Overnight Long/Intraday Short Gold Fund More Than Doubles In Just Over A Year: Generates 43% Annualized Return

Tyler Durden's picture

Back in August 2010, we presented an idea proposed by our friends at SK Options trading for a very simple trading strategy: being long gold in the overnight session, and shorting it during the day. At the time of writing, such a strategy would have returned $2.16 billion from a $100 million initial investment in 10 years, a 37.46% annualized return. Today, we provide a much needed follow up to this quite stunning divergence. As SK notes: "we have revisited the article and written an update. Not only does the discrepancy still exist but it has been actually increasing. That fund would now be worth $5.26B, way up from $2.16B when we last wrote about it - in other words an increase of 143% in just over a year. When we wrote about this in August 2010, the annualized return of the Long Overnight/Short Intraday gold index was 37.46% since the start of 2001. However if we measure from now the annualized return since 2001 is 43.24%, with the annualized return of the Long Overnight/Short Intraday gold index standing at roughly 64.4% since 2009." So for those who wish to layer on an additional alpha buffer on top of what is already the best performing asset of the past decade, the SK Options way just may be the strategy. As for the reasons for this gross arbitrage - who cares. Is it manipulation? is it the early Asian buying offset by London pool selling? It is largely irrelvant - the point is that this is "the divergence that keeps on giving" - kinda like a Stolper trade, or an inverse Tilson ETF, and until it doesn't, or until something dramatically changes in the precious metal market, it is likely that this trading pattern will continue for a long time.

From SK Options trading

Revisiting Our Proposal For An Overnight Gold Fund

In August 2010 we wrote an article entitled “Proposing An Overnight Gold Fund” in which we explored the potential for launching a fund that held long positions in gold overnight and was short gold during the day. We pointed out that “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...would be worth $2.16billion today, before any fees and expenses.” We have been monitoring this trading strategy since then and therefore would like to take this opportunity to update readers on its astonishing progress.

Firstly we will introduce the thinking that led us to investigate this trading strategy. 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 2010 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.

There are other theories that could explain this discrepancy that do not involve manipulation. For example one could take the view that Eastern market participants are perhaps more bullish on gold than their Western trading counterparts. Therefore gold is perhaps more likely to rise during Asian trading and fall when the west takes over.

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.

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 time.

If we take the change in the gold price from the London 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 $31 million, almost a 70% loss in just under ten years. Over the same time period gold prices have risen over 590%.

From this we can infer that in fact it was possible to make money shorting gold everyday for the last decade or so. If a hedge fund or even an individual trader 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 almost tripled 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 590% would have devastated any portfolio, not caused a 178.7% 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 may not be 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 action.

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 1797% in eleven years, a return 3.2 times greater than the 590% 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 strategy.

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 $5.26billion 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.

What has surprised us most in our ongoing investigation into this area is that not only is the discrepancy persisting, but it is arguably increasing. When we first wrote about this in August 2010, the annualized return of the Long Overnight/Short Intraday gold index was 37.46% since the start of 2001. However if we measure from now the annualized return since 2001 is 43.24%. the chart below demonstrates this point, with the annualized return of the Long Overnight/Short Intraday gold index standing at roughly 64.4% since 2009.

Another point of interest is when this outperformance is concentrated. The performance around the September 2011 correction is particularly remarkable. Whilst gold prices plummeted, the Long Overnight/Short Intraday gold index increased dramatically, having already been increasing whilst gold rallied over the previous couple of months.

From this we can infer that the majority of gold’s declines in the recent major correction occurred during the intraday trading session, not the overnight trading session.

However in practice we must keep in mind that reversing one’s position each day is not free. One would have to cross the bid/ask spread. Taking a $0.10 spread into account the short intraday and long overnight index would have increased from 100 to 1827.34 since 2001. This increase of 1727.4% outperforms the 593% increase in gold prices over the same period by almost 3 times. If a $0.20 spread is used on a short intraday and long overnight index, there is an increase of 530.4%, which slightly underperforms a buy and hold strategy. Therefore one would need to be able to reverse one’s position at the AM and PM fix for $0.10 spread for the strategy to work in practice.

Nonetheless we still think that this is an important discrepancy that should be taken into account when trading gold. Even if one does not explicitly execute this exact trading strategy, one can still benefit from the trading patterns it is based on. For example if one was nervous about a correction in gold prices but did not want to be short gold, it would perhaps be preferable to close any long position prior to the intraday trading period and reopen them after the PM fix.

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 investment 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 info@skoptionstrading.com.

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GeneMarchbanks's picture

'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.'

