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But does that mark the end of gold’s bull market? Hardly…

YOU NEED both buyers and sellers to make a market, says Brad Zigler at Hard Assets Investor, especially in markets like the one in which gold is traded.

There’s no shortage of players in the gold market presently. And there are, in fact, sellers aplenty. Commercial traders, as they’re known, have been building up a net short position that could soon outsize the one which set up gold’s December sell-off.

At last count, commercial traders held the equivalent of 326,571 futures contracts short,  betting that prices would fall. As of October 20, 2009 – six weeks ahead of an eventual $183 swoon – commercial traders were short of 328,344 Gold Futures.

Who are these commercial traders? Well, you can, as the Commodity Futures Trading Commission does, break up commercials into two groups.

• The producers/merchants/processors/users contingent includes entities that produce, process or deal in gold and use futures to manage or hedge the risks associated with those activities;
• The other lot, swap dealers, use the futures market to hedge the risk of dealing in contracts for gold known as swaps. A swap is a contract calling for the exchange of cash flows. The buyer of a gold swap might agree to pay the dealer a money market return (typically a spread above interbank lending rates) in exchange for the return generated by gold from a designated starting point.

Swap dealers are primarily investment banks that use futures to manage residual exposures left over after matching long and short commitments internally on their books.

Over the past four years, producers/merchants/processors/users have accounted for 69% of commercials’ net short positions. Swap dealers weigh in at 31%. And the current surge in commercial short positions is an indication that the so-called smart money – those that actually deal in Gold Bullion – are growing increasingly concerned about possible weakness in gold’s price.

Selling Gold Futures at today’s value, after all, provides them a hedge against the receipt of lower prices in the cash market later. But does this mean we’re due for a gold sell-off? Given current market circumstances, probably. Is this the end of gold’s bull market? Hardly. There’d have to be a substantial decline – down to the $830 level presently – to put gold’s long-term trend in jeopardy.

Given the six-week lag between the last high net short position and the market’s top, we might not see a price break immediately. But its likelihood has increased substantially. You can use this as an opportunity to lighten up or to add to your gold positions as you see fit.

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Source:"Smart Money" Shorts Gold

Was US regulator the CFTC right this week to discuss position limits in Gold Futures and options…?

On THURSDAY this week, US regulator the Commodity Futures Trading Commission (CFTC) held a daylong hearing to discuss the possibility of enacting position limits in the gold, silver and copper markets, writes Lara Crigger at Hard Assets Investor.

That might sound a little strange, considering the general lack of evidence or even public outcry on the matter. Apart from Gold Futures manipulation theorists, such as the Gold Anti-Trust Action Committee (GATA) – which was represented by founder Bill Murphy at this week’s meeting – few have even publicly raised the question of curbs on speculation in the metals markets.

That hasn’t deterred the CFTC or Commissioner Bart Chilton, however. He recently called out a need for "professional-grade regulatory tools" in the base metals and Gold Futures markets. But CFTC-managed position limits would be a very bad idea, says precious metals expert Jeffrey Christian. Managing director and founder of the CPM Group, and a well-known authority on gold, silver and base metals, Christian has worked with the United Nations, World Bank, International Monetary Fund, as well as dozens of miners, industrial companies, investment banks and investors.

Here Jeffrey Christian speaks to Hard Assets Investor about position limits, bona fide hedgers, and why gold manipulation theorists shouldn’t be so quick to call for more regulation…
 
HAI: Even though Bart Chilton was quoted as saying we need "professional-grade regulatory tools" in the metals markets, there really hasn’t been much of an outcry in favor of position limits in the metals markets. What are your thoughts?

Jeffrey Christian: Well, the exchanges impose and manage them already; there are position limits in the metals markets now that the exchanges run. And the exchanges’ position limits, generally speaking, tend to be more stringent than the ones that the CFTC might impose, were it to try and take the reins.

