Futures market

While the gold standard may no longer exist, nations and international organizations still have 30,877 metric tons of bullion reserves, valued at about $1.77 trillion. The dollar has been the world’s reserve currency since the U.S. and allies agreed at the 1944 Bretton Woods conference to peg it to a rate of $35 per ounce of gold. It remained the most- traded legal tender after global currencies began freely floating in the early 1970s. The greenback dropped 12 percent against a basket of six major currencies since March 2009. The U.K. suspended the gold standard in 1931, Chatham House said. “Greater discipline on financial markets might have been helpful in inhibiting the reckless banking and excessive debt accumulation of the past decade,” the task force said. “However, with the onset of the global crisis, had gold had a more formal role to play, the rigidity it imposes might also have been a handicap when a more flexible policy response was required.” “For gold to play a more formal role in the international monetary system, it would be imperative for it neither to hamper the system’s performance nor to create unacceptable constraints on national economic policies,” the task force said.  Gold may “continue playing a significant role in the international monetary system, serving as a valuable hedge and safe haven, particularly in times when tail risks predominate.”

Of course, if only one had seen that there is absolutely nothing different or new about the gold "story" at all since March 2009, there would have been no need to strengthen positions. Otherwise, more or less as has been said here all along. Furthermore, below are some pretty charts from the latest World Gold Council demand trends letter, presented below.

There continues to be no coverage of silver in the non specialist financial media and little coverage of silver in the specialist financial media. However, both the Financial Times and Bloomberg cover silver today which might be a harbinger of short term weakness. The majority of articles on silver are bearish and most bank analysts remain bearish on silver again in 2012 – as they have been in recent years. Prices will average $37.50/ounce in Q4, according to a survey of 13 analysts by Bloomberg. The lack of coverage of silver and consequent “animal spirits” in the silver market is of course bullish from a contrarian perspective. Analysts look set to get the silver market wrong again as recent rocketing industrial demand for silver, from solar panels to batteries to medical applications and growing investor demand for coins, and small & large bars is “diminishing a supply surplus” according to Nicholas Larkin of Bloomberg.  This has led to silver’s best January gains in 30 years with silver up over 20% from below $28/oz to nearly $34/oz. Barclay's estimates that manufacturers will need a 2.5% increase of the metric tons used last year and investment demand continues to grow due to risks posed by both inflation and systemic risks. Silver supply shortages are something we and other analysts who are bullish on silver have been warning of for some time. This is because the silver market is small versus the gold market and tiny versus equity, bond, currency and derivative markets.  This is why we believe silver should rise to well over its nominal recent and 1980 high of $50/oz in the coming months.

The slippery slope of lower volume continued today in the NYSE (cash/stock trading markets) despite ES (the e-mini S&P futures market) seeing its 2nd highest volume since 12/16 as that futures market has only seen 1 day of the last 11 with a negative close-to-close change. Driven seemingly by yet another rumor that the Greek PSI deal is close (yet GGBs are lower?), risk assets broadly went into overdrive and while ES held 1300 (on very large average trade size and volume as broke that stop-heavy level), the shifts in commodities, FX, and Treasuiries all helped sustain the euphoria into the close where we stabilized at yesterday's pre-market highs. Copper, Silver, Gold, EURUSD (and all FX majors aside from JPY), Treasury yields (and 2s10s30s) all closed at their highs of the day and while oil dropped early (around the Keytsone news?) it also limped back higher to $101 by the close. Equity markets were slight leaders on the day but credit caught up into the close. We do note that while the high-yield credit index has rallied dramatically but worry that the optical compression of spreads (bullish) is hiding the bear flattener in 3s5s that is seemingly dominating flow for now (relative to underlying credit).

