Thursday, April 25, 2013

The recent plunge in gold was very strange....

I’m not one for conspiracy theories, but the recent climactic selloff in gold looks to be very strange. 

The chart below shows the gold lease rate versus gold. 

Source: Bloomberg

Historically, any time gold has made a precipitous decline, the gold lease rate has spiked up fairly abruptly and significantly. I’ve put yellow boxes around a few past examples. 

However, note the most recent plunge in gold, one the most compressed and painful drops ever for the metal. Given such a hard decline, one would expect the gold lease rate to have shot up through the roof. Yet the lease rate barely budged. In fact, that little rise you see in the lease rate occurred before gold fell off a cliff. In other words, when gold went from 1580 to 1360 in an eye-blink, the lease rate traversed sideways to slightly down. Very odd.

Granted, it's not as if I'm showing volumes of data from various sources, but the gold lease rate generally moves based on fundamental info and events. I can only assume with this recent gold plunge that 1) not much changed fundamentally to serve as a catalyst for the selloff, and 2) more likely key technical levels were breached which triggered many computer algos to dump gold shares. Given these algos are more or less highly correlated, they all fired at roughly the same time causing mass selling, which then likely set in place a selling feedback loop as price declines continued to break key levels. Such technically-induced selling can occur abruptly and for a time within a vacuum, until the unwinding exhausts itself and price finally settles at a (much) lower level, serving as new support. 

That's my guess. It's unfortunate but price action based on technicals is no longer just human-driven. Not by a long shot. And I suspect that hasn't been the case for quite some time.