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Thread: early weekend commentary - something smells rotten ...

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    Default early weekend commentary - something smells rotten ...

    with the US markets closed for the balance of the week, there have been two big developments that simply don't add up ...

    The first is the 'smackdown' in the prices of gold, silver, and certain other commodities




    But the second is the fact that online precious metals dealers are having an awful time getting their hands on enough gold and silver to fill orders from eager buyers ...






    ... and there is an (uncomfirmed) report that the US mint has run out of new Eagle coins with which to fill certified dealer orders.


    Can anybody explain to me how the official price of precious metals can be smacked down by 10%, while willing buyers with cash in hand from coast to coast are simply unable to get their hands on gold and silver to purchase ? The only pertinent news I could find comes out of Reuters Singapore ...

    (snip)"SINGAPORE (Reuters) - Gold dropped more than 2 percent to its lowest level in a month on Thursday amid a broad-based sell off in commodities and as funds cashed in after pushing the metal to a record above $1,000 an ounce this week.(snip)

    (snip)""We have to see whether the funds will continue selling. If they do, of course there is a possibility that it will go down and test $900," said Ronald Leung, director of Lee Cheong Gold Dealers in Hong Kong.(snip)

    (snip)""It is most probably liquidation on margin calls. It looks like players are exiting the market after gold hit the $1,030 level and there's no reason for physical buyers to buy at high levels," said a dealer in Singapore."(snip)


    this of course leads to another question ... what is driving the margin calls that is now forcing hedge funds to sell off their commodity holdings ? The only commentary I could find is as follows from ...

    (snip)"But what's this? "Gold falls to 1-month lows as funds cash in". Friend, I think we have us a winner, and maybe even some insight into what could be ahead next week or so for the PM's. Remember what happens to 10,000 hedge funds worldwide at the end of the month? They have to mark to market on a lot of securities (liar's paper) and if they don't have sufficient liquid assets, they have to sell off whatever they can that's liquid (commodities like gold, wheat, silver, etc.) in order to raise cash. They could be in an almost "sell-at-any-price" mode because it seems so many are on the verge of margin calls, that there's nowhere else to go."(snip)


    but this still doesn't entirely explain the reason for the price smackdown, because there are apparently a whole lot of willing buyers for physical gold, silver etc. who are now being prevented from buying and thus booking transactions counteracting the drop in price because of a shortage of physical gold and silver inventory. The only real theory that addresses this question comes from a professional investor's BBS ...

    (snip)"Record short interest in gold futures-expiration of futures is next week, four days prior to last business day, etc., gold had been up over a hundred dollars since last expiration. Makes sense to me that someone BIG was short a few million ozs and was expected to deliver/rollover, I think a few hundred million dollars at this point in time-no liquidity for the weak- would be enough to sink almost any wounded hedge fund or inv bank. "(snip)

    ~
    Last edited by Melonie; 03-20-2008 at 07:37 PM.

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    Default Re: early weekend commentary - something smells rotten ...

    Quote Originally Posted by Melonie View Post
    Can anybody explain to me how the official price of precious metals can be smacked down by 10%, while willing buyers with cash in hand from coast to coast are simply unable to get their hands on gold and silver to purchase ?
    Metals isn't my area, but from the links you posted it sounds like there's a shortage for physical gold, as distinct from gold futures (are these plain CFDs?). So the sentiment might be "although there's no physical gold obtainable on the market right this second, we reckon the price will be lower in a month or so's time"

    http://futures.tradingcharts.com/mar...php3?market=GC

    FX markets had a full basis point priced in. ALL the major currencies tanked pretty hard vs the dollar at the report. That is bearish for gold.
    http://www.elitetrader.com/vb/showth...6&pagenumber=2
    http://www.bloomberg.com/apps/news?p...er=commodities

    USD worth more means gold costs less? USD isn't suddenly _that_ strong... *boggles*maybe it's partially a correction for the recent buying frenzy.

