Did bankers cause the pound to crash?

  • Gold remains (just) in favour
  • Foul play?
  • A haven from paper money
  • No end in sight
  • Trading Masterclass

Flash. Crash. Rebound.

You may remember the 2010 ‘flash crash’ on the US market.

On an otherwise quiet May afternoon, stocks suddenly started to fall — fast. So fast that the Dow Jones Industrial fell nearly 1,000 points, or 9%, in minutes.

It was the sharpest one-day fall since the 2008 financial meltdown.

However, unlike the 2008 crash, the ‘flash crash’ literally lasted for only a few minutes.

The market ended up recovering most of the losses that day, and then over the next few days. But tellingly, the market resumed falling for the rest of the month, and wouldn’t reach the pre ‘flash crash’ level again until October that year.

Well, today the market has seen another ‘flash crash’. This time, the pound sterling is (for want of a better word) the victim.

chart image

Source: Bloomberg
Click to enlarge

You can see the big spike down. The pound fell over 6% in seconds, before rebounding.

So, what happened? Was it just ‘one of those things’? Or was it a coordinated attempt by certain market players to send the pound spinning downwards?

We’ll give you our take below…


Overnight, the Dow Jones Industrial Average fell 12.53 points, or 0.07%.

The S&P 500 gained 1.04 points, or 0.05%.

In Europe, the Euro Stoxx 50 index fell 4.7 points, or 0.16%. Meanwhile, the FTSE 100 fell 0.47%, and Germany’s DAX index fell 0.16%.

In Asian markets, Japan’s Nikkei 225 index is down 41.08 points, or 0.24%. China’s market remains closed for the national holiday.

In Australia, the S&P/ASX 200 index is down 16.03 points, or 0.29%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$50.43 per barrel. Brent crude is US$52.49 per barrel.

Gold is trading for US$1,257.60 (AU$1,659.34) per troy ounce. Silver is US$17.36 (AU$22.91) per troy ounce.

The Aussie dollar is worth 75.81 US cents.

Gold remains (just) in favour

We’ll get back to the pound ‘flash crash’ in a moment. But first, another price has fallen heavily in recent days. We’re talking about gold.

The gold price has fallen nearly 7% in two weeks.

You may be familiar with your editor’s view on gold. We’re only ever a buyer, never a seller. So, when we see the gold price fall, we buy.

We bought on Wednesday, and after today’s further slump, we bought today too.

Your editor doesn’t appear to be the only one who hasn’t lost faith in gold. As the chart below shows, despite the gold price slump (blue line), gold held by exchange-traded funds (white line), continues to rise:

chart image

Source: Bloomberg
Click to enlarge

Now, that may not be concrete evidence to claim that the gold price won’t fall farther. If you check out the chart below, you’ll see that after the 2011 peak in the gold price (blue line), ETF holdings (white line) held up:

chart image

Data Source: Bloomberg
Click to enlarge

It took a year before ETF gold holdings peaked and then fell.

So it may be too early one way or the other to say that the gold price can withstand the current slump — or that it’s curtains for the metal, with the price plunge set to continue.

Regardless, your editor (foolish or not) remains a buyer. Not a seller.

Foul play?

Back to the pound ‘flash crash’.

In our view it’s clear. Reports suggest that there was a large volume sell order against the British pound, during supposedly light trading in the Asian market time zone.

It may very well be the case that trading in pound sterling is lighter during Asian market hours than in European market hours. However, it’s also worth remembering that the US dollar and pound sterling FX pair is typically the third or fourth most traded pair worldwide each day.

And unlike stock markets, which only trade for around eight hours per day, the foreign exchange market trades 24 hours a day, opening in the early hours of Monday morning, and then not closing again until the early hours of Saturday morning, Australian time.

But the other thing worth noting is the huge spike in volatility created by this ‘flash crash’.

