NYMEX

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Gold And The Potential Dollar Endgame Part 2: Paper Gold, What Is It Good For?





In our first installment of this series we explored the concept of stock to flow in the gold markets being the key driver of supply/demand dynamics, and ultimately its price. Today we are going to explore the paper markets and, importantly, to what degree they distort upwardly the “flow” of the physical gold market. We believe the very existence of paper gold creates the illusion of physical gold flow that does not and physically cannot exist. After all, if flow determines price – and if paper flow simulates physical metal movement to a degree much larger than is possible – doesn’t it then suggest that paper flow creates an artificially low price?
Leveraged systems are based on confidence – confidence in efficient exchanges, confidence in reputable counterparties, and confidence in the rule of law. As we have learned (or should have learned) with the failures of Long Term Capital Management, Lehman Brothers, AIG, Fannie & Freddie, and MF Global – the unwind from a highly leveraged system can be sudden and chaotic. These systems function…until they don’t. CDOs were AAA... until they weren’t. Paper Gold is just like allocated, unambiguously owned physical bullion... until it’s not.

 
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Gold Falls Just 1.3% Despite Massive, Odd 3.5 Million Ounce Sell Orders





As ever, it is very difficult to pinpoint exactly why gold and all precious metals fell in price. Interestingly, oil fell by even more - NYMEX crude was down by 1% and was down by more than 1.7% at one stage. The CME Group, which operates the U.S. COMEX gold futures market, said Wednesday's plunge in gold was not the consequence of a "fat finger" or a human error. The trading wasn’t even fast enough to trigger a pause on Globex, said CME.  One thing that we can say for certain was that there was massive, concentrated selling as the New York stock markets opened with some 35,000 lots sold which is equivalent to 3.5 million ounces and saw the price fall from $1,735/oz to $1,711/oz between 0825 and 0830 EST. One sell order alone was believed to be 24 tonnes or 770,000 troy ounces.  Incredibly there was 35% daily volume in just 60 seconds. The selling, like all peculiar, counter intuitive, sharp sell offs in recent months, was COMEX driven with COMEX contracts slammed leading to further stop loss selling. The selling may have been by speculative players on the COMEX. It may have been algo or computer trading driven or tech selling – although this is less likely. Informed commentators questioned the nature of the selling as a large institutional COMEX trading entity would normally gradually sell a position of this size in order to maximise profit.

 
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Daily US Opening News And Market Re-Cap: November 12





Another day another sell-off…with equity markets in Europe trending steadily lower after it was reported that the decision on Greek aid will not be taken during the Eurogroup meeting scheduled for November 12. Still, EU official said that there will be no Greek default on November 16th (EUR 4.1bln redemptions) and that this redemption is to be "factored in" decision on disbursement. Separately,  analysts at Fitch rating agency noted that while current Spain’s rating is appropriate, further action would more likely than not be to sub-investment grade. Moody’s also commented on the never-ending sovereign debt crisis today, stating that actions taken by the ECB only buying time for Euro region and that a decision on France will be communicated within a few weeks. As a result, bond and credit spreads widen further today, with SP/GE 10s spread at 450 level, which is of particular importance given that this is the level at which the LCH begins to review bonds for margin requirements. Deterioration in Italian paper was linked to next week’s supply. In turn, EUR/USD and GBP/USD trended lower, with the USD index up 0.12% at last check. Going forward, market participants will get to digest the release of the latest U. Michigan Survey (Nov P), as well as macro forecasts from Philadelphia Fed.

 
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Daily US Opening News And Market Re-Cap: November 9





Another day another sell-off…with equity markets in Europe trending steadily lower after it was reported that the decision on Greek aid will not be taken during the Eurogroup meeting scheduled for November 12. Still, EU official said that there will be no Greek default on November 16th (EUR 4.1bln redemptions) and that this redemption is to be "factored in" decision on disbursement. Separately, analysts at Fitch rating agency noted that while current Spain’s rating is appropriate, further action would more likely than not be to sub-investment grade. Moody’s also commented on the never-ending sovereign debt crisis today, stating that actions taken by the ECB only buying time for Euro region and that a decision on France will be communicated within a few weeks. As a result, bond and credit spreads widen further today, with SP/GE 10s spread at 450 level, which is of particular importance given that this is the level at which the LCH begins to review bonds for margin requirements. Deterioration in Italian paper was linked to next week’s supply. In turn, EUR/USD and GBP/USD trended lower, with the USD index up 0.12% at last check. Going forward, market participants will get to digest the release of the latest U. Michigan Survey (Nov P), as well as macro forecasts from Philadelphia Fed.