I think the idea of the CFTC as a federal regulator removed from the market, living in Washington and managing position limits is a bad idea. I think the idea of position limits on noncommercial positions is a good idea, but it is a good idea that is best effected by the exchanges, which are, by definition, closer to the market.

But I’m hesitant to predict the probability of the outcome of something that depends on the attitudes of politicians and political appointees in Washington. I hope we never see CFTC-managed position limits either in energy or metals, because I think it’s a bad idea. I don’t know what the probability is. I know that government regulators regularly crush my hopes.

HAI: Do you think the Nymex and the Comex do a good enough job regulating the metals markets already, then?

Jeffrey Christian: You can always look at it in hindsight and say no, it could be better done. And frankly, I’ve seen a couple slip-ups in the 30 years I’ve been involved in the metals markets. But I think they do a fairly decent job. They could probably do better, but the CFTC could probably do a better job of working with the exchanges on these issues.

HAI: Would adding position limits in the metals markets reduce the liquidity available, and hurt the ability of producers using these futures to hedge their risk?

Jeffrey Christian: I think there’s a risk there, but it would depend on how the CFTC executes the position limits. If they were to put position limits on commercials – and the CFTC seems to have a skewed idea of what a "commercial" entity is trading in the market – then what you have is that you start skewing the futures price relative to the physical price. All of a sudden, you have asymmetrical markets. People will say that the Nymex and the Comex no longer reflect the price, and they start migrating to unregulated or under-regulated and less transparent markets.

So you have a couple of issues. First, you have "regulatory arbitrage," where people bail out of the markets because there’s regulation they don’t like. And the second thing is, if the regulations skew the liquidity in the futures market, you have people saying, "The futures price no longer reflects the underlying commodity market, so I’m not going to use it to hedge my positions anymore."
 
HAI: A lot of gold and silver manipulation theorists – the ones who believe precious metals markets are being manipulated by large banks – are calling for position limits in these markets, and they’re testifying at this hearing.

Jeffrey Christian: Well, the discussion is that bona fide hedgers would not have position limits against their bona fide hedges. And that’s good. But what GATA doesn’t seem to realize – and even some of the people on the CFTC can get confused – is that the major banks are bona fide hedgers, too.

Most producers and consumers don’t trade futures. They trade over the counter forward and dealer options with a bank, and the bank turns around and hedges its forward market position with the futures. So if you’re going to allow bona fide hedgers to hedge their positions on an unlimited basis, the position limits that would be imposed would do absolutely nothing to reduce the concentration of the major banks in the market. In fact, it would actually take other people – noncommercial speculative types – and prohibit them from having too large a position.

So if anything, the position limits that are being discussed – if they’re applied intelligently – would actually have the potential to increase the concentration of trades by the major banks, which is exactly what GATA wouldn’t want. So insofar as they say they want position limits, they’re basically saying they don’t understand the nature of the market. Only speculators, trading opposite of the bona fide hedgers, would be limited.

HAI: All right, a nonposition-limit-related question for you: What precious metals do you see performing the best over the next 12-24 months, and which do you see not doing so well?

Jeffrey Christian: I think all the precious metals will do well, at least by my modest standards. I’m most bullish on the minor gems like rhodium, rhenium and iridium. I’m slightly less bullish on palladium. I’m slightly less bullish than that on platinum, and I’m slightly less bullish than that on silver. Still, I think all of those metals stand to see rising prices over the next 12-24 months.

HAI: Why do you think the minor precious metals like rhodium are going to do so much better than the others?

Jeffrey Christian: I think all the platinum group metals – and silver, for that matter – are relatively tight on a fundamental basis. I think fabrication demand will stay strong for all the platinum group metals and silver, but when I look at the individual markets, I think the fabrication demand for palladium may be stronger than the fabrication demand for platinum. The same is true for rhodium.

Also, for rhodium, rhenium and iridium, not only do you have healthy fabrication demand, but you have some supply constraints. They’re much tighter, much less liquid markets, because they’re not exchange-traded, and they’re not commonly seen as investments. They tend to respond to tighter supply more dramatically.

