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 Wednesday 23 March 2016

PM Bulletin: Melt-down in precious metals

 

 

We have seen some vicious moves in gold and silver today. Early on gold broke below the $1,240 support level. However, trading was orderly and there was little reason not to think that it couldn’t rally back up above this level as it has done on a number of occasions. Silver also broke below significant support around $15.70, but again the selling seemed controlled and probably related to profit-taking on the stronger dollar, and position squaring ahead of the long weekend.

But just before midday GMT silver dropped over 2% in the space of one minute. This should qualify as a “flash crash” in anybody’s book:
  


  
However, generally speaking, if the price of something experiences a flash crash due to heavy order flow or a “fat finger” the price should recover quickly and normal trading would resume close to pre-crash prices. That hasn’t happened here. As we can see on this one-minute chart, silver bounced but has fallen steadily ever since. At the time of writing it’s trading close to its flash-crash low.

As we can see in the one-minute chart for gold the decline has been orderly with no corresponding lurch down at 12:00 GMT.

   
Both metals were under pressure as the US dollar pushed higher and FOMC-member James Bullard suggested that the Fed could hike rates next month. Add in thin conditions and possible position-squaring ahead of the Easter weekend and one can understand the sell-off in the two precious metals. It is worth noting that base metals and iron ore have also all fallen sharply today.

So the best explanation that I can think of for silver’s slump is that it was due to market illiquidity. Trading volumes are considerably lighter in silver than they are in gold so sometimes a large order can move the market dramatically one way or another. As this move happened just ahead of the open of pit trading in New York, the order book could have been particularly thin. I’m sorry if this isn’t much comfort for anyone caught on the wrong side of the move.

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Posted by David Morrison

Tagged: Bulletin PM

Category: PM Bulletin


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