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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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Sun, 01/15/2012 - 14:10 | Link to Comment GeneMarchbanks
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...

Sun, 01/15/2012 - 14:15 | Link to Comment BaBaBouy
BaBaBouy's picture

Proves GOLDMANIP In NYC???  Bitchez

Sun, 01/15/2012 - 15:03 | Link to Comment nope-1004
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.

 

Sun, 01/15/2012 - 15:15 | Link to Comment WmMcK
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. 

Sun, 01/15/2012 - 17:52 | Link to Comment Rynak
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.

Sun, 01/15/2012 - 18:04 | Link to Comment Kick_the_Kan
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.  

Sun, 01/15/2012 - 21:13 | Link to Comment Vendetta
Vendetta's picture

excellent

Sun, 01/15/2012 - 21:20 | Link to Comment Spigot
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.

Wed, 01/18/2012 - 12:58 | Link to Comment BlackSwanCrash
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.

Mon, 01/16/2012 - 00:48 | Link to Comment Cadavre
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.

Sun, 01/15/2012 - 14:17 | Link to Comment dwdollar
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.

Sun, 01/15/2012 - 15:40 | Link to Comment midtowng
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.

Sun, 01/15/2012 - 14:12 | Link to Comment Hulk
Hulk's picture

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

Sun, 01/15/2012 - 14:12 | Link to Comment lemosbrasil
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

Sun, 01/15/2012 - 16:27 | Link to Comment Dismal Scientist
Dismal Scientist's picture

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

Sun, 01/15/2012 - 14:14 | Link to Comment BaBaBouy
BaBaBouy's picture

Just Buy Physical GOLD ...

Sun, 01/15/2012 - 15:19 | Link to Comment Sudden Debt
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.

 

Sun, 01/15/2012 - 17:18 | Link to Comment StormShadow
StormShadow's picture

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

Sun, 01/15/2012 - 14:14 | Link to Comment tricky rick
tricky rick's picture

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

BTW....  trade before 10 am...

Ranting Andy will love this!

Sun, 01/15/2012 - 14:14 | Link to Comment Roger O. Thornhill
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.

Sun, 01/15/2012 - 16:14 | Link to Comment swissaustrian
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/

Sun, 01/15/2012 - 16:18 | Link to Comment swissaustrian
swissaustrian's picture

English interview with Dimitry: http://www.youtube.com/watch?v=UFjst9YR4os

Sun, 01/15/2012 - 14:15 | Link to Comment Belrev
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.

Sun, 01/15/2012 - 21:06 | Link to Comment oncefired
oncefired's picture

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

Sun, 01/15/2012 - 14:17 | Link to Comment DoChenRollingBearing
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...

Sun, 01/15/2012 - 16:22 | Link to Comment s2man
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.

Sun, 01/15/2012 - 14:21 | Link to Comment Marty Rothbard
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?

Sun, 01/15/2012 - 14:17 | Link to Comment Bansters-in-my-...
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.

Sun, 01/15/2012 - 14:25 | Link to Comment Bansters-in-my-...
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.

Sun, 01/15/2012 - 14:29 | Link to Comment navy62802
navy62802's picture

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

Sun, 01/15/2012 - 15:30 | Link to Comment Sudden Debt
Sudden Debt's picture

smart enough to buy....

to dumb to remember where they hidden it...

 

Sun, 01/15/2012 - 16:05 | Link to Comment Buckaroo Banzai
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!

Sun, 01/15/2012 - 16:22 | Link to Comment Jena
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

 

http://bit.ly/w03wq1

 

 

Sun, 01/15/2012 - 17:21 | Link to Comment Sudden Debt
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....

 

Sun, 01/15/2012 - 22:16 | Link to Comment Jena
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.

Sun, 01/15/2012 - 14:29 | Link to Comment Marty Rothbard
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.

Sun, 01/15/2012 - 14:26 | Link to Comment My Days Are Get...
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.

Sun, 01/15/2012 - 17:46 | Link to Comment Pladizow
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!

Sun, 01/15/2012 - 18:15 | Link to Comment Fuh Querada
Fuh Querada's picture

I preferred your previous avatar.

Sun, 01/15/2012 - 14:38 | Link to Comment JustObserving
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

 

Sun, 01/15/2012 - 14:35 | Link to Comment HungrySeagull
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.

