Original article at WSJ:
“A huge trade by a tiny hedge fund has sent shudders through the gold market.
Thanks to the nature of futures trading, Daniel Shak’s $10 million hedge fund held gold contracts valued at more than $850 million, more than 10% of the main U.S. futures market, and the equivalent of South Africa’s annual gold production.
But as gold prices started falling this year, the trade, which was a combination of being long and short gold contractsâ€”bets that prices will both rise and fallâ€”started going bad. Monday, he liquidated his position, and is returning money to clients.”
Go figure, leveraged paper gold rocking the boat.
Jim Sinclair’s website weighs in:
“The mystery of the recent sharp drop in open interest in gold has finally been revealedâ€¦
One thing that stood out to me when looking at the data when it was released was that the reduction in contracts was not mainly limited to the two most active front months, but was spread out across the entirety of the board on out as far as December 2015. That was a clue it was a spread trade being lifted but the sheer size had me stumped until now. I could not have imagined a spread trade of that magnitude nor complexity being employed by a single trader.
It is also the reason that gold took another hit even after the huge drawdown in open interest. Many of us were thinking that there was a larger exodus of speculative longs than what probably occurred and that led us to thinking that the wave of liquidation was drawing to a close.”