‘This doesn't seem like a store value… How are we supposed to trade this?’ – Phoenix Futures’ Grady on gold’s shock selloff

The speed and severity of the selloff stunned even the most seasoned of commodity traders, and forced market participants to question whether the metals have moved too far, too fast – and whether Thursday’s volatility signals the end of the bull market rally.

Kevin Grady, president of Phoenix Futures and Options, has been trading gold and silver on the CME for over 30 years, and even he was struggling to make sense of what the market had endured.

“It seems to me that maybe there were some big stops placed below the market,” he told Kitco News. “They went for those stops, and got the stops, which just exacerbated that move. But it's insane. Real traders are just looking at this like, ‘How are we supposed to trade this?’”

Grady agreed that gold and silver are performing more like meme stocks than mature commodity markets. “This doesn't seem like a store value,” he said. “It doesn't seem like ‘Let's get a steady asset, we're going to invest in gold, it's a hard asset.’ This is flying all over the place.”

He said a major contributing factor is that the metals’ recent parabolic rise has brought in a lot of algorithmic trading bots – and the volatility that comes along with them – at the same time that a lot of regular traders are out of the market. “So any type of business that goes through, it's just like going through a washing machine,” he said. “It's incredible. You can't trade.”

And while much of the recent volatility has been concentrated in the silver market, with its smaller supply and disrupted stocks, Grady believes Thursday’s wild ride started in gold – but the algos were firmly in the driver’s seat.

“I think it was gold-driven,” he said. “Gold is the big brother, and I think that people saw the move happen in gold. I was looking at the DOM [depth of market] trader when this whole thing was going on. There's no way you can humanly… It's impossible to put an order in on that system. You couldn't do it. If you don't have an algo or something trading for you, the only thing you can do is hit ‘sell at market’… and pray."

“You could have a stop, and in this move, they could have gotten filled $150 lower than their stop,” he added. “You're not getting filled around your price. I'm telling you, I was looking at the screen and I had to stop. I thought I was going to get vertigo. It was insane; you couldn't find the market. I've never seen anything like that.”

But despite the near-unprecedented volatility gripping metals markets, Grady doesn’t interpret Thursday’s slide as a sign that the gold market has reached its zenith, only that speculators have jumped into the fundamentals-driven rally.

“You can see where the market trades, and the players that are entering the market,” he said. “When we saw gold going up, we saw all that central bank buying; you didn't see these moves. But then at the end of the year, everyone starts reporting, ‘Hey, gold was up 50% and silver 100%.’  And then you saw a different type of player come into the market. Investors, they're not the ones getting out like that. Those aren't the ones that are trading in that move.”

“You're seeing a tremendous amount of volatility, and I think that's because a lot of speculators have entered the market,” he added. “But I do think that ultimately gold is going higher. I think silver's going higher.”

Still, on days like today, Grady said experienced professional traders know to stay away.

“I'm looking right now at the market, it's a dollar and a half bid/ask,” he said. “When that thing was flying, I couldn't even figure it out. It was just moving so fast.”

“The manual traders definitely stepped back. This market today was not meant for individual traders.”