Sun, 01/15/2012 - 15:03 | Link to Comment Quintus
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.

 

Sun, 01/15/2012 - 16:15 | Link to Comment HungrySeagull
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.

 

Heh.

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

Sun, 01/15/2012 - 20:23 | Link to Comment BetweenThe Coasts
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.

Sun, 01/15/2012 - 14:40 | Link to Comment Stuck on Zero
Stuck on Zero's picture

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

Sun, 01/15/2012 - 14:53 | Link to Comment fast mover
fast mover's picture

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

http://goldenlightswitch.blogspot.com

Generated $116K profit in 2011 on 1 contract.

Sun, 01/15/2012 - 14:43 | Link to Comment KingPin 999
KingPin 999's picture

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

Sun, 01/15/2012 - 17:53 | Link to Comment Pladizow
Pladizow's picture

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

Sun, 01/15/2012 - 14:45 | Link to Comment deflator
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.

Sun, 01/15/2012 - 14:53 | Link to Comment tmosley
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.

Sun, 01/15/2012 - 19:09 | Link to Comment Zero Govt
Zero Govt's picture

it's clearly nothing to do with Central Banks who have no public mandate to manipulate commodity markets or criminally collude in trans national price rigging

especially the US Federal Reserve which is a private bank afterall and therefore would be criminally and civily liable for market rigging under SEC legislation like any other private bank/company and open to being sued by private investors for losses incurred when rigging Gold prices

Sun, 01/15/2012 - 23:43 | Link to Comment StychoKiller
StychoKiller's picture

Hmm, you're "assuming" that the SEC has better things to do than watching pr0n -- check yer premises.

Sun, 01/15/2012 - 14:53 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

tyler writes: 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 irrelevant - the point is that this is "the divergence that keeps on giving" -

obviously, tyler did not consider leprechauns

still, is it not the logical scientific hypothesis?  alex sez the judges will also accept "gnomes"

Sun, 01/15/2012 - 16:19 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

i see tyler is j*nking me, again   L0L!!!

i think there might be a typo or oversight in that if the intraday = buy AM & sell PM fixes, then the chart for "long overnight gold index" has AM & PM reversed in the explanation on the chart, according to the explanation just above the (4th) chart

Sun, 01/15/2012 - 14:50 | Link to Comment props2009
props2009's picture

Great charts and analysis

http://fnn24.com/?p=38097

 

 

Sun, 01/15/2012 - 16:31 | Link to Comment Dismal Scientist
Dismal Scientist's picture

Another spammer.

Sun, 01/15/2012 - 14:54 | Link to Comment Tom Green Swedish
Tom Green Swedish's picture

I call it a bullshit Casino hack much like the little thing they used to use on the  slot machines to trick it into paying out.

Sun, 01/15/2012 - 14:55 | Link to Comment DCFusor
DCFusor's picture

I've noticed this going back quite a few months and mentioned it to fellow traders.  It seems like the Asians are buying, and the West is selling.  It's been pretty predictable.  Transaction costs need not be too high to make money, as results prove.  But it's a lot of work, and there's always the danger that a particular situaion will kick you off your discipline and you'll trade emotionally and blow it.

Sun, 01/15/2012 - 15:11 | Link to Comment RobotTrader
RobotTrader's picture

The PM bugz will never give up on "Paper"

 

Why is that?

- Because they are so convinced that the system is going to crash.

- And they will be the only ones to profit from it when gold goes "to 'da moon!" and everything else tanks

- They keep playing the futures and paper markets on margin after getting encouragement from sensational KWN articles

- And get killed every time.

My guess is that only about 15% of the gold bugs really hold physical and stay out of the futures market.

Gerald Celente is one who got so angry, he was certain that he was right, everyone else was wrong, and he was going to get rich.

What happens?

He gets wiped out.

Now the guy is even angrier!

LOL.....

Sun, 01/15/2012 - 15:34 | Link to Comment the grateful un...
the grateful unemployed's picture

yeah what sort of arrogance is this? i am taking a stand against the combined resources, intellectual, financial, and military, of the industrialized nations, not just the Fed, and then I'm surprised that they don't capitulate because i see their accounts are overdrawn? funny, Bob Prechter especially. and if and when they do lose it all, nobody wins, like nuclear war.

your only chance is to stay out of their cesspool.