Friday was the most active day in ES (the e-mini S&P 500 futures contract) since 12/16 and today saw volume once again surge in the futures market as it tested 1300 for the first time since 7/28. However, NYSE stock volume (which managed a very late-day spurt on Friday) was dismal once again today (for instance -25% from Friday with 3 minutes to go) with another extremely late jump taking it back to 'normal' for the year so far (but still dramatically low compared to previous year 'norms'). Stocks rallied on China GDP and an optically decent Spanish auction but as we moved into the European close, risk started to leak off and accelerated in the afternoon as IMF headlines, LTRO rumors, and IIF/PSI chatter hit though more expansive ECB rumors seemed to stall losses at last night's ES re-open levels. ES is down very marginally from Friday's late-day ramp close and credit outperformed today (though HYG hung in with stock's weakness) as financials underperformed. The majors were the worst performers with Citi and BofA giving decent amount of YTD gains back. EUR stabilized post-Europe (after selling off into their close) with the USD (DXY) down 0.4% from Friday and GBP underperforming. In the face of the USD stability this afternoon, commodities were mixed with Oil spiking back over $100 (as NatGas was crushed), Copper leaking off but holding gains 2%-plus gains from Friday (China), as Silver and Gold lost their earlier gains (3% and 1.5% at best) to end around 0.75-1% better from Friday's close (still a double on USD weakness). Treasuries closed marginally lower in yield from Friday (1bps max) but were 4-5bps lower in yield from around the European close (as 2s10s30s slid also). Stocks closed well below broad risk assets as FX carry never really joined the derisking craze and oil's strength seemed divergent for now.

Back in August 2010, we presented an idea proposed by our friends at SK Options trading for a very simple trading strategy: being long gold in the overnight session, and shorting it during the day. At the time of writing, such a strategy would have returned $2.16 billion from a $100 million initial investment in 10 years, a 37.46% annualized return. Today, we provide a much needed follow up to this quite stunning divergence. As SK notes: "we have revisited the article and written an update. Not only does the discrepancy still exist but it has been actually increasing. That fund would now be worth $5.26B, way up from $2.16B when we last wrote about it - in other words an increase of 143% in just over a year. When we wrote about this in August 2010, the annualized return of the Long Overnight/Short Intraday gold index was 37.46% since the start of 2001. However if we measure from now the annualized return since 2001 is 43.24%, with the annualized return of the Long Overnight/Short Intraday gold index standing at roughly 64.4% since 2009." So for those who wish to layer on an additional alpha buffer on top of what is already the best performing asset of the past decade, the SK Options way just may be the strategy. As for the reasons for this gross arbitrage - who cares. Is it manipulation? is it the early Asian buying offset by London pool selling? It is largely irrelvant - the point is that this is "the divergence that keeps on giving" - kinda like a Stolper trade, or an inverse Tilson ETF, and until it doesn't, or until something dramatically changes in the precious metal market, it is likely that this trading pattern will continue for a long time.

While on one hand we get news from Nigeria that the government and the labor unions have failed to end a labor strike, raising the prospect of a halt of all production in the country which produces 2.4 million barrels of oil per day or roughly the same as Iran exports, we now find out that the US attempt at de-escalating tensions with Iran (following Thursday's news of an extension in the oil embargo deadline by 6 months - one would almost think Obama realized $5.00 gas may be an issue with the election looming) may have failed massively, and it is now Iran's attempt to score political brownie points knowing well it has all the advantage. As EA WorldView reports, instead of backing away from last week's sensitive issue of the assasination of a nuclear scientist, Iran has ripped the scab right off the wound and its foreign ministry has boldly proclaimed that it has "reliable documents and evidence that this terrorist act was planned, guided and supported by the CIA. The documents clearly show that this terrorist act was carried out with the direct involvement of CIA-linked agents." So the ball is now squarely back in America's court, and any further attempts at appeasement, such as the embargo extension was perceived as being, will merely serve to make US foreign policy appear even more toothless. Which Hillary will hardly stomach. So we may well be back at square one (only this time with two aircraft carriers in the Arabian Sea instead of just one).

One of the main reasons why we have been not so focused on paper representations of real currencies (i.e., gold and silver) is that ever since the MF Global debacle, in which it became all too clear that if physical gold can be "hypothecated" via conflicting ownership, then there is no way that paper versions of precious metals are viable and indeed credible. After all, the only real owner at the end of the day is the certificate holder, which as we have explained before, is none other than DTCC's Cede & Co. Good luck collecting when the daisy chain of counterparties starts falling. Which leaves physical. And for a good sense of what the "real" price of the metal is, not one determined by institutions whose interest it is to preserve the hegemony of paper, one can either try to procure gold and silver at a retail merchant, or one can look to the premium of a dedicated physical ETF over spot. Such as Eric Sprott's PSLV which as of today is trading at an all time high premium of 30%! In other words, someone is willing to pay up to 30% over spot for the right to be closer to the physical metal than merely have a paper claim on a paper claim (pre hyper rehypothecation and what not). Incidentally the last NAV premium over spot record was back in April 2011 just as silver went parabolic and the entire commodity complex experienced the infamous May 1 takedown when it collapsed by $8 dollars in milliseconds on glaringly obvious coordinated intervention. Said otherwise, like back then, so now there is an actual shortage, manifesting itself in the premium. And while last time its was the price plunge which eased supply needs, we are not so sure how one will be able to spin a collapse of the current, far lower paper silver price.

