Apparently ECB President Draghi believes things are going so well over in Euroland that traders are "correct" in their perceptions that no near term stimulus is needed. Down went gold, and silver, and copper, etc. as money flowed out of those markets and elsewhere into I have no idea what based on the fact that the equity markets are lower and are the bonds. Let's call it mattress money flows.
Meanwhile data coming out ahead of tomorrow's payroll numbers are indicating that the report will not be particularly strong here in the US. It will be interesting to see if we get a weak number how gold reacts to it. Normally we would expect to see it lower on the risk aversion trades but if it actually moves higher on a weak number, it will be additional fodder for the notion that the weaker the economic numbers are in the US, the better the chances are of the Fed engaging in a third round of QE (at least as far as a growing number of traders believe).
Anyway, for whatever reason, once again gold could not make it past the $1680 level as it was not even able to make it any higher than $1672 before the buyers stepped aside. Having fallen back below $1650 is short term negative however and now we will need to see whether or not it will fall as deeply as the $1620 level or lower where previously buyers have made their presence known.
The mining shares are lower today (Gee what a surprise - do these things ever go higher anymore) but remain above 420 in the HUI. Perhaps we will get a bounce from that level and confirm it as a bottom. We simply have to wait and see.
Thursday, May 3, 2012
Wednesday, May 2, 2012
CME issues Clarification on Performance Bond Requirements
This afternoon, the CME Group issued a clarification on their communique detailing the increase in performance bond requirements for it clearing member customer accounts with non-hedged positions. Evidently there was a great deal of confusion regarding the wording of the original release.
The Dow Jones wire service interpreted the original communique in the same manner as I did. I am not sure about Reuters but either way, the wording was so poor, that it forced another release to clarify it!
Here is the Dow Jones report:
3:03 (Dow Jones) CME notifies members of its clearinghouse that starting
Monday, members will need to effectively double the initial margin collected
for non-hedge trading positions, with no exception for members' customer
accounts. The move is required by CFTC as part of Dodd-Frank, While market
participants have known about it for some time, CME apologized Wednesday for
the "short notice" of the change. As per CFTC rules, hedges must reduce risk
for commercial users of derivatives markets, linked to such a company's assets
or liabilities. (jacob.bunge@dowjones.com)
In speaking with a rep from the CME, the change will affect a relatively small subset of traders and not have the drastic impact, that many traders, myself included, originally believed based on the initial news release.
Following is the complete news release:
DATE: May 2, 2012
TO: Clearing Member Firms
FROM: CME Clearing
SUBJECT:
Important Clarification
Note: the original version of this advisory was misleading regarding the applicability of the new rule and the manner in which "initial to maintenance ratios" work.
12-187 Performance Bond Requirements for Member Accounts: Effective this Monday, May 7, new CFTC Regulation 39.13(g)(ii) mandates each DCO to require its clearing members to apply "initial to maintenance ratios" for customer accounts with non-hedged positions. There is no exception for speculative customer accounts of exchange members that fall within the Regulation. The Regulation applies equally to positions that are regulated as futures and to positions regulated as swaps.
Note that the requirement only applies to non-hedged member accounts. Member accounts containing hedged portfolios are always assessed only at the maintenance requirement level. Most CME Group members engage in hedging activity on a routine basis -- for example, they make a market in one set of our products and lay off their risk in another set of products at CME Group or other markets. Such positions are still subject to hedge treatment. Note, however, that if you are a member and you have only outright positions you will be subject to the new rule.
For example, suppose you are a member and you qualify for hedge treatment. You have a portfolio with a maintenance requirement level of $100. The sole requirement you have is that $100 level.
On the other hand, suppose you do not qualify for hedge treatment, and your portfolio has a maintenance requirement level of $100 and an initial requirement level of $110. As long as you have $100 worth of value in your account, no margin call is issued. But Page 2 #12-187/May 2, 2012 if your collateral value falls below $100, then a margin call is issued to bring you back up to $110.
