Gold topped $1230 this morning – breaking to 3-month highs and up over 4% year-to-date – up 5 days in a row for the best run in 4 months. The surge comes causally or correlatedly coincidental with China’s explicit shift into extraordinary measures (LTROs) but, as The FT reports, market participants are concerned that algo-based funds have created a “frenetic liquidity” environment as everyone from real money to central banks “aren’t trading the gold market the way they used to.”
With most gold trading screen-based and a decline in bank-to-bank activity — the anchor of the over-the-counter (OTC) bullion market — as many institutions have scaled back or exited commodities,as The FT reports, this has made the gold market more frenetic and pushed up the costs of hedging and doing larger trades, according to market participants…
“If you’re just transacting in small sizes then probably you have benefited from the changes as you can transact directly through a bank’s electronic platform,” says one veteran trader.
“The issue is if you want to transact in a decent size, which used to be 100,000 to 200,000 ounces. That has become harder to get away with without influencing the price unduly.”
The decline in interbank trading has prompted a debate about the most appropriate structure for the bullion market, with some people suggesting physical gold should be traded on an exchange.
While algorithm-based hedge funds are more active that has created a “frenetic liquidity”, market participants say, causing choppiness in the market. That exacerbates any price moves on lower volumes but also means liquidity can disappear just when it is most needed, for example in the event of a market rout.
“The algos use similar sorts of momentum-driven models — it can all be liquidity in the same way, particularly around economic data releases or when gold prices are at well-identified technical levels,” one gold market participant says.