Sun, 01/15/2012 - 15:40 | Link to Comment WmMcK
WmMcK's picture

I hope it's at least 15%, we (physical holders) will be able to get things restarted then.  I won't laugh at those who don't realize where this is headed.  I don't believe you're even a real/sincere person. 

Sun, 01/15/2012 - 15:53 | Link to Comment jekyll island
jekyll island's picture

He hardly got wiped out, he was using proceeds from cash settlements he received to roll over a contract and not take delivery.  Playing with house money mostly.  Buying a futures contract and standing for delivery is the cheapest way to buy gold short of digging it up yourself. 

Sun, 01/15/2012 - 18:17 | Link to Comment Poor Grogman
Poor Grogman's picture

This article is gold!
Its only bernakbux anyhow ...now he's giving them out free

Volatility bitches..

Sun, 01/15/2012 - 15:11 | Link to Comment hungarianboy
hungarianboy's picture

Let me get this straight, I buy when Asia Opens until 13:00 GMT or how long exactly?

Can anybody give me GMT time when to buy and when to sell?

 

Thanks in advance.

Sun, 01/15/2012 - 17:03 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

these prices are the AM and PM "fixes" outa london, which can be found on the LH side of kitco's main page [Gold, Silver, Gold Price, Silver Price, Gold Rate, Gold News | Kitco]

& the reader of this report is also invited to read adrianDouglas': Gold Market is not “Fixed”, it’s Rigged  L0L!!!  i liked that!

when i want to figure out the "times" of these london fixes, i usually just put the google on it

actually, if i read this right, you don't even hafta know the price of the "fix" just the time it is issued and a "market" you can trade @ pretty damned near that "fix" to.  this would be the arb trade, no?  what this fix is and what you can buy at or sell at are two different things by definition.  plus, unless you use a market order, your trade may not cross, and so on, as the article goes into when "distilling" these "abstract results" into actual trading

i agree that there are situ's around anybody's fave gold market/bazaar when it might be helpful to know this data about price behavior in the london "fixes"

Sun, 01/15/2012 - 15:26 | Link to Comment Herkimer Jerkimer
Herkimer Jerkimer's picture

Let'skedd'ater!

 

I'll throw a few sheckles in for a laugh!

 

•?•
V-V

Sun, 01/15/2012 - 15:28 | Link to Comment the grateful un...
the grateful unemployed's picture

I have been watching the same pattern in the daily dollar index. as long as the dollar and gold correlates so well, why not consider playing the paper currency as well. and of course if you were really on your game you would be looking at short term changes in the correlation between paper and PM

if the market has been strong dollar, weak gold for instance, and the dollar is better after market, go long the dollar PM, short gold AM, afgter you do some studies. hey there's a bull market somewhere.

Sun, 01/15/2012 - 16:04 | Link to Comment Bull_Colapse
Bull_Colapse's picture

Paper is not the devil, it sometimes is a bit of a religon here on ZH. I have physical metals but equites and currencies have their benifits, its to risky to invest everything into metal. You can only sell at the price someone else thinks its worth not what you thinks its worth.   

 

- 1134 - 

Sun, 01/15/2012 - 18:09 | Link to Comment Teamtc321
Teamtc321's picture

"Paper is not the devil, it sometimes is a bit of a religon here on ZH."

Tell that to the trader's that got MF Globaled by the Corzangy. 

Sun, 01/15/2012 - 16:16 | Link to Comment PSEUDOLOGOI
PSEUDOLOGOI's picture

 

I can't figure out how to submit an article... (maybe I'm not allowed)... whatever...

Here's my 2 cents/post on gold and it's unequivocal, modern manipulation:

"Paper Gold products are NoT worthless!"

What's all this talk about any investment that isn't physical gold being worthless?  This is just blatant, tin-foiled, conspiratorial and so 1900s talk one can only expect from a serf who has not had an Ivy-league education.  This person probably failed advanced math or at least can't understand the modern day economic facts and laws, they couldn't even put together a simple derivative if their life depended on it.  You want proof?  Here's you proof:  

A 1909 Russian Imperial banknote convertible to gold.  You can sell it on eBay for $15.  That's right!! It’s not worthless.

<SARCASM OFF>

That piece off shit paper says on it that upon presentation you can get approximately .3 ounces of gold.

Really???  Where do I present it now?  A Russian bank?  Or maybe Mr. Ras-Putin himself?