HAI: So what about gold?

Jeffrey Christian: Gold may actually be reaching a cyclical peak right now, and it may have reached its cyclical peak back in December, when it touched $1227 per ounce. I think it has the potential to go a little higher over the next month or two. But if the economy continues to improve, gold actually may reach a cyclical peak in the first part of this year, and then it may trade sideways.

I don’t see it falling sharply, though, because there are a lot of long-term investors who will take any decrease in the price of gold as an opportunity to add to their positions. So I don’t think the Gold Price is necessarily falling. But it may not rise as rapidly as the white metals.
 
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Source:Position Limits in Gold Futures

Feb. 9 (Bloomberg) — Mongolia, the Asian nation with some of the world’s largest untapped mineral resources, is considering setting up separate companies owning the country’s gold, copper and coal reserves and using investment banks to sell shares to global investors, the prime minister said.

Source:Mongolia Considers Selling Stakes of Copper, Coal, Gold Assets (Bloomberg)

Falling Gold Prices can’t hide the deep trouble facing stocks, bonds and the Dollar…

The WASHINGTON-BEIJING AXIS again hammered New York and London stocks on Thursday, says Dan Denning in Melbourne, Australia for the Daily Reckoning Down Under.

Wall Street fell 2% after suffering a surprise attack on its regulatory flank by President Obama. The Obama proposals are designed to prevent any one bank from becoming "too big to fail." They aim to achieve this – in ways not pleasing to the investment banking industry – by cracking down on proprietary trading and bank sponsorship of hedge funds.

We’re not going to defend the investment banks. But Washington should make up its mind.

Back under Bill Clinton, the Rubin Treasury had a clear economic philosophy. It thought – in the academic jargon of the day – that it should "privilege" Wall Street over Main Street and Detroit (manufacturing). Thus the US came to run a capital account surplus and a massive current account deficit. Wall Street thrived and booked record profits (as a percentage of S&P 500 earnings) and stocks soared. The wealth effect even trickled down into 401(k)s during the dot com boom. And it was all good.

But now, and since 2000 in fact, it’s not all good for anyone. Banks are bad. And fresh from a third-straight trip to the electoral woodshed, the American president is prepared to go populist. We don’t know if the President’s proposals will pass, or if they will fix a banking sector that’s still saddled with debt. But we doubt it.

Regulatory reforms deal with the future. In the "now", banks still have massive exposure to falls in residential and commercial real estate. Accounting tricks have forestalled the realization of losses. But not even Moses could hold back the tide forever, we reckon.

Another rising tide shows another 482,000 Americans filing for unemployment benefits for the first time last month. That was a 36,000 increase over the previous month. Economists expected a decline. Stock prices, under siege as Washington attacks the only profit engine in America’s economy still firing away, are also being hammered by growing concern over tighter Chinese bank lending. That concern, ironically, is even stronger now that China has reported fourth quarter GDP coming in way above expectations at 10.7%. If inflation gets loose in China, the central bank will have to be even tighter.

Thus the Gold Price fall and the zombie-like rally of the US Dollar. We’ve seen this before in the last two years. When bad news gains momentum in the investment press, the Dollar rallies and gold and stocks fall. The Dollar gets a strange "flight to familiarity" bid.

What does this say about gold?

It says that US Dollar rallies are a great chance to enter or add to your positions in precious metals and/or precious metals stocks, we believe. Even base metals like copper might be worth a look on the dips, says Diggers and Drillers editor Alex Cowie. Alex sent us the first draft of his January letter late last night. Commodities will retrench on Dollar strength, he writes, but these Dollar rallies on uncertainty and gloom shouldn’t be confused with any kind of real Dollar strength.

On an interest-rate basis, the Dollar is still getting clobbered by the Aussie and other commodity currencies. Or, if you prefer to view your currencies as proxies for an entire economy and its growth prospects, you could do worse than look at Brazil.

