Archive for May, 2011
30 years ago, Bunker Hunt, while trying to demand delivery for virtually every single silver bar in existence, and getting caught in the middle of a series of margin hikes (sound familiar), accused the Comex (as well as the CFTC and the CBOT) of changing the rules in the middle of the game (and was not too happy about it). Whether or not this allegation is valid is open to debate. We do know that “testimony would reveal that nine of the 23 Comex board members held short contracts on 38,000,000 ounces of silver. With their 1.88 billion dollar collective interest in having the price go down, it is easy to see why Bunker did not view them as objective.” One wonders how many short positions current Comex board members have on now. Yet by dint of being a monopoly, the Comex had and has free reign to do as it pleases: after all, where can futures investors go? Nowhere… at least until now. In precisely 9 days, on May 18, the Hong Kong Mercantile exchange will finally offer an alternative to the Comex and its alleged attempts at perpetual precious metals manipulation. From Commodity Online: The Hong Kong Mercantile Exchange (HKMEx) has received authorisation from the Securities and Futures Commission and will make its trading debut on May 18, 2011 with the 1-kilo gold futures contract offered in US dollars with physical delivery in Hong Kong. The ATS authorisation grants HKMEx the right to offer market participants, through its member firms, the use of its state-of-the-art electronic platform to trade commodities. The Exchange will begin trading with at least 16 members including some of the world’s largest financial institutions as well as several well-established brokerages in Hong Kong. “We are very excited about this historic day. It allows us to establish a liquid and vibrant international commodities exchange based in Hong Kong, linking China with the rest of Asia and the world,” said Barry Cheung, chairman of HKMEx. “Global demand for core commodities has in recent years been driven by Asia, especially China and India. However, market participants in the region have had to rely on Western exchanges for price discovery, bearing the basis risk exposure in the process. Our new platform will offer Asia a bigger say in setting global commodity prices. It will also enable market participants to more actively manage their risk exposures, using products tailored to Asian market needs.” HKMEx’s broking members at launch include BOCI Securities Ltd, Celestial Commodities Ltd, CES Capital International Co. Ltd, Chief Commodities Ltd, ICBC International Futures Ltd, Interactive Brokers LLC, KGI Futures (Hong Kong) Ltd, MF Global Hong Kong Ltd, Morgan Stanley Hong Kong Securities Ltd, OSK Futures Hong Kong Ltd, Phillip Commodities (HK) Ltd, Tanrich Futures Ltd and TG Securities Ltd. Its three clearing members are Interactive Brokers (UK) Ltd, MF Global UK Ltd and Morgan Stanley & Co International Plc. And while the Chinese market is far more bubbly when it comes to gold and silver purchases, it remains to be seen just how happy a gambling addicted Chinese population will take to spurious and conveniently timed margin hikes that take the air out of the next parabolic move up in gold and silver (our guess is not very). Far more importantly, the Comex monopoly appears to be over, and going forward the exchange will have to be far more sensitive about angering broad swaths of the population using 5 consecutive margin hikes in 9 days. The new exchange will also make the now traditional “banging the close” operation (or “banging the whatever” as the May 1 15% drop from $ 49 to $ 42 in minutes demonstrated) obsolete, as traders will have options of where to route orders from the hours of 0800 HKT to 2300 HKT. Bottom line: if Chinese demand for gold and silver is as strong as it was a week ago, and it is, the recent Comex-directed plunge in precious metals is about to the BTFDed. From the HKMex: HKMEx is introducing a 32 troy ounce gold futures contract useable by a wide range of market participants to execute hedging, arbitrage and other investing strategies. Moreover, the HKMEx gold futures contract has the following important characteristics designed to meet the needs of a marketplace which lacks an international price-setting mechanism in the Asian time zone: * Secure physical delivery in Hong Kong meeting international standards Gold is one of the world’s most important and actively traded commodities. Demand for the metal is driven by three main factors: the jewellery market, industrial manufacturing and financial investment. In addition, gold is relatively unique in that it is used as both a commodity and a monetary asset. Although gold has a long trading history in Asia, the majority of price formation for gold is today concentrated in the North American and European markets. In recent years, the introduction of gold futures trading in Asia has tapped into latent trading demand that is primarily driven by strong economic development in China and India. Hong Kong is historically one of the world’s leading gold centres and has a natural geographical advantage in Asia. Hong Kong’s vibrant financial infrastructure ensures access to leading market participants and deep regional and international pools of liquidity. Trading hours for the HKMEx gold contract will extend from 0800 HKT to 2300 HKT, opening with TOCOM in Japan and encompassing the London Bullion Market Association AM Fixing, the opening of COMEX, and the LBMA PM Fixing. The HKMEx opening auction will run from 0730 to 0800. While gold futures trading on Asian exchanges has demonstrated significant growth, there is currently no contract that is or will likely become a regional benchmark contract for gold pricing. Without a regional benchmark, true price discovery for gold is either confined to the local in-country market or must depend on the European or North American markets. In-country markets generally restrict foreign participation and often subject it to adverse currency restrictions or tax treatment. Meanwhile, global benchmark pricing from the western hemisphere provides imperfect hedging for Asia’s trading community. HKMEx is well positioned to address the demand of Asia’s trading community for the establishment of a gold futures contract as the regional benchmark.
