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FOCUS: More Investors, Electronic Trade Makes Today's Gold Mkt Different From 1980s

By Debbie Carlson, Allen Sykora and Neils Christensen of Kitco News
Monday April 15, 2013 3:50 PM

(Kitco News) - With gold continuing to fall sharply, the editors of Kitco News talked to veterans of the gold industry to get their views on the current drop in prices. We asked them to compare the current sell-off with the drop in prices gold experienced in 1980, when prices fell from their then-record high.

At that time, nearby Comex gold hit a high of $873 in January 1980 as investors were nervous. There was rampant inflation, high crude oil prices, the Soviet Union had invaded Afghanistan and there was the Iranian revolution to overthrow the Shah and U.S. Embassy staff members were taken as hostages in Iran. But by March, prices hit a low of $463.

More recently, gold prices rallied on concerns regarding the global economy, particularly crises in the eurozone over high sovereign debt, and worries about possible inflation because of ultra-loose monetary policy. Gold hit a nominal all-time gold high of $1,923 set in September 2011 following high-profile arguments between President Obama and Republican over raising the debt ceiling. On Monday, most-active June Comex futures settled at $1,361.10, down 9.3%.

High Volume Creating Major Moves – Peter Hug, global trading director at Kitco Metals Inc

Hug was a senior vice president for the international division for Guardian Trust when gold tumbled in 1980; he was in charge of 70 traders and said the biggest difference was the amount of volume involved in today’s trades, which is increasing the volatility.

“Back then everything was done over the phone. You just didn’t have the volume that can hit the market today,” he said. “On Friday there was a rumor that someone was trying to sell 4 million ounces of gold at the open. I don’t know why anyone would want to try to sell that much volume.”

Hug pointed out the increased activity in the last two days has been a lot more surprising. On Friday priced dropped more than $80 during the session and on Monday prices were down more than $120.

“I didn’t think we would get to $1,370 so quickly,” he said.

A Different Type Of Trade - Peter Thomas, vice president, INTL FCStone Precious Metals North America

Thomas was active in the gold markets during 1980 and said there are differences between the current selloff and the price break then. “This is a different type of trade. This is a different feeling. I have to predicate that on the fact that I’m not filling paper and I’m not standing in the pits,” he said.

What makes the current selloff seem different than the break in 1980 is the dominance of electronic trading, he said. “There’s no one to stop it as it goes into a freefall. The computer lights up all red and the selling goes on until the computer changes color. Now so much depends on the algorithm.

“In the old days, prices would fall $50 and some guys would step in front to see how it felt, to see if it would slow down. You could see how strong the move was.”

What’s also different about now versus then are the different tools market participants have to hedge positions, Thomas said.

“A guy might be getting massacred in the futures, but he might be doing something in the OTCs (over-the-counter trading) in Singapore or London or Hong Kong. He might have written a call versus a net-long position and his parachute kicked in. So he might only be out $35 an ounce versus $120. I just don’t feel the same urgency that was there during other market declines,” he said.

Customers are savvier now, Thomas said, and will hedge positions against wild swings. “They use a variety of vehicles out there, something to protect them from the ‘God forbid’ trade, something that will kick in when everything turns against them and let’s them live another day,” he said.

New Ways To Trade - Ira Epstein, director of Ira Epstein division of the Linn Group

One big difference in the gold market from the 1980 sell-off is the new ways in which the metal can be traded, Epstein said. And the increased number of trading vehicles – exchange-traded funds in addition to electronic futures trading – may be adding to the intensity of the selling.

In recent years, almost all of the futures volume is now electronic rather than traded on the Comex floor, he pointed out. For instance, data on the CME Group Web site for Friday shows that volume on the Globex electronic platform was 368,559 contracts, while the volume for open-outcry trading was 2,527.

Further, investors can now use ETFs, which were not around until a decade ago, Epstein pointed out. These are products that trade like a stock but track the price of the commodity, with their prospectuses saying that metal is put into storage to back the shares.

“It (gold) just lost its flavor,” Epstein said. “And because more people have more vehicles to trade, you exacerbate a move up or down when something of this nature happens.”

Epstein said the current decline in gold has been building. Gold recently failed to rally despite worries about a nuclear threat from North Korea. Factors such as the potential for Cypriot gold sales as part of a bailout package and weaker-than-forecast Chinese economic growth were not enough to break gold down on their own. “It just isn’t enough to break the market this way,” he said. “This is a move that was building anyway.”

And, he continued, the market “just fell on itself” as “these new electronic vehicles fed on themselves.”

“I think you’re witnessing the first really big historic sale of the ETFs combined with the futures contract,” he said. “That to me is something we just haven’t seen…They’re going lockstep with each other. As people are liquidating their ETFs, it’s causing more liquidation in the futures market, because they balance out at the end of the day.”

By Debbie Carlson of Kitco News dcarlson@kitco.com, Allen Sykora of Kitco News asykora@kitco.com and Neils Christensen of Kitco News nchristensen@kitco.com

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 precious metal products, 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.

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