When the UK surprised the pundits by voting to leave the European Union in June, volatility on the British pound hit 270. The volatility from today’s ‘flash crash’ hit 334:

chart image

Source: Bloomberg
Click to enlarge

The volatility spike after the EU vote is the high bar towards the left, today’s ‘flash crash’ spike is on the extreme right.

What does this mean?

For a start, we don’t buy the idea that today’s ‘flash crash’ is all down to light trading and a single big volume trade.

As far as surprises go, even after the polls closed in the EU vote, the pundits were still predicting a win for the ‘Remain’ side. It was only after the results started coming in that things changed.

In fact, as the polls closed back in June, the pound sterling actually climbed against the US dollar.

Our bet is that there could be something more sinister at play. The world’s banking elite is already miffed by the vote for the UK to leave the EU.

The big banks threatened to leave Britain in the event of a ‘Leave’ vote, but when the ‘Leave’ vote happened, they began lobbying for special favours so that they could stay in the UK, but still get the benefits of the European single market.

Based on the speeches coming out of the ruling Conservative Party’s annual conference this week, it appears that the banks aren’t about to receive any favours or benefits at all.

It would be an understatement to say they’re unhappy.

So, is it such a crazy idea to think the big banks have a hand in this takedown of the British pound? Maybe. There’s every chance we could be spouting conspiratorial junk.

But we don’t think so.

Not surprisingly, we’ve seen the ‘fat finger’ excuse rolled out. That’s a euphemism for a trading error. Again, it could be. But in our view, it’s more likely that big traders at the big banks are using any method they can to influence the UK and it’s progress towards leaving the EU.

The message is clear: Don’t mess with the bankers.

A haven from paper money

With growing instability in the currency markets, in our view it makes more sense than ever to own gold. By that, we mean physical gold.

But, if gold regains favour after the recent slump, one other type of ‘gold’ may perform even better. We call it ‘penny gold’. Details here.

No end in sight

While some markets are slumping, crashing, or flash crashing, other markets appear to defy all notion of reason.

We’re talking about the Aussie housing market. Bloomberg reports:

Australian policymakers say efforts to rein in the runaway housing market are working. But on the ground there’s a fresh bidding frenzy, as fibreboard shacks fit for demolition and miles from downtown Sydney go for almost $1 million.

As long time readers know, your editor gave up trying to predict the fortunes of the Aussie housing market a long time ago.

We expected a major crash in 2008, 2009, and in 2010. We think by 2011 or 2012, we decided it was time to stop applying the egg to our face and move on to other things.

But onwards and upwards house prices go. When will they at least stop rising, even if they don’t crash?

With interest rates at a record low, it’s hard to see a crash coming soon, unless there are external or other factors at play — such as rising unemployment or a recession (overdue after 26 years of growth).

But regardless, we’ll continue to keep tabs on the Aussie housing market. Surely even Australia’s most hardcore property spruikers will see that even $1 million for a dilapidated shack is one step too far.

Trading Masterclass

Look out for our latest Trading Masterclass series next week.

We’ve hosted a number of these series over the past couple of years, and each time we’ve received great feedback.

So, next week, we’re doing it again.

Remember why we do this. We do it to help you with your trading and investing. Yes, we have a financial interest in it too. If you take out a subscription to one of our services, it helps us pay the bills and make a profit.

But we also know that if the only thing we do is sell subscriptions, without providing education and knowledge, there is a greater chance that you won’t get the most out of the subscription. And if you don’t feel as though you’re getting the most of it, you’ll cancel.

I’m not just saying that either. It’s a statistically factual part of our business. That’s why we hold online masterclasses and training sessions.

Anyway, I won’t reveal the details of our next masterclass here. You’ll find out about it soon enough.

All I can say is that it involves one of our most popular and highly respected editors. Make sure you don’t miss it. Check out the details in your inbox tomorrow.

And remember, as with all our masterclasses, this one is free. It won’t cost you a penny to register for the event, nor to participate.

Details tomorrow.