Problem is... that AM bid farewell is emotionally taxing. I'm glad to buy the actual thing and then NOT get Corzined. Sometimes it's not about what you get but what you don't risk...

BaBaBouy's picture

Proves GOLDMANIP In NYC???  Bitchez

nope-1004's picture

The fact that the return on this type of arbitrage is increasing in such a short time means one thing:  The frequency of Western manipulation on the price of gold has been increasing.  This simply proves the economic fires are increasing, banks are desperate, the Fed is desperate, and a lid is intentionally and deliberately being kept on the severity of the matter by suppressing gold.

This update is welcome to me.  If things were getting better and if Benocide truly had things under control, the opposite would be occuring.

It also means their ship is sinking.  Buy PM's, sit back, and watch the rat banskters squirm.


WmMcK's picture

Please people, don't be "greedy" (foolish) trying to pick up nickles in front of this steamroller at least with your core positions.

Vote by buying physical metals and supporting anything/one that will shorten the duration of the present over-hypothacated economic system. 

Rynak's picture


The fact that the return on this type of arbitrage is increasing in such a short time means one thing:  The frequency of Western manipulation on the price of gold has been increasing.  This simply proves the economic fires are increasing, banks are desperate, the Fed is desperate, and a lid is intentionally and deliberately being kept on the severity of the matter by suppressing gold.

Not just that. About 2-3 weeks ago, i commented that to anyone who has ever looked at the stats of paper gold for the last 24 months, it should be abundantly obvious, that a radical change happened in mid 2011. Up to that point in time, the spot price did behave amazingly consistent. If one applies an average of about 1 month, it was almost a completely flat line, that slowly but continiously moved up.

Then beginning in mid-2011, spot-price behaviour completely changed. It began with a sudden jump up.... followed a bit later by a sudden big plunge..... then another big jump up, followed by another big plunge, and so on. Back then, i argued that "their" strategy beginning at 2011, was not simply to "make gold spot prices go down by intervention".... but instead, plain and simply causing uncertainity via volatility. At mid 2011, they began to just artificially pump paper gold big time, then dump it big time, over and over, to scare investors.

And if in the above graph, you look at the one for 2011, it shows unambigiously, how beginning in mid-2011, the "buy and hold" and the "long night, short day" strategies began to decouple, implying that starting at mid-2011, during US-day, plunges began to happen..... yet not during US-night.

The result has been, that via artificial volatility, they managed to from mid-2011, until now, managed to keep paper gold prices static (neither up nor down). So yes, at least for the last 6 months, they managed to stop the paper gold rise. They did not manage to bring paper gold down, but they did manage to stop its advance.

Kick_the_Kan's picture

Excellent post Zerohedge.....one of the best I have read since I started following this blog. This will all get resolved in time, just like with the breaking of the London gold pool. In the meantime, people should make sure that the foundation of their portfolios are the physical pms first and then if they have the means to take advantage of the strategy laid out for them above then I wish them well.  

Spigot's picture

And, of course, the chart being exponential in nature it costs TPTB more and more to maintain the effect, and at some point we will see either a flat lining of their efforts, hence an unleashing of the market, or an outright reversal on their part in which case the metal will escallate very rapidly a la the metal will exhibit the exponential escalation instead.

I do not believe that they can do this much longer. Nor do I believe that those who do this will be credible as market makers if they persist in this.

The old saying "If you want to buy you must drive the price down, if you want to sell you must drive it up." may show that the real intention is to manage buying/accumulation on the part of TPTB.

IMO this "scheme" was institued on behalf of those wishing to accumulate. London has been playing this to the benefit of London insiders. They knew the scheme and are the ones who played it for the 5000% shown in the chart. The question is when will they change the scheme? We will only know when the chart (long night/short day) breaks into a new pattern and matching that with the action in physical pricing.

If I were a producer I would be very inclined to NEVER trade on a commodity exchange again. Also, would never reference any "market price" within a contract. Would never store bullion in a commercial warehouse or "bank". Not one more ounce to these god damned bastards.

BlackSwanCrash's picture

"The fact that the return on this type of arbitrage is increasing in such a short time means one thing:  The frequency of Western manipulation on the price of gold has been increasing."


No it doesnt.

It may be that the volatility of the gold swings is increasing. The level of manipulation could remain constant or even decrease, but with larger price swings, it would paint such a picture.

A case in point was the september 2011 massacre of the gold price helped the short side of the trade pushing up profits and steepening the curve for this period for the shorted AM/PM session.