Granted, there aren’t a lot of highly liquid options to the US Dollar – not outside Gold Bullion – that don’t also suck, as do the Yen and the Euro. But we read in the wee hours of the morning that the Russians are loading up on some of Canada’s money and lightening their load of US Dollar.

The main point? The United States is a worsening fiscal trap. Washington confusing the markets about policy and being alternatively negligent and belligerent won’t help anything. But then, this is government we’re talking about.

Looking to Buy Gold today? Make it simple, secure and low-cost by using BullionVault…

Source:What January's Drop Says About Gold

Falling Gold Prices can’t hide the deep trouble facing stocks, bonds and the Dollar…

The WASHINGTON-BEIJING AXIS again hammered New York and London stocks on Thursday, says Dan Denning in Melbourne, Australia for the Daily Reckoning Down Under.

Wall Street fell 2% after suffering a surprise attack on its regulatory flank by President Obama. The Obama proposals are designed to prevent any one bank from becoming "too big to fail." They aim to achieve this – in ways not pleasing to the investment banking industry – by cracking down on proprietary trading and bank sponsorship of hedge funds.

We’re not going to defend the investment banks. But Washington should make up its mind.

Back under Bill Clinton, the Rubin Treasury had a clear economic philosophy. It thought – in the academic jargon of the day – that it should "privilege" Wall Street over Main Street and Detroit (manufacturing). Thus the US came to run a capital account surplus and a massive current account deficit. Wall Street thrived and booked record profits (as a percentage of S&P 500 earnings) and stocks soared. The wealth effect even trickled down into 401(k)s during the dot com boom. And it was all good.

But now, and since 2000 in fact, it’s not all good for anyone. Banks are bad. And fresh from a third-straight trip to the electoral woodshed, the American president is prepared to go populist. We don’t know if the President’s proposals will pass, or if they will fix a banking sector that’s still saddled with debt. But we doubt it.

Regulatory reforms deal with the future. In the "now", banks still have massive exposure to falls in residential and commercial real estate. Accounting tricks have forestalled the realization of losses. But not even Moses could hold back the tide forever, we reckon.

Another rising tide shows another 482,000 Americans filing for unemployment benefits for the first time last month. That was a 36,000 increase over the previous month. Economists expected a decline. Stock prices, under siege as Washington attacks the only profit engine in America’s economy still firing away, are also being hammered by growing concern over tighter Chinese bank lending. That concern, ironically, is even stronger now that China has reported fourth quarter GDP coming in way above expectations at 10.7%. If inflation gets loose in China, the central bank will have to be even tighter.

Thus the Gold Price fall and the zombie-like rally of the US Dollar. We’ve seen this before in the last two years. When bad news gains momentum in the investment press, the Dollar rallies and gold and stocks fall. The Dollar gets a strange "flight to familiarity" bid.

What does this say about gold?

It says that US Dollar rallies are a great chance to enter or add to your positions in precious metals and/or precious metals stocks, we believe. Even base metals like copper might be worth a look on the dips, says Diggers and Drillers editor Alex Cowie. Alex sent us the first draft of his January letter late last night. Commodities will retrench on Dollar strength, he writes, but these Dollar rallies on uncertainty and gloom shouldn’t be confused with any kind of real Dollar strength.

On an interest-rate basis, the Dollar is still getting clobbered by the Aussie and other commodity currencies. Or, if you prefer to view your currencies as proxies for an entire economy and its growth prospects, you could do worse than look at Brazil.

Granted, there aren’t a lot of highly liquid options to the US Dollar – not outside Gold Bullion – that don’t also suck, as do the Yen and the Euro. But we read in the wee hours of the morning that the Russians are loading up on some of Canada’s money and lightening their load of US Dollar.

The main point? The United States is a worsening fiscal trap. Washington confusing the markets about policy and being alternatively negligent and belligerent won’t help anything. But then, this is government we’re talking about.

Looking to Buy Gold today? Make it simple, secure and low-cost by using BullionVault…

Source:What January's Drop Says About Gold