Gold volatility spikes in Asia during China’s lunch break

Some of the biggest price moves in gold since late last month have, unusually, occurred in Asian hours and traders more accustomed to following the lead of their Western counterparts suspect a big increase in algorithmic trading may be to blame.

Sensitivity to the US dollar-yen exchange rate may also help explain the moves, although some traders speculated that the timing looked suspiciously like attempts to catch Chinese traders off guard during their lunch break.

Liquidity in Asia tends to be thin until Europe wakes up but recent weeks have been different: Comex gold futures, the busiest gold contract in the world, have suffered sharp sell-offs in Asia, sometimes sparked by the news flow or currency moves but often for no identifiable reason.

"It is unusual for Asia to be seeing these busy trading sessions," said David Govett, the head of precious metals at broker Marex Spectron in London. "I have spoken to a lot of people about it and the general consensus seems to be that there is a big increase in algorithmic and high-frequency trading in this time zone nowadays as it can be quite easy to push about."

The trend began on October 31, when US gold futures fell through a major technical level of US$1,180 an ounce late on that Friday afternoon in Asia at a time when markets were just opening up in Europe. They dropped US$11 in a minute and nearly 9,000 lots were traded in five minutes, compared with just 535 lots in the five minutes preceding the drop.

The breach of US$1,180 - the lowest level hit by gold during last year's 28 per cent slide - sparked a huge sell-off in the precious metal over the next two weeks.