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
(NYSE:
CME-
News) 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.
"Yeah, that was just me liquidating my spread position," Mr.
Shak, 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."
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.
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.
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gold contract liquidation last monday
Posted by hazbin1 on 28th of Jan 2011 at 12:32 pm
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 (NYSE: CME- News) 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.
"Yeah, that was just me liquidating my spread position," Mr. Shak, 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."
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.
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.