* Trading execution on an advanced and robust electronic platform
* World-class clearing functionality
* Extended Asian day trading hours to tap into global market liquidity
* Contract specifications tailored to market participants in Asia
Stephen Schork, president of the Schork Group, explains why he believes oil and gas prices should continue to surge higher. He explains that he is bearish from a fundamental perspective, but that the dollar could continue to decline as the US government remains very accommodative. He says it will ultimately be “as bad or worse” than 2008.
A few months ago we wrote an article talking about how gold could rise to a price level that would represent inflation, and if it was high enough it would pressure the economy (represent that cost pressure). Oil prices rising to $ 5 gas in the US are in effect, and indeed both high oil and high gold prices have converged and the US economy is pressed. At this same time, the USD appears to be testing multiyear lows on the USDX, which I peg at about 70 on that index. That index is heavily Euro weighted by the way, with the Yen a distant second. In any case the USD appears possibly close to bottoming near this level, or perhaps 72. If so, it would be a continuation of a multiyear low range for the USD at about 70 on the USDX. What could this mean for commodities and gold and silver? Take a look: Because we believed the USD may be bottoming, we alerted subscribers that Silver was a sell to us: Here was the alert sent April 25, 2011 : 25 Apr 2011 (11:39 am Central) PrudentSquirrel alert – USD GOLD YEN OIL DOW “Subscribers, The Dow appears to be driving market sentiments, I know people have other more ‘relevant’ indexes but I like to use the Dow. It’s testing that range 12200 and 12500 now. The USD should find a bottom here somewhere above the critical 70 level on the USDX particularly if US markets weaken. Gold is priced pretty near where I believe it should be and Silver worries me as a bubble. Problem with bubbles is they gain the most at the very end making it almost impossible to get out mentally. I do not feel gold is in any kind of bubble but is presently fairly valued. Several years ago I told readers to buy gold at anything under $ 1000…. That looks right on now. We actually were the first that I know of to talk of the Gold $ 1000 USD floor several years ago. I don’t like this silver bubble and who knows how high it will go. Silver is a classic speculator market by the way, in case you feel it’s so -safe- Just be warned of the silver hype. I personally, now would sell it. That’s me and don’t yell at me if silver rises to $ 100 then crashes! The Yen has been weakened and that is market friendly in general but this is probably only temporary. Oil is in chaos with the ME in a new mess every week. This is totally unprecedented. Do not speculate in chaotic markets…” Needless to say that was one timely call! We do all our own research and I am not aware of any other specific call like that on this silver bubble. We reiterated this view to subscribers several times before this large silver correction. We also have calls on silver’s real price today (where it should settle, or bottom). As to the USD let’s take a look: If the USD were to find its usual multiyear bottom at around 70, this can combine with market sentiments to pressure some commodities and precious metals. Gold is much more reasonably priced, and should resist hard corrections, we have new levels for a gold bottom, as well as silver bottom. Once again we have made an incredible call, two weeks before this latest big market change in the USD and in precious metals and commodities. It is possible Silver can correct to a new much higher base, which formerly was in the teens for a long time. Silver should keep a good chuck of its gains but will find a new lower base. Silver has other issues with its market, it’s supposed to be smaller and much more speculative than gold, while gold kind of meanders along steadily around $ 1500 for the moment. Again, gold is steady and silver is very hyper or volatile. In case you think this call might be a fluke, we have made incredible calls on the USD now for years, usually several weeks in advance of major changes. So, this is not a fluke for us.
Famed doomsayer Marc Faber did not disappoint at the Ira Sohn investing conference Wednesday.
