Source FT.com

These large volumes indicate a change. They show us that something is happening.

Can this be the gold price top?

ETFs are attractive to short term speculators because it is an easy way to get exposure to a commodity. Short term traders are, however, much more volatile in the reactions to market news. This means the gold price is partly built on an unstable demand. What we witnessed on Friday and throughout last week was mostly short term traders selling their gold positions on the back of news…

News this week which would have acted as drivers included the Fed Chairman Ben Bernanke claiming that inflation "appears likely to remain subdued for some time."

JPMorgan Chase (NYSE: JPM) said, "Fundamentally, the gold price appears over-valued."

Credit Suisse (NYSE: CS) stated "Gold may decline to $900 to $1,000 an ounce by the end of the first quarter next year."

And on Wednesday, 2nd December, the Telegraph reported that the vice governor of the People’s Bank of China, Hu Xiaolian said Beijing would not buy gold indiscriminately, suggesting it was in a bubble.

These parts of the news address underlying demand for gold: Bernanke’s claim about subdued inflation addresses the widely held view that gold is an inflation hedge; the banks statements suggest we’re in an overvalued gold bubble; and if a representative of the People’s bank of China indicates China is unwilling to acquire gold at its current price investors will remember China is known to need to acquire the yellow metal to bulk up its reserves. They are suppose to be buying on dips. In reaction people have started to sell their positions which has triggered the huge fall we witnessed.

The recent spat of selling will have involved a large amount of day traders and short term traders who have put in place stop losses, seeking to make a return on their profits. The higher the price of gold climbs you’ll see a larger amount of stop losses in place as people seek to protect their value. In our opinion only something similar to the Dubai crisis can prevent gold climbing higher.

As with all commodities the path will involve corrections… it will not be a smooth ride to the top. We mentioned last week that the investment demand has led to a much more volatile trader investing in gold. What the spikes in volume indicate is the investment demand that is determining the gold price is much more reactive to other factors happening in the market, and likely to experience wide swings in sentiment. Speculators are looking short term, they are driven by fear.

As a consequence the price can unravel rapidly. Whilst the recent events look like a top in the gold price, all bull markets will have corrections. Now doesn’t look like a time to panic… It may continue to decline for the near future, but the fundamentals are still in place and we’ve not seen the end of the giant hangover from quantitative easing. Until we do we believe the gold price will, once again, be hitting new highs soon.

Until next week,

Regards,

Digger Gold Price Today

P.S Digger writes a weekly email analysing the gold price and the gold industry. Visit Digger at Gold Price Today (http://goldpricetoday.co.uk).

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