So your logic is flawed however i still agree with you. Manipulation probably has increased significantly from 2008 onwards as they try and keep the wheels on.

Cadavre's picture

First, does mean Goldman and Morgue put themselves on their sell lists. The only play in their play books has been the USD carry.

Silver does not seem to be in a lock step with gold - wishing me knew both if inded that is the case and then why.

dwdollar's picture

Yep. Being Corzined could easily wipe out any profits from this trade. Suckers can keep playing the rigged game. I won't.

midtowng's picture

You also can't execute these sorts of trades from a mutual fund. For instance, your IRA will also buy and sell at the times of the day that are worst for your return.

Hulk's picture

I often wondered why the overnights even bothered running up the price...

lemosbrasil's picture

8 charts show to us a imminent sell off ahead of us. a "perfect sell off"

2 downtrend line, Up divergences to VIX and VXD and other charts like DOWA50 and Bullish percent of Dow


See here: http://pracompraroupravender.blogspot.com/2012/01/venda-perfeita-pode-estar-nossa-frente.html

Dismal Scientist's picture

Stop spamming, noone cares for amateur technicians, even if you're lucky enough to be right.

BaBaBouy's picture

Just Buy Physical GOLD ...

Sudden Debt's picture

It's all that counts.

If you bought it 10 years ago, you made a 500% profit.

If you followed this article and paid a 5% fee in option trades EACH DAY, you would still be out of money in 2 months in the most bullish scenario.


StormShadow's picture

Agreed.  EXCELLENT theory and research, but won't work in practice due to "friction" (credit to Clausewitz)

tricky rick's picture

ah so....   JPM won't like others in their sandbox.

BTW....  trade before 10 am...

Ranting Andy will love this!

Roger O. Thornhill's picture

This is why I love ZH. Investing ideas that cut through the 20/20 hindsight nonsense of CNBS.

It's a lot harder to play now in the crazed momo game, so any interesting ideas with any consistency are better than getting killed by ZIRP or Hal 9000.

swissaustrian's picture

Gotta give credit to the guy who exposed this in the early 2000s, Mr Dimitry Speck. He wrote a German book about this called "Geheime Goldpolitik" (secret gold politics). English summary of the book: http://www.geheime-goldpolitik.de/english/

Belrev's picture

Will Zerohedge please help spread Ron Paul's campaing message, like directing people to money bomb, and a bit more political commentary in cotext of Ron Paul's run for president. This will help all of us and also may bring additional visitors to this website. Just a thought.

oncefired's picture

The "Powers to Be" will not allow Ron Paul. Candidates are selected, not elected

DoChenRollingBearing's picture

The transaction costs would likely eat into those returns for us small investors.


Fringe Blogger Bearing does not address this particular topic (yet), I do write about gold and other matters of interest.  Anyone interested in getting a link to my blog please gmail me at my name and promise that you will behave.  Among my most recent pieces are a Thought Experiment on the Value of Gold and a review of this weekend's Barron's.  I write under my own name, hence I make ZH-ers jump through this hoop.  Of the 230 or so who have joined up, I have gotten 2 spammers...

s2man's picture

"The transaction costs would likely eat into those returns for us small investors."

yep, hence the idea for a fund which could minimize the % overhead.

Marty Rothbard's picture

Is there a mutual fund set up to follow this strategy?  If I follow this strategy, will it be more expensive for the fed et.al., to supress the price of gold?  I sort of like the idea of taking some cash of the bastards.  Could the justice department consider it financial terrorism?

Bansters-in-my- feces's picture

Gee... I wonder if the North American Markets are being "centrally Planned"...? Ps. FUCK OFF,Timmy G and Benny B.... You fucking low life sleazebags. The sooner BOTH of you's stop taking on air,the better.

Bansters-in-my- feces's picture

Why don't people just buy PHYSICAL.......

FUCK the paper chase game.

You's paper chasers are PART of the Problem....

Get a fucking job.

navy62802's picture

I'm going to go out on a limb here. I think many people on ZH buy physical.

Sudden Debt's picture

smart enough to buy....

to dumb to remember where they hidden it...


Buckaroo Banzai's picture

I love to buy physical, but I can never seem to get any of it home. My boat always capsizes in the middle of the lake!

Jena's picture

You're inspiring me to take up scuba diving for fun and profit.


OT:  Not that I'm paranoid or anything but this companion piece to NDAA is ominous


Government could strip citizenship from Americans under Enemy Expatriation Act





Sudden Debt's picture

I really concidered burrying my stash for safety a while back.

And than I noticed people who's hobby was walking with a metal detector to find old stuff.