In a wide-ranging presentation filled with shots at Ben Bernanke and the Fed commissioners, Faber predicted the Fed will continue to print money.
That means cash and bonds should not be considered safe assets.
He also ominously predicted escalating tension with China and in the Middle East: “You have to prepare for the next war, and, in war commodities go ballistic.”
He urged investors to diversify assets and hold everything from precious metals and commodities to real estate and equities.
And if they hold gold, it might be good to spread their holdings all over the world — Australia, Switzerland, Singapore, Beijing.
“You have to prepare yourself. Diversify.”
With the near future of real estate still in question, investors have been hungry for a fast way to play the market or to hedge against their volatile portfolios. Futures contracts have been an extremely popular method of balancing a portfolio in other markets, and real estate is, with a little knowledge, now in the same boat.
In 2006, the Chicago Mercantile Exchange (CME) started trading futures contracts for the S&P/Case-Schiller Home Price Index, which covered both U.S. residential and commercial properties. The Case-Shiller index, originated in the 1980s by Karl Caser and Robert Shiller, is widely considered to be the most reliable gauge to measure housing price movements.
Advantages of Futures Contracts Futures contracts that trade at a centralized exchange allow market participants more financial leverage, flexibility and are guaranteed by the exchange so there is no risk of counterparty default. They are also in and of themselves leveraged investments, which allow investors a way to benefit on movements in housing prices as well as provide them with the opportunity for a liquid short-term real estate investment. These futures also allow investors a way to speculate on housing prices with much lower capital requirements.
Contract SpecificationsThe CSI index futures and options are cash settled to a weighted composite index of U.S. housing prices. Contracts are available for 10 major U.S. cities, including Boston, Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San Diego, San Francisco and Washington DC.
Each contract will be valued at $ 250-times the CSI index for that city. For example, if the value of the index for Los Angeles was reported at 270, the contract value would be $ 67,500 ($ 250 x 270 = $ 67,500). The minimum price fluctuation or tick will be 0.20 index points, or $ 50. The contract will trade only on the CME Globex platform Mondays through Thursdays, from 5pm to 2pm the next day.
The composite weight of the CSI index is as follows:
- Boston 7.4%
- Chicago 8.9%
- Denver 3.6%
- Las Vegas 1.5%
- Los Angeles 21.2%
- Miami 5%
- New York 27.2%
- San Diego 5.5%
- San Francisco 11.8%
- Washington DC 7.9%
Options do trade via open outcry in the Goldman Sachs Commodity Index (GSCI) pit Monday through Friday, 8 am to 2 pm. The options trade European style, and are exercised into futures contracts. The strike prices are in intervals of five index points above and below the underlying futures. Position limits for futures and options is set at 5,000 contracts, as set by the exchange.
The CSI futures will trade for the next 18 months, and will be listed on a quarterly cycle. Months include February, May, August and November. Futures will also trade 19 to 36 months out, but only for May and November. Futures for three to five years out will only trade for November. All contracts will be cash settled on the day the indices are released.
Seven investment banks (Credit Suisse, Goldman Sachs, Merrill Lynch and four others) have licensed the National Council of Real Estate Investment Fiduciaries to come up with an index to get into the over-the-counter market. Many people think that a liquid and specific property derivative could help smooth out pricing bubbles. A healthy derivatives market could allow investors the ability to short with relatively low transaction cost versus actually playing the market. The ability to trade real estate futures started in London a couple years before the CME.
Comparison to Other Housing IndicesAlong with the CSI, there are a couple other real estate indices like the National Association of Realtors (NAR) – which is quoted in terms of median home value – and the Office of Federal Housing Enterprise Oversight (OFHEO). Median home value can be skewed by remodeled homes or the addition/subtraction of luxury/low-cost housing in the area. The OFHEO utilizes a repeat sales methodology, similar to the CSI, but the OFHEO is confined to the mortgages of Freddie and Fannie, and is therefore biased to the low end of housing.
Market ParticipantsThere are two types of market participants for futures markets: speculators and hedgers. Speculators are investors who looking to speculate on price movements. Speculators include hedge funds, CTAs, individual investors, pension funds, etc. Hedgers are either consumers or producers of a certain commodity. In this case, hedgers would be property and real estate developers, banks, mortgage lenders and home suppliers.
Investors have been using CSI futures to speculate by investing directly for a while, but home owners looking to sell within a year or two can also go short home prices, looking to recoup losses on their homes.
