Submitted by Sam Kirtley of SK Options Trading
Proposing an Overnight Gold Fund
There is much debate within the precious metals industry
regarding the alleged suppression, or at least manipulation to an
extent, by either central banks or the proprietary trading divisions of
large banks, or a combination of the two.
In April the US Commodity Futures Trading Commission CFTC fined Hedge
Fund Moore Capital for manipulation of the New York platinum and
palladium futures market, as the firm was found to be “banging the
close”, which involves entering orders in a manner designed to inflate
the closing price, which other various derivatives contracts could be
based on. So that is irrefutable evidence that the precious metals
futures market is, at least to some extent, being manipulated. However a
large concentration of this debate is based not on platinum and
palladium, but on gold and silver, and particularly gold.
Numerous hypothesises have been put forward as to the motive behind
alleged suppression of the gold, ranging from a central bank conspiracy
to keep gold prices low, to large trading banks simply exploiting their
market dominance for easy profits, or even a combination of the two with
the central banks and large bullion trading operations working together
in some kind for cartel to keep gold prices low. This article does not
intend to discuss the merits of these theories, however plausible or
implausible various parties believe them to be. Instead we will focus on
finding out if a discrepancy exists and if it does, can one take
advantage of it and use it for profitable trading strategies.
Firstly we would like to recommend an excellent article by Adrian
Douglas, editor of Market Force Analysis and a GATA board member
entitled “Gold Market is not “Fixed”, it’s Rigged” which goes into great
detail on the statistics behind the difference between how gold trades
between the AM and PM fix, and how it trades from the PM to AM fix. The
very fact that there appears to be a significance difference sets our
alarm bells ringing. Whether gold trades in New York, London, Tokyo or
Timbuktu, gold is still gold and so one would expect that it would trade
in a similar fashion across these timeframes over a long period of
If we take the change in the gold price from the AM to PM fix
(intraday gold) compare it to the change in the gold price from the PM
to AM fix (overnight gold), we can see the startling difference between
the two periods of trading. We will demonstrate this by showing what
would have happened if one had theoretically invested in the intraday
gold market from 2001 to present.
Starting in 2001 with an indexed based at 100, the chart below shows
what would have happened to that investment of 100 if it had been used
to purchase gold at the AM fix and sell gold at the PM fix, replicating
the daily percentage performance of gold in the intraday market.
As the chart above shows, the performance is dismal. For example a
hypothetical gold investment fund starting with $100m in 2001, and using
it to buy gold at the AM fix and sell it at the PM fix would now be
left with just $40million, a 60% loss in just under ten years. Over the
same time period gold prices have risen over 350%.
From this we can infer that in fact it was possible to make money
shorting gold everyday for the last decade. If a hedge fund were to have
sold gold at the AM fix and covered that short position at the PM fix,
for each day of this terrific bull market run in gold, that fund would
have doubled their starting capital.
This appears to be a remarkable result, as one would presume that
shorting gold everyday during a period where the yellow metal has risen
350% would have devastated any portfolio, not caused a 107.5% increase.
Those who do not believe in theories of gold price suppression, often
cite the fact that gold prices are at an all time high as a major piece
of evidence to discredit any suggestions of price suppression. After all
how can the price be being suppressed if prices are sky rocketing?
Well the answer to that question is that if the gold traders at the
large banks accused of such manipulation are just trading during the
intraday market between the AM to PM fix, they are not too concerned
about how gold trades overnight (provided they are not holding positions
overnight of course). What matters is how gold trades during this
intraday period, and if more often than not gold is falling during this
time, and more often than not the banks are short gold during this
period, then they are making money regardless of the overnight price
It would appear that subtle manipulation is more likely that blatant price suppression.
So the question on the mind of many gold bulls might be; how do I
remove this downward manipulation during the intraday period? Even if I
do not believe in manipulation, suppression or any other conspiracy
theories, how do I eliminate this statistical fact that gold is
underperforming during the intraday period?
The answer is to buy gold at the PM fix and sell it the following day
at the AM fix, or more simply put, just be long gold overnight.
The graph above shows how rewarding this strategy would have been,
with a return of 947% in less than ten years, a return 2.7 times greater
than the 350% that would have been made simply buying gold in 2001
holding until now. With many investors and traders looking for the
best way to lever their gold returns, from pouring over drill results to
identify the best gold stocks to experimenting with leveraged gold ETFs
and ETNs, a more simple solution could be simply to only have long
exposure to gold overnight.
For the more cavalier traders, going long gold overnight and then
short gold for the intraday period, makes for an even more profitable
Consider a hedge fund starting in 2001 with $100m, with the strategy of
being long gold from the PM to AM fix, and short gold from the AM to PM
fix. That hedge fund would be worth $2.16billion today, before any fees
and expenses. This should be enough to catch any investor’s attention.
Even without shorting gold during the intraday period, limiting
exposure to gold to just the overnight period enhances returns enough to
justify using this as a basis for a trading strategy.
As stated at the beginning of this article, our focus is not what or
who is causing this discrepancy nor any potential motives for such a
discrepancy, but what action to take in order to profit from it.
In addition to incorporating these patterns into our trading strategy
at SK Options Trading, we are also looking into the feasibility of
launching some form of fund to take advantage of the opportunities
discussed in this article. As part of this feasibility study we are
looking to gauge investor interest and so would welcome any comments,
suggestions or ideas that people may wish to contribute, simply email