But of course modern day paper gold investments could never become worthless, right?  That's just impossible because the governments have laws, rules and whole departments to protect the investors... But wait, didn't Russia (a whole country) fail back then?  and all those left holding gold paper get screwed?  But, but it just couldn't happen today, no way!! My news anchor person on the Truth TV tells me so... this time it's different... this time it's really different...

What a bunch of bullshit.  You know why?  Because history repeats itself and as soon as you have 2 generations since some event in history, it's all but forgotten about.

Anyway... Shall we examine the said 1909 10 gold rubles for shits and giggles some more??? Let's do some back of the napkin math:

I've asked around some old immigrants if they recalled from their own stories (probably from their parents/grandparents) how much was 20 rubles.

Well, if you were a teacher in the imperial Russia and were employed in a (by that day) modern city you made at least 20 rubles a month. Give or take a few... whatever...

How would you live on these 20 rubles a month... Oh fuck it, let's just call it what it was before the revolution: .6 ounces of gold...

For .6 ounces of gold, you had a very nice apartment for yourself, your wife (who did not work) and you could raise and educate 2 kids without trying...  You were not in kings court, but you were middle class.

All for .6 ounces of gold....  What's .6 ounces of gold today? As of this moment, it's about 1640*.6= $984 dollars... OK, call it an even thousand.

Where the fuck are you going to be middle class today with a stay at home wife and have 2 kids living somewhere downtown in Russia???? NOWHERE...

In United States, without doing any research and going out wayyy on a limb here, I'm going to say that same .6 ounces probably got you the same standard in USA back in 1909.  Someone else feel free to write another back of the napkin analysis here on ZH on this...

So, we know that was the pay and that was the standard of living afforded by such pay.  Well, how much do we need for the equivalent in the USA today?  To live in say downtown Chicago in a nice place with a stay at home wife and with raising 2 kids you probably need over 120K /yr.  Most likely you will need a bit more, so let's call it 150K

150K/12 = $12,500 per month.  With .6 ounces, we derive a rough estimate of $20,000 per ounce today...

But there's no price manipulation, right??? Therefore my analysis can't be right...

Ok assholes… Let’s say I’m waaay off… by 50%!!  So, let’s say it should only be $10,000 per ounce instead of $20,000… Do you still not see how absurdly fucked up today’s prices are??? Why?  There’s only one explanation: manipulation.

Conclusion: Keep stacking.  PMs are a fraction in worthless fiat of what they should be and you are getting an enormous store of purchasing power at a liquidation style sale discount.  All right before PM paper instruments and currencies collapse.

Then you all will convert them to real-estate and food producing land.  Then you will be independently wealthy (fuck being rich, wealthy is where you want to be). 

 

Sun, 01/15/2012 - 18:51 | Link to Comment AC_Doctor
AC_Doctor's picture

WIN!

Sun, 01/15/2012 - 21:14 | Link to Comment deflator
deflator's picture

While I enjoyed reading your rant, your back of the napkin math is messed up as a soup sandwich. Yes, top down centrally planned wealth distribution has made it impossible for a single male to head a household on wages but overall energy is much higher. The world is not powered by gold anymore than it is powered by fiat. The world is powered by energy.

 

Sun, 01/15/2012 - 17:01 | Link to Comment pakled
pakled's picture

That is a very compelling trade. Wonder if it will continue that way, now that it is getting disseminated?

 

I personally will never find out, as last week I closed my brokerage accounts. No sarcasm. I am going to pure cash and pure physical. In my possession and with goldmoney.

Why? Who knows when the markets will "crash", if ever. But in paragliding there is an expression: "It's better to be on the ground and wish you were in the air, than to be in the air and wish you were on the ground".

Need I translate? Yeah, if I stay in, knowing what I know, what we all know, and get hypothecated in the ass... I would regret that forever.

And to be brutally honest, I would be better off if I had gone to 100% physical in 2004, the date I took my red pill, and stayed the phuck there (and btw, Jeff Kern of the SKI gold stock report, once told me the same thing).