2011 was an abysmal year for the global insurance industry, which had to cover yet another enormous increase in damages from natural disasters. Unknown to most casual observers is the fact that during the past few decades the frequency of weather-related disasters (floods, fires, storms) has been growing at a much faster pace than geological disasters (such as earthquakes). This spread between the two types of insurable losses has moved so strongly that it prompted Munich Re to note in a late 2010 letter that weather-related disasters due to wind have doubled and flooding events have tripled in frequency since 1980. The world now has to contend with a much higher degree of risk from weather and climate volatility, and this has broad-reaching implications. And critically, it has a particular impact on food.

As EURUSD leaks very gently lower into the new year (but stocks popped excitedly across quiet European markets that lacked a bond market supervisor to keep them honest), we thought it might be interesting to look at the relative strength of the Euro against six different measures. From FX option risk-reversals to ECB's European Bank Lending statistics, QE and sovereign risk relationships to Fed/ECB balance sheet dynamics, and finally from futures commitment of traders data to EUR-USD swap spread frameworks, the results are unsurprisingly mixed with a bias towards EUR weakness. Between the European auctions (and redemptions) of the next two weeks, and the FOMC meeting on the 24-25th January, we face quite a rude awakening from the low volume holiday week malaise.

Update 2: NYMEX GASOLINE, HEATING OIL LIMITS NOW 50 CENTS, CRUDE $20. Basically the CME just doubled daily limits. Of course, the CME is happy to double the drops... but never the surges.

Update: CME RESUMES TRADING ON NYMEX CRUDE, PRODUCTS FUTURES

Uh, what?

• CME HALTS TRADING ON GAS, CRUDE OIL, HEATING OIL FUTURES
• CME TRADING HALT IN ENERGY FUTURES WILL LAST 5 MINUTES

So now crashes cause the entire market to be halted? Swell

The Silver market is in a bubble stage right now. No one really knows how long this will last, whether Silver goes up another $5, 10, 20 doesn`t really matter for investors who are buying the physical metal in the form of coins because when the bubble ends they are going to be sitting on a depreciating asset.

Columbus Day, many markets will be closed, but some futures markets are now trading.

It appears that a Phibro/Buffett-inspired attempt to corner a commodity market is in progress. Amusingly (or not so much for chocolate mousse cake makers), it is occurring in the relatively compact and illiquid cocoa market, where the WSJ reports ten brokers (mainly BNP Paribas) took possession of more than 240,000 tons of cocoa, valued at as much as
$1 billion, leaving just 6,710 tons available for purchase. The Telegraph adds some further color: "The cocoa beans, which are sitting in warehouses either in The
Netherlands,
Hamburg, or closer to home in London, Liverpool or Humberside is
equivalent
to the entire supply of the commodity in Europe, and would fill more
than
five Titanics. They are worth £658 million." This is nothing less than an attempt to squeeze existing shorts, with an emphasis of the on the run, July contract. Indeed, the backwardation between July and September has surged to 11%, even as the settlement price on the continuous front-month, closing at $3,165, approaches all time highs: "Thursday, cocoa for July delivery settled at £2,732 ($4,221) a metric
ton. Friday, the new front-month contract, for September delivery, rose
1% to £2,445 a metric ton." And that's not all: "Already, cocoa for September delivery is trading at a big premium to
December cocoa, sparking talk that another run on inventories may occur
when the September contract expires." In other words, with half of America beckoning diabetes with open arms, a rather sharp bout of inflation is about to be felt for all those whose daily calorie intake is over 2,000. Incidentally, this is precisely the kind of action that would happen if and when someone had the urge to pull a Buffett and send the price of gold and silver through the roof (and destroy JPM and the LBMA in a matter of hours).