Gone In A Flash? Flash crashes are becoming ever more common as traders use enormous leverage and clever timing to move markets wherever they want.
These short-term manipulations, however, should not shake investors' confidence in the underlying asset. By Fergus Hodgson,
Gold Newsletter’s Roving Editor Dear John, It was a regular Thursday in June, yet the second largest crypto-currency lost 99.97 percent of its value in a few hours.
Ethereum gained all its value back and more by the next day. Meanwhile it continues to nip at the heels of bitcoin and challenge bitcoin's natural monopoly.
But this dramatic flash crash was no external black-swan event. Rather it was a product of both a peculiar sell-off and autotrading from other participants in the market.
Holders of ethereum and their hypersensitivity exacerbated enormously what would have otherwise been a minor blip. A slight drop in price generated automated hysteria, triggering over 800 immediate sales in what was a relatively small marketplace.
Now, because of stop-loss orders, the flash crash will go down in the history books. Those with their wits about them — who believed in the value of their asset — avoided getting caught in the stampede and selling at a ludicrously low price.
You can guess what other asset is susceptible to flash crashes. That's right, just two days later, on June 24, gold had its own dramatic dip: someone offloaded $2 billion worth and within minutes the price fell $18, from $1,254 to $1,236.
Like ethereum, gold bounced back over the coming 24 hours, although it then entered a lull in the first half of July.
Questions have abounded regarding who had the capacity to sell such a large quantity of gold in the first place, with no resolution on the matter. Our own editor Brien Lundin has in the past doubted the "fat finger" explanation, that somehow gold's flash crashes are all an accident.
He points to research by Nanex, which demonstrates a sophisticated algorithm from high-frequency traders that evades Chicago Mercantile Exchange protections: "To me this is ironclad evidence that someone is manipulating the market in a very sophisticated way."
What is most puzzling is that those initiating flash crashes in gold do not appear to be motivated by profit. That suggests a manipulation strategy to undermine confidence in the gold market and defend use of fiat currencies, presumably enabled by paper gold with minimal backing and no need for physical exchange.
The Gold Anti-Trust Action Committee has for almost two decades been alleging such foul play by central banks. Thus far they have struggled to garner little more than derision from major financial outlets, but regardless, don't expect any regulatory agency to have the motivation or efficacy to nip it in the bud.
The good news for holders of gold, and investors in mining shares, is that no one party has the capacity to flood the market on a long-term basis — much less to create gold out of thin air. Unlike ethereum and bitcoin, gold is a tangible asset with industrial uses, in addition to its merits as a medium of exchange and store of value.
Paper gold, with only fractional backing, does generate a legitimate concern and downward pressure on prices. However, much as bad money drives out good under Gresham’s Law, deficient paper gold will drive more investors to own real gold — either physical possession or responsible, transparent vaults, such as the forthcoming anthem digital currency.
In other words, when it comes to manipulation and flash crashes of gold, what we have to fear most is fear itself. We need not be intimidated by major players who seek to destabilize the market, nor do we have to succumb to the hysteria and take losses during any mad dashes for the exits. Fergus Hodgson is an economic consultant and Gold Newsletter’s roving editor. |