Previously, for futures, the use of "initial to maintenance ratios" applied only to accounts that were neither hedge nor member. Accounts are coded by FCMs as member, hedge or spec, and only accounts coded as spec had an "initial" requirement level that was higher than the "maintenance" level.
Note also that even for non-hedged member accounts, the higher "initial" requirement level only applies if (a) the account had no positions on the prior day, or (b) the value of collateral on deposit has fallen below the lower "maintenance" requirement. On all other days, it is the lower "maintenance requirement" which applies – which is the same level that the FCM is assessed – and so long as the account maintains a cushion of collateral value over the maintenance requirement, there is no margin call.
We believe that FCMs will be able to accomplish this change for member accounts which do not qualify for hedge treatment, simply by changing the account type that drives the margin calculation in books, from member to spec.
We apologize for the short notice about this change. See also Clearing Advisory 12-136, published March 28, about the use of initial to maintenance ratios for non-hedged positions in swaps, at:
http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv12-136.pdf
The Dow Jones wire service interpreted the original communique in the same manner as I did. I am not sure about Reuters but either way, the wording was so poor, that it forced another release to clarify it!
Here is the Dow Jones report:
3:03 (Dow Jones) CME notifies members of its clearinghouse that starting
Monday, members will need to effectively double the initial margin collected
for non-hedge trading positions, with no exception for members' customer
accounts. The move is required by CFTC as part of Dodd-Frank, While market
participants have known about it for some time, CME apologized Wednesday for
the "short notice" of the change. As per CFTC rules, hedges must reduce risk
for commercial users of derivatives markets, linked to such a company's assets
or liabilities. (jacob.bunge@dowjones.com)
In speaking with a rep from the CME, the change will affect a relatively small subset of traders and not have the drastic impact, that many traders, myself included, originally believed based on the initial news release.
Following is the complete news release:
DATE: May 2, 2012
TO: Clearing Member Firms
FROM: CME Clearing
SUBJECT:
Important Clarification
Note: the original version of this advisory was misleading regarding the applicability of the new rule and the manner in which "initial to maintenance ratios" work.
Note that the requirement only applies to non-hedged member accounts. Member accounts containing hedged portfolios are always assessed only at the maintenance requirement level. Most CME Group members engage in hedging activity on a routine basis -- for example, they make a market in one set of our products and lay off their risk in another set of products at CME Group or other markets. Such positions are still subject to hedge treatment. Note, however, that if you are a member and you have only outright positions you will be subject to the new rule.
For example, suppose you are a member and you qualify for hedge treatment. You have a portfolio with a maintenance requirement level of $100. The sole requirement you have is that $100 level.
On the other hand, suppose you do not qualify for hedge treatment, and your portfolio has a maintenance requirement level of $100 and an initial requirement level of $110. As long as you have $100 worth of value in your account, no margin call is issued. But Page 2 #12-187/May 2, 2012 if your collateral value falls below $100, then a margin call is issued to bring you back up to $110.
Previously, for futures, the use of "initial to maintenance ratios" applied only to accounts that were neither hedge nor member. Accounts are coded by FCMs as member, hedge or spec, and only accounts coded as spec had an "initial" requirement level that was higher than the "maintenance" level.
Note also that even for non-hedged member accounts, the higher "initial" requirement level only applies if (a) the account had no positions on the prior day, or (b) the value of collateral on deposit has fallen below the lower "maintenance" requirement. On all other days, it is the lower "maintenance requirement" which applies – which is the same level that the FCM is assessed – and so long as the account maintains a cushion of collateral value over the maintenance requirement, there is no margin call.
We believe that FCMs will be able to accomplish this change for member accounts which do not qualify for hedge treatment, simply by changing the account type that drives the margin calculation in books, from member to spec.
We apologize for the short notice about this change. See also Clearing Advisory 12-136, published March 28, about the use of initial to maintenance ratios for non-hedged positions in swaps, at:
http://www.cmegroup.com/tools-information/lookups/advisories/clearing/files/Chadv12-136.pdf
Dodd-Frank Strikes the Commodity Markets
I will try to write more on this later as I am still working the session but news came out last evening that CME was requiring all member firms to comply with regulations arising from Dodd-Frank which basically is forcing margin requirements for all "Non-Hedges" to effectively double as of this coming Monday.