    Quote Originally Posted by Melonie View Post
    this of course leads to another question ... what is driving the margin calls that is now forcing hedge funds to sell off their commodity holdings ?
    Taking profits or having to close futures positions to increase their cash/credit reserves and no buyer actually believes that the high prices of gold will carry on? Is the fed asking banks to deleverage themselves?

    Once again - metals isn't my area, so I'm doing some educated guessing here. I'd appreciate a link to a better explanation (so many analyst reports seem to be either just regurgitating numbers, crystal ball gazing, or just pretending they know what the market thinks )

    Man, it's like I'm still at work
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    Default Re: early weekend commentary - something smells rotten ...

    ^^^ well the only analogy that immediately comes to mind is grocery stores in the old Soviet Union, where food prices were set far lower than 'fair value on the world market', but there wasn't actually any food available for sale !

    The other BIG question mark stems from the fact that commodity futures contracts are supposed to be tied to the actual commodity ... meaning that when commodity contracts mature somebody is supposed to be held liable for actually delivering the physical goods at the contract price. Having a boatload of contracts being sold off by hedge funds needing to raise cash, and a comparative shortage of contract buyers, does indeed drive down the price of the commodity. But by definition it should also result in a glut of the commodity itself ... and instead we have just the opposite, a shortage of the commodity itself.

    Of course the latter would happen if somebody has been (illegally) writing / trading 'naked' futures contracts ... i.e. 'paper' backed by nothing. Trading 'naked' futures contracts is extremely profitable, but also constitutes a major 'trap' if maturing 'naked' contracts can't be rolled over into new 'naked' contracts such that no delivery ever has to take place. But if nobody is eager to buy new contracts, the 'naked' contract writer is then supposedly forced to go to the commodity market and purchase physical commodity to cover delivery commitments made via the 'naked' futures contract they previously sold ... which should send the spot price of the commodity skyward. But this isn't happening either from a price standpoint ... although it might explain why somebody needs to get their hands on a whole lot of physical gold and silver in a big hurry while stealthily trying to avoid triggering a 'short squeeze' rapid increase in gold and silver prices !

    As to your request for additional links, there's nothing out there in the mainstream financial press that can explain the downward price hammering while a physical shortage apparently exists. In fact, the very lack of mainstream financial press coverage on this topic is almost as suspicious as the topic itself. My nose tells me that 'sumptin ain't right' here !

    And the 'tin foil hat crowd' has some opinions as well ...



    (snip)"Jason Hommel of Silver Stock Report is getting word of shortages of silver at dealers around the world. Of course there doesn't seem to be any shortage of promises of silver on the commodities exchanges and in the exchange-traded funds, and if you buy only promises, you often don't have to pay storage fees, which is very convenient -- especially for the people selling imaginary silver."(snip)

    ~
    Last edited by Melonie; 03-20-2008 at 09:44 PM.

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    Default Re: early weekend commentary - something smells rotten ...

    The only thing that smells rotten is the 'shady' website links.

    I'm still hoping that one of these days I'll actually stumble upon something useful from the links. I'll stick to WSJ and FT for now.

    Anyway, any talk about Fed Printing money without considering GDP and Productivity growth is best ignorant and at worst smacks of hidden agenda.

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    Default Re: early weekend commentary - something smells rotten ...

    I wouldn't stick to the FT too closely ... they have been doing a pretty good job of exposing 'shady' hedge fund activities lately !




    any talk about Fed Printing money without considering GDP and Productivity growth is best ignorant and at worst smacks of hidden agenda.
    Really, the FED might have a hidden agenda ? Say it isn't so LOL !

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    Default Re: early weekend commentary - something smells rotten ...

    Quote Originally Posted by Melonie View Post
    I wouldn't stick to the FT too closely ... they have been doing a pretty good job of exposing 'shady' hedge fund activities lately !
    !
    http://bankimplode.com/ and http://hf-implode.com/ are handy to keep an eye on
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    Default Re: early weekend commentary - something smells rotten ...

