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Futures traders also responsible for gold's sell off

Kitco News

(Kitco News) - In my Kitco AM report I mentioned the reasons safe-haven gold is selling off late this week despite global stock markets remaining in meltdown mode. Read the first paragraph of that report for some interesting perspective.

One other element I want to point out is that the gold futures traders are also playing a big part in the overall gold market’s selling pressure this week. Reason: Futures trading is highly leveraged. That can be both good and bad for a speculative trader. When the futures market’s price goes the trader’s way, he or she can make a lot of money in a hurry. However, when a futures market turns against a trader, the consequences can be devastating.

Here's a likely scenario that many futures traders experienced this week: Futures traders (many of whom likely don’t even trade gold very often) saw the global stock markets selling off sharply amid fears over the coronavirus outbreak. Those futures traders reckoned it’s a “no-brainer” to get long (buy) gold futures. So they jumped in to that market as marketplace anxiety continued to rise, thinking “As global stocks continue to sell off and fears grow, gold’s price will continue to rise.” There is one major problem with that notion. Very, very rarely in futures trading is there a “lay-up” trade that will make good profits. Those lay-up trade notions find too many traders moving to one side of the boat. In fact, if a futures trade seems like a no-brainer winner, it probably will wind up being a loser. This scenario is also where the futures trading term, “weak long liquidation” comes in.

The other issue at work in markets this week, including gold, is that many traders dabble in several markets. This week, traders could have had a big winner (early this week) in gold, but also have a big loser going at the same time (silver). Remember that ultimately trading is a money game. When markets get volatile and price moves are bigger and faster, margin calls in futures markets can come, forcing a trader to come up with cash or liquidate his losing position. That’s when the old trading adage comes in: When markets get wild and trader tensions are high, you don’t sell what you want, you sell what you can. Gold was likely a victim of this scenario this week.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.