Another Capitulation …
Early on Monday in Asian trading, someone (or something, like a trading algorithm) sold quite a bit of gold in the futures market. Apparently the sale was so overwhelming that circuit breakers were triggered twice. Someone seems to have developed an odd predilection for selling a lot of gold futures at precisely those times when futures market liquidity is at its thinnest – as the same thing happened again after the close of official COMEX trading on Monday, in what is normally a “quiet period”.
There are many ways in which such a seemingly strange trade (which ensures one doesn't get the best price) can potentially pay off. For instance, it could generate a big profit for outright short positions taken at an earlier stage, by triggering the sell stops of other traders. It could also pay off if a large options position was previously bought, either on gold futures directly or perhaps on closely related instruments like gold stocks or ETFs on gold stocks.
A second capitulation after the 2014 capitulation move – click to enlarge.
The most interesting action took indeed place in gold stocks. The HUI Index produced an RSI of slightly above 11 on its daily chart, after declining for a record 10th day in a row. This RSI reading is the lowest in the history of the index (the previous record low was produced in 1998 at about 16). Moreover, gold stocks have now broken every historical bear market record in the sector. Not only is this by now the biggest decline on record, the sector (as measured by the BGMI) is also trading at a record low relative to the gold price – undercutting the previous record low established in 1942 in the mini-crash following the Pearl Harbor attack.
The reason why this move deserves to be called another capitulation is that it has something in common with the 2008 and 2014 capitulation lows: in both cases record high trading volume was recorded (not in all gold stocks, but in selected stocks, resp. ETFs). This time it was the turn of the GDX, of which nearly 170 million shares traded on Monday, dwarfing all previous trading volume spikes by a huge margin:
Trading volume in GDX explodes – click to enlarge.
A number of the declines in individual gold stocks seemed downright silly – e.g. ABX, the world's largest gold miner by output, saw its shares decline by almost 16%. This is remarkable even by the sector's standards of volatility, but it is even more so if one considers that ABX was already trading below its low of 2000 before Monday's decline. When ABX made its low in 2000, the gold price was at $270. We are not particularly enamored of ABX by the way (we think it has way too much debt), we're merely using it for the purpose of illustration here.
