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Could a Hedge Fund’s Forced Liquidation be Causing Gold’s Plunge?

Thursday, October 6, 2016 7:09
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Gold coinFrom Tyler Durden: Acclaimed analyst Dennis Gartman has an interesting theory regarding gold’s recent mega-pullback, suggesting that a sinking London-based hedge fund may be a big part of the equation.

As noted yesterday morning, when commenting on the biggest gold slam in 3 years, Gartman said that he has “wounds to lick and heal” adding “what can one say other than “We truly didn’t see that coming!” The light at the end of the tunnel was a fully loaded train heading right for us and we smashed into it! We were concerned and indeed we voiced that concern in our comments yesterday that $1305-$1310 in spot gold could be hit and that stop loss selling could follow hard upon. However, we actually believed that the follow-on stop loss selling would be far, far less severe than it proved to be. Indeed, we had hoped that the selling would be sated quickly and thought it possible that a “reversal” would be possible. It was not.”

So, having “licked his wounds” today, Gartman proposes an interesting explanation for what is causing the relentless selling:

As for gold and the other precious metals they remain rather obviously weak and as we move away from Tuesday’s collapse it appears more and more that this was a forced liquidation on the part of a large… actually a massive… hedge fund out of London. The sheer panic that swept through the gold market then really hadn’t the look of a sell off predicated upon a rumoured push by the ECB to curtail its purchases of sovereign debt securities, nor had it the look of a rush on the part of hedgers in the gold mining industry to hedge forward production. Rather it had the look of forced margin-clerk liquidation. It looked like panic on the part of someone, somewhere who had lost control of the situation.

Reading through the always interesting… but usually openly anti-everything and especially anti-TGL… ZeroHedge comments, we came across the following regarding Mr. Crispin Odey and the troubles he and his funds have been having of late. ZeroHedge wrote:

In mid-August, when the market was enjoying its low-volatility grind higher, we observed that one of the biggest bears in the hedge fund industry, Crispin Odey, was having a bad year, with his hedge fund sinking some 30% through the end of July. Since then, conditions have only gotten more precarious for the billionaire hedge fund manager, and as the FT writes, for Odey, who is betting it all “on a violent unwind of a QE bubble”, the endgame may have arrived.

As Miles Johnson writes [for the Financial Times], “many financial commentators have warned that current monetary policy has inflated a bubble that will one day violently pop. Few of them have risked money betting on the precise manner in which a chaotic unwinding of quantitative easing will play out through financial markets. This makes the portfolio of Crispin Odey, a London-based hedge fund manager, an interesting outlier. Mr. Odey is one of only a handful of investors who has backed up his dire prognosis for the global economy with a series of large, leveraged trades designed to pay off in the event of a crash.”

To be sure, as we noted two months ago, Odey’s bets are predicated on a collapse of Japanese bond prices, a surge in the price of gold and immolation of equities. Or as the FT puts, it, “If it works he may make hundreds of millions of dollars for his clients. If wrong his fund may not survive.”

We are not rumor mongers here and we do not like to report on other people’s problems for we’ve plenty of our own errors and sins to account for; but the fact that much of this was reported in The Financial Times allows us to speculate that Tuesday’s sell-off did look like liquidation rather than fundamentally warranted selling. This view is further supported by the fact that the open interest in the COMEX futures has fallen by more than 4% this week, suggestive strongly of forced liquidation and a throwing up of the hands… and of the stuff in one’s stomach.

It is very possible that Gartman is actually quite correct on this one, in which case the forced liquidation by one fund may lead to similar selling by many others in a daisy-chain of margin calls by all those who had loaded up on gold in a bearish bet that central banks will lose control, only to be forced to unwind their bets with China still on holiday and unable to provide a friendly bid. To be sure, one look at today’s gold chart reveals that there may be much more pain on deck for gold longs.

This article is brought to you courtesy of ZeroHedge.

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