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Market Recap: Low Volume Christmas Rally As Dollar And Yields Surge; US Risk Hits 6 Month Highs
After an initial bounce early in the am courtesy of a variety of undeserved and circly jerkular upgrades by the big banks, equities zombied out as the liquidity providers scalped their penny quota for the day. In the meantime the DXY hit another multimonth high, passing and closing above 78, creating massive losses for a whole range of FX trading and correlation desks which have yet to unwind underwater positions. If the dollar continues rallying into the New Year a few banks will start 2010 from a 6 feet under (the water surface) position. Another observation, as Nic Lenoir discussed earlier, Treasurys are getting spooked. The name of the game is, once again, starting the be supply, supply, supply, made ever more dreary courtesy of some "we don't get this whole M.A.D. thing" statement in China. The whole posturing about the trade deficit means that Obama will now do everything to make consumer stay true to their noun. If this means Cash for Chinese Crap, or even Cash for Cash, so be it. Summers is already on it, and Bernanke just ordered another 100 tons of ink.
The single most troubling (and lucrative) piece of news: US CDS hit a 6 month wide of 42 bps. At 22 bps from when we noted this was a screaming, brain death buy at 20 bps, the associated P&L on $500 mm notional is roughly $5 million net of the point lost in roll. The risk averse may consider book half the P. Then again, the risk tolerant shall inherit the earth. Those who take on the Fed and win, shall inherit everything.
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Speaking of the dollar, GATA pointed me to this article about margins being upped on the gold market:
Bad cut and paste job but basically:
-COMEX is upping the margins on borrowing paper gold(because asking for physical delivery could prove to be disasterous.)
-No grandfather clause, margins are just up. So that means if you cannot pony up, the COMEX just squooze you out and you have to sell fast.
-If gold keeps moving down, more squeeze to cover your paper loss.
I was wondering how the IMF and FED would hose the gold longs...
this article <javascript:void(0)> | Source: GoldSeek.com
By: Trace Mayer, J.D.The COMEX has raised the margin requirements for gold and silver futures contracts. Additionally, gold is trading in minor backwardation but this is probably not serious. The margin requirement rise validates the strength of the bull market. There will likely be additional margin requirement increases during this upleg.MARGIN REQUIREMENTA margin, or performance bond, is collateral that the holder of a position in futures contracts, securities or options has to deposit to cover credit risk. The use of margin greatly amplifies either the gain or loss with a position. The higher the margin requirement the more capital is required to control the same amount of the underlying asset.One consequence that can result from using margin to purchase assets is a margin call. If the margin posted in the margin account is below the minimum margin requirement then the broker or exchange issues a margin call. The investor has to either increase the margin deposited or close the position and can be accomplished by selling the securities, options or futures if they are long and by buying them back if they are short.If they do not do any of this the broker can sell his securities to meet the margin call. If the exchange is unsuccessful in executing margin calls and receiving enough capital then the exchange could fail.The COMEX has recently raised the margin requirements <http://www.cmegroup.com/wrappedpages/clearing/pbrates/performancebond.html?group=COMEX%20METALS&type=OutrightRates&h=2&reporttype=marginrate> for gold and silver contracts.The result of these increases in the margin requirements will likely be somewhat bearish for the metals in three to six months. This is because it will require more capital to control the same amount of the commodity and will serve to dampen some of the speculative hot money which has been flowing into the metals lately.Margin requirements and other exchange rules are what put a damper on the Hunt brother’s plans. Overnight the rules were changed without notice and it resulted in tremendous losses and margin calls to the Hunts. The effect of margin requirements on the instruments of the gold price suppression scheme does cause some questioning. For example, are they even subject to the requirements?GOLD AND SILVER BACKWARDATIONAs of 16 December 2009 <http://www.cmegroup.com/trading/metals/precious/gold.html> there has been some minor backwardation appearing for both gold and silver. For example, gold for delivery in December 2009 was higher than the January, February and April contracts.Likewise the LBMA silver forwards have been showing some particularly interesting activity since about 24 November 2009. For example, the SIFO for one month was higher than all other months on 15 December 2009. The 16th showed similar unusual activity. Silver only recently slippped out of significant and prolonged backwardation in June 2009.This bout of both silver and gold with backwardation is likely minor or immaterial. With gold it is likely due to delivery considerations. With silver there would need to be a prolonged condition to merit much more attention. Either way this is a condition to observe. Backwardation in the monetary metals implies loss of confidence in the paper instruments and both the desire and ability to take immediate possession without the use of margin.PRECIOUS METALS BULLAs the gold, silver and platinum precious metals bull continues gaining intensity it will gather in more capital. With their use as currency in ordinary transactions, through services like GoldMoney <http://goldmoney.com/?gmrefcode=gsr> , it will continue to increase the percentage of the total market that is owned outright. Already, most physical gold bullion is owned outright without any attaching liabilities in jewelry, coin or bar form by either individuals or massive central banks. This adds stability to the market because when an asset is owned outright then the owner cannot be margin called.By analogy one of the reasons the US residential property market, which is heavily purchased on margin, is in such dire straits is because of the constant ‘margin calls’, the surplus inventory which is put on the market after foreclosure which results in further declines in market prices and more margin calls. In contrast, real estate in Argentina is 93% owned outright with only 7% encumbered. This adds tremendous stability to prices.The increase in margin requirements on the precious metals will only serve to strengthen the bull market. But in the short term the effect could be to depress the price because of margin calls to speculative hedge funds.CONCLUSIONThere is old advice that the market can remain irrational longer than you can remain solvent. But this advice applies if margin is used. Gold, silver or platinum that is completely paid for becomes sovereign wealth, cannot be margin called and therefore the owner can hold it indefinately without fear of insolvency. Unlike with a margin call there is no forced selling. Holding the monetary metals in such a way is in harmony with provident living principles and a safe way to buy gold.DISCLOSURES: Long physical physical gold, silver, platinum and no position the problematic SLV or GLD ETFs.Trace Mayer, J.D.
