"The sudden and exaggerated drop in the price of gold this week has piqued my curiosity and I was wondering if you could venture an opinion.

"It is obvious that gold is back to trading as a "risk on" asset and that certainly explains some of the drop, though nothing like the correlation with risk assets in 2008.. What is interesting is that it has traded as both a commodity and a safe-haven currency during various stages of the secular bull run. We also know that secular phases are interrupted often by reversals or corrections which can be quite spectacular in their move.

"Another known, I believe, is that there could be some panic selling by late-comers. I may not have added this except that it is now down close to 5% in $USD today.

"What is conjecture, but worth noting, is the many articles I have read recently about the possibility of Gold Leasing going on at the Central or large Commercial bank level. If this is indeed taking place, all it would take is for the lessor to sell the gold in the market in order to create a potentially large but temporary overhang in supply. With the critical need of European banks for recapitalization and liquidity, do you think this is a possibility?

"Here is a short article that does a decent job of explaining this."

David Fuller's view Thanks for your thoughts on this, including the link which I have posted in the Subscriber's Area.

I too have seen several recent articles on gold leasing which may be a factor, although I have no further insight on this. I have also mentioned on several occasions my own conjecture regarding European central banks and their need to raise cash, some of which could come from gold sales.

Regarding correlation and the recent volatility, including a number of unusual downdraughts in precious metals, I would not be surprised if this was exacerbated by the machines. In other words, it can be caused by the predatory practice of algorithmic high frequency trading (HFT).

As I understand it, HFT often uses a technique known as 'pinging', in which thousands of small orders are placed rapidly and mostly withdrawn just as quickly, to identify larger or pooled orders in price ranges. Think of it as similar to the sonar used by factory fishing fleets to identify schools of what ever fish they seek. Once identified, HFT can front-run those orders, often triggering stops in futures markets and then closing out those positions once the sudden downdraught or updraught has occurred.

Conjecture aside, the best way for most of us to cope with all this, and it has not been easy recently due to the volatility, is to monitor the price chart action closely.