Gold Price Top Indicated by Record Trading Volume

Source:

"What we witnessed on Friday and throughout last week was mostly short-term traders. . ."

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 3rd–8th December, Gold has had a sharp selloff, 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.

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.

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