Let me know if my interpretation is off, but it looks like a clever way to suppress gold speculation
This is all way way to complicated and doesn't make the piont.
Let's clear this up. Build and build and build paper gold etf's. Loan and loan and loan gold to them. Inflate inflate inflate. Yank the paper margin money and try to create a collapse that waves into the real physical market. It's a show. It's a good show. Unfortunately the show will be over very shortly and gold will be right back to where it was before and headed high as a kite through march april and may.
There's huge driving demand to REALLY inflate gold it's being driven and channled through paper markets as a way to divert the natural flow and order that is happening, into a paper bubble that can be popped to try to put a stop to the very real dynamics.
Once the show is over it will not only show the very real and very manipulated but it will channel thousands of buyers left unsatisfied by the paper game into the real market with much desperation.
October and November of 2009 was the way wrong time to be looking for a deal in gold.
yes.
Same as in 08, when spot dove but physical became unobtanium.
I believe that some major banks, most notably JPM, are heavily net short (as was LEH) and they are threatened by the rise in price. They want to insure that COMEX cannot be busted out; it's probably teetering as we speak.
The day LEH imploded, they had to cover their shorts and spot gold rose like $80. If they can shake out some margined longs, the bigger banks can cannibalize their positions as GS did to Amaranth on gasoline.
COMEX does not want everyone taking physical delivery, so there is a concerted effort to put these contracts OTM.
A contradiction:
I understand timing and relative currency strength, but they should tend to move together.
USA protection is denominated in EUR - no contradiction.
I understand your remark. It might be counterintuitive but not really a contradiction.
USD strengthening against other currencies is an extrinsic measure.
US CDS is an intrinsic measure. Check CDS for European countries: they are all up too.
If there is a conclusion, USA/USD is in a less bad situation than most of Europe.
I have been amazed at other currencies 'relative' strength the last couple months. Since the QE1 set sail, I thought for sure we were starting a race to the bottom of the Atlantic. It appears only the English received the transmission to meet us half way.
That's the problem with Continentals... they never really did understand the importance of a blue water navy!
Translation: go long until you're proven to be wrong over several weeks. Ignore any negative news.
Watched C and it was pretty much level the entire day. Looked as though HFT taking place between GS and other parties just keeping the volume up.
thx for the decidedly technical update, TD. nice work, sir.
truer words have never been spoken.
i think de Vere (the real big willy shake a spear, which was nothing more than a pseudo) was writing about the Fed within Sonnet CXVI (#116) :
click here for the lay version
Hey, only slightly off topic (but still along the lines of pumping):
Nothing funnier than watching the guy from the Weather Channel this week end repeatedly trying to pump up retail sales with lines like "I see a lot of big bags going by" and "this weather isn't stopping shoppers."
Classic. Your would think think they were owned by CNBS. Oh wait .........
One more reason not to pay somebody to pipe that poison into my house. Seriously, you all talk a good game but you keep feeding the fucking beast. Real men don't have cable. What do we do with the free time? You figure it out. I'll give you a clue though, it's a whole lot better than watching the fucking weather channel.
The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut.
http://www.bloomberg.com/apps/news?pid=20601103&sid=aHgegawJWJcI
Future for GOLD? ^^^^
Anyone else think that Hang Seng and India have rolled over ?. Nikkei was dead before qe announcement. How the f@@k are we rallying ?..
Nikki.
Interesting geopol, the million ounce question is how do you play stagflation ?
Sell paper. But stuff.
Nimbleness.
The gold bugs here are beginning to reek of desperation. You're like a bunch of ugly girls who sit around telling each other how pretty you are. You need constant validation from each other, or else you might actually have to *think* for yourselves, and just maybe finally come to the conclusion that you're very likely entirely wrong.
No, that would be the dollar bugs. Printing dollars is not that hard to do, printing gold on the other hand actually presents a real challenge.
You're like a bunch of ugly girls,,
And this coming from a guy wearing a bag over his head.
I'm reeking desperately to buy more..
Now go play with your fucking FRN's ya half a sissy...
The dollar rally I forecast some months ago continues to trend up but is still overbought after it's big run.
The dollar rally may last for years as long term charts give bullish warnings.
http://www.zerohedge.com/forum/market-outlook-0
answer me how we roll our paper next year.
If the US is going to suddenly become fiscally solvent, then the dollar may remain strong as the POG in other currencies continues to escalate. There's not a major nation out there that isn't fundamentally insolvent.
A strengthening dollar implies deflation and the prescription then is devaluation by the government.