Over the past several weeks there had been rumors that the reason for the precipitous drop in gold was primarily driven by a hedge fund liquidating its futures positions. This has now been confirmed: "Yeah, that was just me liquidating my spread position," Mr. Daniel Shak, [of SHK Asset Management] 51 years old, said in an interview. "I had a significant, fully margined position. The dollar amount of the gold liquidation was very small, it was just a lot of contracts." Of course in the extremely jittery gold market, the kind of persistent marginal gross selling of contracts was all that was needed to spook weak hands into a consistent dump of the precious metal, which as we pointed out was beyond overdone. Judging by this morning's jump in the PM complex, SHK's liquidation is now not only over but about to promptly reverse as daytrading momos realize they were duped by one single guy. Look for gold to resume its upward advance as investors realize that the gold dump was nothing more than an ongoing futures position liquidation.
More from the 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 contracts—bets that prices will both rise and fall—started going bad. Monday, he liquidated his position, and is returning money to clients.
As a result, the number of gold contracts on CME Group Inc.'s Comex division plunged more than 81,000, to about 500,000, the biggest single reduction ever. While his trade didn't account for all of the contracts, an average daily move is about 3,000 to 5,000 contracts.
That Mr. Shak and his firm, SHK Asset Management, could control one of the largest positions in the gold market underscores how leverage can enable investors to control huge positions in many commodity markets.
We wonder how authors Carloyn Cui and Greg Zuckerman would feel if they knew just how big JPM's positions are. On the other hand, there is nothing to worry about: after all the corrupt muppets at the CFTC have just made sure that Jamie Dimon's criminal syndicate will be allowed to toy with the gold market at will in perpetuity.
As for SHK Asset Management, RIP:
Mr. Shak said he quit the trade when he was 70% down. People close to the firm confirmed the loss was about $7 million.
Just over a week ago, he put his apartment on Manhattan's Fifth Avenue up for sale with a price tag of $7.5 million. He said the sale wasn't related to his losses.
And as we prdicted previously, the weak hands in gold's recentless surge saw this one-off liquidation event as something far more profound, and translated the sell off as a fundamental weakness in gold, despite attempts to disabuse them of this lunacy.
While the drop in contracts didn't appear to hurt gold prices, it caused some panic in the market. Brokers said they fielded calls from clients worried that a big trader may be dumping holdings. Monday, gold futures rose slightly to $1,344.50 a troy ounce and settled at $1,318.40 Thursday. The front-month contract is down 7.3% from its record close on Jan. 3.
And some more on the gold trade gone horribly wrong:
Mr. Shak's positions were extended as far as December 2015, according to exchange data.
"He just had too much position on," said a person who is familiar with his trades. "He didn't think he was flying naked the whole way."
A CME spokesman said he couldn't comment on specific trades.
Mr. Shak said the trade had been profitable for him for years, but it stopped working and the exchange kept raising his margin requirements, forcing him to put up more money. Mr. Shak said that when the exchange raised it by 25% Monday, he decided to cut his losses and end the trade.
Some Wall Street banks and gold producers were on the other side of the trade, according to people close to the matter.
"It was David against Goliath," Mr. Shak said, referring to his position in the market in relation to banks and the commodity exchange. "I just decided to get out; down 70% is better than down 100%."
He had worked as a floor trader at Comex for years before he set up his own fund in 2002. The firm suffered losses of about 12% in 2008, before rising 20% in 2009 and 100% last year, Mr. Shak said.
Mr. Shak, who lives in Las Vegas and also owns a home in the Hamptons on New York's Long Island, also is a competitive poker player and says he has won more than $2 million, including a $1 million win at the Aussie Millions in Melbourne, Australia, last year.
Mr. Shak said his decision to close his position wasn't related to the faulty trade, but rather was a "lifestyle decision."
"I just chose to close, I didn't like my positions so I chose to liquidate, I wasn't forced," he said. "I was in the process of closing anyway."
Mr. Shak said he will return to trading in a few weeks, though perhaps not manage money for others.
"This is not career ending," he said. "I'm not stopping trading."
Oh yes you are.
Bottom line, M2 just surged by the highest amount ever, Bernake will never stop monetizing, and fiat is contiuing the race to the bottom. Most importantly for those with a trigger finger response time, the liquidation is now over. Keep a close eye out on the price of gold.
Note below what happens when a key selling catalyst is removed... or at least made apparent.