After sudden plunge, gold traders cry conspiracy
Gold dropped $25 in two minutes Friday morning following what appeared to be a single massive sell order, and professional traders are now pronouncing the sale a deliberate attempt to manipulate the market.
At 8:42 a.m. ET Friday morning, a firm appeared to sell 5,000 gold futures contracts "at the market," meaning at whatever price was available. The massive order was more than the market could take at once and led the CME to automatically halt trading for 10 seconds.
Eric Hunsader of Nanex told CNBC.com on Friday that 2,700 contracts were sold, which triggered the halt, and that the remaining 2,300 were sold once the market resumed trading.
(Read more: Gold's plunge blamed on one massive sell order)
Since one futures contract controls 100 troy ounces of gold, and each troy ounce was worth $1,285 at the time of the sale, this party was selling some $640 million worth of gold in one shot. And it overwhelmed the liquidity in the market.
"Anyone with knowledge of the size and volume in the market would absolutely never, ever place a 5,000 [contract] sell [order] at market, because you could not estimate the offset price," said iiTrader CEO Rich Ilczyszyn.
If Ilczyszyn's firm were placing the order, he said, "we generally would piece the order in to work a better price." That's why he believes the trade was "an error."
But Euro Pacific Capital CEO Peter Schiff, a longtime gold fan, infers darker motives.
"Someone's obviously trying to move the market lower," he told CNBC.com. "A legitimate seller would work a limit over time to get a good price."
Jim Iuorio, managing director at TJM Institutional Services, sees similarities between what happened to gold Friday and what happened Sept. 12, when a big gold sale at 2:54 a.m. ET similarly caused a trading halt and hurt the market.
"There is only one conclusion that seems logical regarding Friday's gold trade and the one from a month ago, and that's that they were designed to manipulate prices," Iuorio said. "They were slightly different, in that the one from a month ago was done when the market was illiquid in order to get the biggest prices movement. Friday's was done around the opening to ensure that there was maximum visibility."
Jeff Kilburg of KKM Financial noted that the trade was done when gold was at $1,285.
"If you look at the last few explosive moves in gold [to the downside as well as the upside], you can see as we approach significant levels that algos come alive," Kilburg said, referring to trading algorithms. "I think it was a predatory high-frequency trading algo that knew it could force a [boatload] of stops under $1,280."
But not everyone is on the conspiracy train.
George Gero of RBC Capital Markets, precious metals strategist and a veteran of the gold market, says what we saw could have simply have been a fund changing its mind.
"Gold has been a market hedge for some big funds, and of course you've had big ups in the stock market all week," Gero said. "As soon as they felt there would be a compromise in D.C. [on the shutdown and debt ceiling], they felt they had to cash in right away to get into stocks."
(Read more: The gold market's big question: Deal or no deal?)
So is that how Gero would have sold $640 million worth of gold?
"Absolutely not," he said with a laugh. "But I don't know who the fund was, and I don't know who managed their order room."
When reached for comment, CME Group spokesperson Damon Leavell said: "Our markets functioned properly, and price discovery continued throughout the move."