Can a flash crash hit gold market?

This article was originally printed in the latest issue of Numismatic News.
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Remember the flash crash of May 6, 2010, when the Dow Jones Industrial Average sank by nearly 1,000 points in minutes, reducing the value of some big name stocks by huge percentages?

Authorities have now fingered a single large electronic trade in futures contracts set in motion a downward cascade of rapid fire transactions between firms that buy and sell with computer programs. And unlike the comments that arose on the day afterward that it was some sort of error, the firm in question intended to make the trade, though it did not intend the sequence of trading events that followed.

What happens if that kind of trading hits the gold bullion market? This is the first bull market where computer trading has had that kind of power.

Gold investment writers have speculated about all kinds of nefarious influences on the gold market from secret government sales or leases to sinister bank trading patterns.

Each one of these theories, or allegations if you will, presupposes that there is some person or group of persons who are doing something deliberately with the full knowledge of the actions they are taking and what the market impact is likely to be.

What happens if one day trading in gold goes haywire as it did for the stock exchanges in May?

With modern financial innovations, it could even be the stock exchanges that set off such an occurrence. Exchange Traded Funds are stock exchange products. They control huge quantities of bullion. What might happen if a firm that trades in them decides the market has temporarily or permanently peaked and unleashes large computer guided sales?

Will there always be an optimist on the other side to absorb them so the market won’t go into a rapid swoon as the stock market did?

The last time we experienced the gold market conditions that exist today was in 1980 when the dollar’s value was questioned, inflation was high and the idea of hyperinflation was bandied about.

When gold peaked on Jan. 21, 1980, at a closing high of $825, it fell 18.79 percent in one day from close to close. The fall was an even greater 23.43 percent if you figure it from the intra-day trading high. This was without the benefit of computer program trading.

It would be truly ironic if the same high tech wreck occurs in the gold market where buyer sentiment is largely fueled by suspicion of what Wall Street has done to finance specifically and the economy generally, but having a sense of history is no compensation for the financial damage such an “accident” or unintended trading incident could cause.

Those who own their gold free and clear and in their own possession would not face any immediate problem much as the owners of the stocks that were drastically devalued on May 6 did not face problems, but the overall impact was still huge because traders know in the back of their minds that it might happen again.