Talk about short notice!
The ramifications of this are obviously huge and no doubt are adding to an already volatile mix of madness. Those traders with losing positions are going to be impacted even more since the new requirements may well push them over the line as far as margin calls and force them to either liquidate or come up with more cash, immediately.
I think some of what we saw in the markets today is traders already anticipating this with the result that we had a significant amount of position squaring.
more later... hopefully....
Here is a chart showing the carnage in the commodity sector. Of course not all of this was caused by Dodd-Frank but it certainly did not help the case of those who are generally LONG COMMODITIES to have such lousy economic data coming out of the US in today's session which generated risk off trades. Combine that with the fact that their margins are going to be doubled soon and it does not take a rocket scientist to understand why we are seeing such strong selling across the commodity sector today.
Like I heard elsewhere - there are two main things wrong with Dodd-Frank; Dodd and Frank. One is out of the Senate (thank heaven) and the other is retiring from the House (a double thanks).
Talk about short notice!
The ramifications of this are obviously huge and no doubt are adding to an already volatile mix of madness. Those traders with losing positions are going to be impacted even more since the new requirements may well push them over the line as far as margin calls and force them to either liquidate or come up with more cash, immediately.
I think some of what we saw in the markets today is traders already anticipating this with the result that we had a significant amount of position squaring.
more later... hopefully....
Here is a chart showing the carnage in the commodity sector. Of course not all of this was caused by Dodd-Frank but it certainly did not help the case of those who are generally LONG COMMODITIES to have such lousy economic data coming out of the US in today's session which generated risk off trades. Combine that with the fact that their margins are going to be doubled soon and it does not take a rocket scientist to understand why we are seeing such strong selling across the commodity sector today.
Like I heard elsewhere - there are two main things wrong with Dodd-Frank; Dodd and Frank. One is out of the Senate (thank heaven) and the other is retiring from the House (a double thanks).
Monday, April 30, 2012
One Minute Chart of Gold - 7,501 contracts
By request of a reader S Roche, I am providing a one minute chart showing the enormity of the trade in gold early this morning (4-30)
Monthly Gold Charts
Isn't it amazing that some are so ready to call for an end to the bull market in gold. From a monthly chart perspective, there is nothing to indicate such an occurrence.
In 2008, the CLOSING MONTHLY GOLD PRICE dropped 26.5% from its best to worst level before it renewed its uptrend.
More recently, gold has dropped a mere 14.4% from it bests closing monthly level to its worst level reached with a handle of "15" in front of the gold price.
Keep in mind that purely from a long term technical chart perspective, the metal remains in a solid uptrend.
As a side note - for those of you would never seem to grow tired of castigating me for using the phony government CPI data in calculating my inflation adjusted gold price chart, please make an attempt to restrain yourself. You are always welcome to create one of your own and send it to us for publication which I will gladly to do.
In 2008, the CLOSING MONTHLY GOLD PRICE dropped 26.5% from its best to worst level before it renewed its uptrend.
More recently, gold has dropped a mere 14.4% from it bests closing monthly level to its worst level reached with a handle of "15" in front of the gold price.
Keep in mind that purely from a long term technical chart perspective, the metal remains in a solid uptrend.
As a side note - for those of you would never seem to grow tired of castigating me for using the phony government CPI data in calculating my inflation adjusted gold price chart, please make an attempt to restrain yourself. You are always welcome to create one of your own and send it to us for publication which I will gladly to do.
FAT FINGER IN SILVER TOO?
Traders continue to chatter about the so-called "FAT FINGER" trade in gold that occurred early this morning, a trade which dropped the gold price $15 in minutes and consisted of an order of 7,500 contracts. Many seem to agree that it was a trade placed in error.