Sun, 01/15/2012 - 17:17 | Link to Comment savagegoose
savagegoose's picture

when celente gets his  6 digits back, ill let him  know about this trade , im sure he will want to be in on it

Sun, 01/15/2012 - 17:34 | Link to Comment Zola
Zola's picture

This line was discussed by GATA and represents the actual manipulation of the price better than any other metric. when the P&L acceletates to the upside is when evidence of manipulation is flagrant. Indeed in a normal market operation the arbitrage profit should tend to 0 . However here you can distincly see that the line goes through the roof from august onwards, when Gold was actively suppressed around the time of swiss franc invtervention and further into the year end. Whenever the market doesnt seem to "make sense", this line illustrates the anomaly. 

Sun, 01/15/2012 - 18:03 | Link to Comment Market Efficien...
Market Efficiency Romantic's picture

Add VIX threshold level, TSY momentum and FED instrument schedule to filter the entirely unplausible intraday short moments.

Sun, 01/15/2012 - 18:26 | Link to Comment Market Efficien...
Market Efficiency Romantic's picture

I don't buy the net Western selling and Estern buying argument. If globalized capital markets have achieved one thing, then it is the arbitraging of regional price differences for the same asset. Any larger entity would buy on the cheapest exchange and vice versa and arbitrageurs would do the rest. Also, intraday price suppression in the West and bidding-up in the east to me looks more like Western big boy accumulation, if at all, not the other way around. Plus, the evil siblings JPM/FED interest in low PM prices is well known, so their intraday trading activity absent any tactical or strategic positioning on all fronts during US market times should be all to clear.

What keeps perfect arbitrage from working here is the asynchronity of the price differences. I would consider different margin rules, regionally and intraday/overnight a more compelling argument. Also, I would look for portfolios and pairs that are not tradeable in the respectively other region, which requires closing intraday.

Nevertheless, as quant, I am very surprised by the sustainability of such an easily observable trade, that should have come up in any macro filter and alerting system. 

Oh and BTW, now we know how Renaissance managed its >30% return in 2011 again.

Sun, 01/15/2012 - 19:38 | Link to Comment chirobliss
chirobliss's picture

Well one thing is certain, it is over now that it is a headline!!

Sun, 01/15/2012 - 20:19 | Link to Comment BlackholeDivestment
BlackholeDivestment's picture

...not even tempted.

Sun, 01/15/2012 - 21:42 | Link to Comment deflator
deflator's picture

 One reason the arbitrage has accelerated despite the recent gold price depreciation is the much written about Chinese "hard landing". Many in the West, particularly in the U.S., are shorting gold in anticipation of a hard landing in China while Asians are still accumulating gold. 

                                                                I wonder how many fiatskis have gone down the toilet shorting commodities that have made the wealth transfer from West to East that much easier?

Sun, 01/15/2012 - 23:28 | Link to Comment beaker
beaker's picture

So where/how do you trade this?

Mon, 01/16/2012 - 01:36 | Link to Comment covert
Mon, 01/16/2012 - 08:37 | Link to Comment TooBearish
TooBearish's picture

Ah yes we must trade with the manipulators and cenetral planners in order to make money in this market.

I would suggest similarly that when the FED is in the market buying bonds for Op Twist, when the bond market is lower in the o/n session (as no one overseas buying bonds in the secondary market, just CBs buying in auctions), bonds will usually rally in the US session to make a new daily high and settle mid range.  This is a typical pattern like the gold suppression move.

Additionally, the if the EURO is down in the overnight session (and the ES, whose correlation to EUR has fallen dramatically since the turn into 2012) it will usually rally into the US opening as the huge short base there books profits.

Just saying....

 

Mon, 01/16/2012 - 19:08 | Link to Comment Mr Bears
Mr Bears's picture

I'm going to try (or at least look into trying) this strategy in the silver market. I will probably use HZD or other leveraged inverse during the day, and an undervalued silver miner to hold overnight (don't want to hold an ETF overnight), maybe SLW to start with. On days when it looks like there is a defninite uptrend in silver I will just let the SLW ride. Thanks for the article, great to keep in mind for metals trading. 

 

Tue, 01/17/2012 - 00:32 | Link to Comment shokdee
shokdee's picture

The East bullish, the west bearish.

Tue, 01/17/2012 - 00:36 | Link to Comment shokdee
shokdee's picture

<<Is it manipulation? is it the early Asian buying offset by London pool selling? It is largely irrelvant..>> if you hold physical.

Tue, 01/17/2012 - 15:41 | Link to Comment I should be working
I should be working's picture

I'm beginning to think this correlation would work just as well for the whole market.  Every day it's up at the open and down during the day.

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