And the reason why that's a pest arround here is because I live in a place where during the middle ages, about 400 meters from my house the knights of flanders played their tournaments. In the 18th century it was where the dog races and horse races where held and there are 3 mideval castles of the old dukes of flanders. And that kind of attracks a lot of gold diggers looking for souvernirs....

and a few weeks ago when I was walking my dog, I talked to one of these guys and they can even finetune their detectors for "look for gold" "look for silver".... I was... horryfied! Just imagine if I burried it in the woods arround here!!! Some jackass would have found it within a week!

so burrying stuff around here is like putting up a neon sign....


Jena's picture

I didn't know metal detectors were that sensitive.  They've come a long way with them.  I guess any burying has to be done where no one will have access to, or.. nope, it's back to Crater Lake.

Marty Rothbard's picture

I hold physical, the bulk of my liquid assets are in physical, but the power company still wants paper, and the transaction costs are a bitch, so I've got paper assets too.  I like the idea of taking some paper off the Bernank, and his cohorts.  I'm not part of the problem, I'm part of the solution.  Ron Paul needs paper for his campaign too.  Go to his website and buy a T-shirt.

My Days Are Getting Fewer's picture

Great article - ZH is on the cutting edge.  However, with the publication of this information, this trade has probably eclipsed itself.

Pladizow's picture

Did you not read the paper or were you perhaps educated in an American Public School?

This trade was originally propossed about 1.5 years ago by Adrian Douglas (Or as early as 2001 by Dimitri Speck).

This investor group that wrote this particular paper is following up on a paper they wrote 1 year ago on the same subject.

They just told you how the profits are growing!

Fuh Querada's picture

I preferred your previous avatar.

JustObserving's picture

That strategy works even better for silver. Only about a billion ounces of silver bullion available worldwide - so easier to manipulate.

Trading precious metals is a racket


HungrySeagull's picture

That is paper make believe.

Don't you think for a second that if you buy and then sell something like 5000 dollars worth of Gold in a 24 hour period it's taxable?


Buy Physical and forget about it. Sun come up and goes down without the need for churning money ...


As we say down heah in the south, this article is nothing but "Spinning Money" Bull.


No paper, no game. Buy and take delivery and rest a while.

Quintus's picture

UK based traders can exploit this trading strategy tax free (Legally) and at very small buy/sell spreads by using Spread Betting firms such as IG index, Cityindex etc.


HungrySeagull's picture

Here in the USA in the one Exchange I trade at from home, it costs a certain percentage in fees and shipping for Silver Eagles or Gold Eagles. If memory serves I have to be careful to buy at a price and make sure I account for the total costs to get it into my hand and also the total cost it would be to sell it plus a equal amount for my own profit.

That usually yeilds a spread I can buy/sell at. I am a tiny buyer a few here and there and wait a while and accumulate this way.


But when there is a wave in the Kitco or you are up against the Federal Limitations in Wiring money in so many days through the Credit union rules it's interesting sometimes when... Gold drops to 1400 and you cannot be liquid fast enough to order more at that price point.



And that is physical stuff folks, none of that Paper inferno.

BetweenThe Coasts's picture

If you wanted to risk it you could build up funds in your Kitco account while you wait for your trigger price.

Stuck on Zero's picture

By coincidence those curves look like the rise in the ratio of paper to physical.  Imagine that.

fast mover's picture

Follow trading this LBMA-based gold fix system at the retail level at:


Generated $116K profit in 2011 on 1 contract.

KingPin 999's picture

This might be the best post I've ever seen on zerohedge. And that's pretty impressive.

Pladizow's picture

Perhaps you should use the ZH search feature to find Adrian Douglas and/or Market Force Analysis!

deflator's picture

 Couldn't emerging market buying and developed market selling be the cause of gold going up overnight and going down during the day? A simple wealth transfer from West to East rather than an coordinated suppression scheme?

 Gold would probably be $300 the oz again if only relying on Western buyers. Asian market buyers are responsible for golds ascension as Asians have been victims of currency debasement many times over the centuries centuries and have little confidence in fiat currency regimes. Most Western countries have nothing but confidence in fiat as Western hegemony has coincided with the energy abundance of crude oil, coal and natural gas.

 As long as resources are theoretically infinite then fiat currencies can be infinite. The only thing that makes a fiat currency "money" is confidence in the currency. The fiat currency regime will forever insist that more "money" created out of thin air will always produce more resources.

tmosley's picture

Unlikely, as Easterners would notice what is going on, and buy on Western exchanges.

No, this divergence is simply too large and too long lasting to be natural.