    Quote Originally Posted by Melonie View Post
    The other BIG question mark stems from the fact that commodity futures contracts are supposed to be tied to the actual commodity ...
    Well, in some commodities markets, cash-settled futures ("contracts for differences") are used (http://www.investopedia.com/terms/c/cashsettlement.asp), which has the benefit of saving on transportation whilst still allowing you to take a position or hedge your exposure.

    For instance, a cattle supplier might want to lock in the price of a sale he will do by selling a future, and a speculator might want to bet on the price going up by buying one. At expiry, the difference between the strike and the spot is exchanged without the cows having to be shipped across the world to the speculator's lounge room

    (eg. Alice in Australia has a cow she plans to sell to her local butcher in a month but doesn't want to risk getting paid less than $10 when she does. She sells Bob in Boston a future with strike $10, expiring in a month's time. At expiry say the price of a cow is $8, so Alice sells the cow at her local butcher for $8 and Bob has to pay her $10-$8 = $2. If the spot price at expiry were $22, Alice would sell the cow for $22 and have to pay Bob $22-$10=$12. So via the futures trade, Alice is locking in her price and Bob is speculating that the price will go up, without having to ship the cow to Bob in Boston. Take away the existence of the cow and you just have 2 people making a bet.)

    You still have the problem that you need to find someone to sell you a futures contract or buy one from you, but the counterparties don't necessarily need to have any gold.

    Quote Originally Posted by Melonie View Post
    Of course there doesn't seem to be any shortage of promises of silver on the commodities exchanges and in the exchange-traded funds, and if you buy only promises, you often don't have to pay storage fees, which is very convenient -- especially for the people selling imaginary silver."
    Are metals traders really still using physically settled futures? If not, then the people writing these articles have no clue - imaginary silver
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    Default Re: early weekend commentary - something smells rotten ...

    (The above CFDs explanation is an effort to be educational and to not be one of those snarky unfriendly people - it's not meant to be condescending )
    Once again, the conservative, sandwich-heavy portfolio pays off for the hungry investor
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    Default Re: early weekend commentary - something smells rotten ...

    ^^^ understood ! I'm certainly no expert on commodity markets ... however ...

    There is a big difference between commodity related securities i.e. Exchange Traded Funds on the AMEX / TSE / London etc. and commodity futures contracts on the COMEX or LME. Yes, the ETF's, as well as options on those ETF's, as well as options on commodity futures, are all financial instruments. Thus there are no expectations in regard to actual physical delivery of the commodity / settlement in commodity when ETF shares or options are sold.

    However, where COMEX or LME commodity futures contracts are concerned, there IS a basic requirement that the futures contract will be settled with delivery of the actual physical commodity when the contract matures. Granted that many times maturing futures contracts are 'rolled over' into new futures contracts, but this requires the agreement of the folks on both sides of the maturing contract. If the contract buyer wants delivery of physical commodity, the contract seller is (supposedly) obligated to deliver. And if the contract buyer wants delivery of physical commodity, and if the contract seller doesn't actually HAVE any physical commodity (i.e. the contract was sold 'naked'), the contract seller is (supposedly) obligated to purchase that commodity on the spot market and deliver it to the contract buyer at the point where the contract matures.

    I included 'supposedly' because the LME has in the past suspended physical delivery requirements in 'emergency situations' i.e. a short squeeze on physical Nickel in the past. But this 'emergency' rule suspension was well publicized. Something different now appears to be going on with the precious metals. If there is any truth to the speculation that hedge funds are being forced to liquidate 'winners' i.e. their precious metals futures contracts before end of quarter in order to cover mark-to-market losses on the toxic mortgage / commercial paper they are holding, this would explain the sudden drop in precious metals prices. However, at the same time, if nobody is buying the other side of the contract sale, gold and silver should be piling up in COMEX and LME warehouses ! Instead, there is a physical shortage. Again, the best way to explain this situation is that the hedge funds have previously sold 'imaginary' gold and silver via 'naked' futures contracts ... thus they do not have any actual gold or silver to deliver if their contracts must be sold instead of rolled over, and they are trying to keep a lid on this fact to prevent the spot commodity markets from skyrocketing due to short squeeze buying.

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