Mystery Of Huge Drop In Open Interest Explained

Surprisingly, for such a large drop, it's a small player that was responsible. Daniel Shak had a $10 million hedge fund, and he put the proceeds into a gold spread trade that went bad as prices fell.

Thanks to the nature of futures trading, Daniel Shak's $10 million hedge fund held gold contracts valued at more than $850 million, more than 10% of the main U.S. futures market, and the equivalent of South Africa's annual gold production.

But as gold prices started falling this year, the trade, which was a combination of being long and short gold contracts—bets that prices will both rise and fall—started going bad. Monday, he liquidated his position, and is returning money to clients.

As a result, the number of gold contracts on CME Group Inc.'s Comex division plunged more than 81,000, to about 500,000, the biggest single reduction ever. While his trade didn't account for all of the contracts, an average daily move is about 3,000 to 5,000 contracts.

That Mr. Shak and his firm, SHK Asset Management, could control one of the largest positions in the gold market underscores how leverage can enable investors to control huge positions in many commodity markets.

He ended the trade because his fund was down 70% on it, so he salvaged what he could by liquidating. The reason given by him was the commodity exchange bumping up margin requirements by 25%.

Mr. Shak is a champion poker player as well as a spread trader. He claims that his spread trades usually make money, but in this adventure he had to fold a big hand.


Amazing what paper gold can do. Paper cancels out paper...