The problem is that we also witnessed a similar surge in the volume done in the nearby silver pit at the exact same moment. Note the time right after the 5:00 AM hour (Pacific time) on the following 5 minute chart and see how large the volume was compared to that for the remainder of the session.
No matter who did the trade, ( I remain of the opinion that this was a raid designed to knock the metal lower in hopes of creating a cascading running of downside sell stops), the fact is that it failed miserably. Besides, if it was a "FAT FINGER" ( a trade placed in error) how did the same fat finger knock silver down so sharply? Was that too a simple "error".
Note how both metals recovered the losses and added some additional gains even with the mining shares weaker and the broader equity markets lower. Even copper was lower today for a while before it too moved higher.
I still believe that traders are becoming more convinced that another round of QE is coming sooner rather than later. At least that is what is being reflected in the price action.
The problem is that we also witnessed a similar surge in the volume done in the nearby silver pit at the exact same moment. Note the time right after the 5:00 AM hour (Pacific time) on the following 5 minute chart and see how large the volume was compared to that for the remainder of the session.
No matter who did the trade, ( I remain of the opinion that this was a raid designed to knock the metal lower in hopes of creating a cascading running of downside sell stops), the fact is that it failed miserably. Besides, if it was a "FAT FINGER" ( a trade placed in error) how did the same fat finger knock silver down so sharply? Was that too a simple "error".
Note how both metals recovered the losses and added some additional gains even with the mining shares weaker and the broader equity markets lower. Even copper was lower today for a while before it too moved higher.
I still believe that traders are becoming more convinced that another round of QE is coming sooner rather than later. At least that is what is being reflected in the price action.
Gold Takedown Rejected
Take a look at the following 5 minute chart and note especially the volume readings posted below each individual price bar. Look just past the 5:00 AM Pacific time hour and you will see the enormous volume spike accompanying the sharp downdraft that occured in the gold price dropping it $15 in the course of minutes. Analysts are still grasping for an explanation.
The most common is that it was another one of those "fat fingered trades". Have you ever noticed how many fat fingered human beings apparently camp out in the trading community. Last time I checked a skinny finger could hit an "enter" key just as easily as a fat finger could.
My view on this is that gold's psychology changed late last week as it begin seeing some seriously interested buyers whose entrance back on the long side was able to take it up through a minor chart resistance level near $1650 and set it on a course to test overhead resistance at $1680, a key chart level. That is a no-no in the world of the Western Central Banks who cannot tolerate this rebellious upstart of a metal telegraphing to the entire world the failure of their attempts to paper over the problems ailing both Western Europe as the US.
That called forth reinforcements to take the price lower to try to corral the unruly upstart and put it back into the box. As you can see, the selling was met with more buying that completely erased the losses and then added some more gains for good measure.
We are right back to being in position to try to tackle $1680 again. Weakness in the mining shares however is working once again to dampening excitement in the actual metal.
The most common is that it was another one of those "fat fingered trades". Have you ever noticed how many fat fingered human beings apparently camp out in the trading community. Last time I checked a skinny finger could hit an "enter" key just as easily as a fat finger could.
My view on this is that gold's psychology changed late last week as it begin seeing some seriously interested buyers whose entrance back on the long side was able to take it up through a minor chart resistance level near $1650 and set it on a course to test overhead resistance at $1680, a key chart level. That is a no-no in the world of the Western Central Banks who cannot tolerate this rebellious upstart of a metal telegraphing to the entire world the failure of their attempts to paper over the problems ailing both Western Europe as the US.
That called forth reinforcements to take the price lower to try to corral the unruly upstart and put it back into the box. As you can see, the selling was met with more buying that completely erased the losses and then added some more gains for good measure.
We are right back to being in position to try to tackle $1680 again. Weakness in the mining shares however is working once again to dampening excitement in the actual metal.
Saturday, April 28, 2012
Trader Dan on King World News Metals Wrap
Please click on the following link to listen in to my regular weekly radio interview with Eric King on the KWN Weekly Metals Wrap.
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