 
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Daily US Opening News And Market Re-Cap: November 8





European equities have made tentative progress this morning, led by the technology and basic materials sectors. The European morning was relatively peaceful until a flurry of activity on the back of European sources commenting that Spain are unlikely to seek ESM aid until the end of the year, and the ECB are not in a rush to commence bond-buying using their OMT facility. The delay of expectations of purchases has taken its toll on the Spanish debt markets which, despite completing their 2012 issuance smoothly today, show signs of strain as the 10yr yield breaches 5.81%, and the yield spread approaches 450bps against the German benchmark – the level at which LCH begin to review margin requirements. The pain in Spain has also impacted the EUR currency, with the major EUR/USD pair printing a two-month low of 1.2720 this morning.

 
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Daily US Opening News And Market Re-Cap: November 5





Equity markets kick started the week on a negative footing, with the troubled Iberian giant back in focus after it was reported that the ECB is checking whether it may have contravened its own strict rules by lending to Spanish banks on overly generous terms, an ECB spokesman said on Sunday. According to press reports, Spanish banks had borrowed funds from the ECB at a preferential interest rate of 0.5% even though the creditworthiness of the T-bills they provide as collateral should have required them to pay 5.5%. The never-ending Greek drama is another factor for the risk-averse sentiment, with only weeks before the country runs out of cash and still no evidence that lawmakers will find a solution to diffuse the situation, there is a risk of another speculative attack on weaker EU states. As a result, credit and bond yield spreads widened, led by Italian and Spanish bonds, both wider by around 9bps in 10s. Despite the evident distress in credit markets, EUR/GBP is essentially flat, with GBP underperforming following the lacklustre PMI report from the UK.

 
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Daily US Opening News And Market Re-Cap: November 1





As we enter the North American session, equity markets are seen marginally higher, as concerns over the never-ending Greek debt drama are offset by the release of an encouraging data from China. Chinese HSBC Manufacturing PMI printed a fresh 8-month high, while the official Chinese Manufacturing PMI came in line with expectations. In addition to that, a state researcher has said that the countries economy has bottomed and is stabilizing. Meanwhile in Greece, the fact that debt is now seen climbing to 192% in 2014 and an agreement on how to defuse the situation has yet to be found may lead to another speculative attack not only on Greek paper, but also other southern states. As a result, GR/GE 10s spread is seen wider by 30bps, however other peripheral bond yield spreads with respect to the German Bund are tighter. The second half of the session sees the release of the latest weekly jobs report, consumer confidence and the weekly DoE from the US.

 
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Daily Market Re-Cap: October 30





Equity markets in Europe traded higher today, supported by solid corporate earnings, further monetary policy easing from Japan, as well as what can only be described as “less bad” GDP report from Spain. Also, commodity complex benefited from upward revision to China’s GDP estimate by analysts at Bank of America (Q4 GDP estimate now stands at 7.8% vs. Prev. view of 7.5%). Decent demand for the latest debt issuance saw IT/GE 10s tighten by c.5bps, with SP/GE 10s also seen tighter by 3bps.

 
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Overnight Sentiment: Cloudy, If Not Quite Frankenstormy





It is cloudy out there as Sandy enters the mid-Atlantic region, although for all the pre-apocalypse preparations in New York, the Frankenstorm may just be yet another dud now that its landfall is expected to come sufficiently south of NYC to make the latest round of Zone 1 evacuations about overblown as last year's Irene hysteria (of course it will be a gift from god for each and every S&P company as it will provide a perfect excuse for everyone to miss revenues and earnings in Q4). That said, Wall Street is effectively closed today for carbon-based lifeforms if not for electron ones, and a quick look at the futures bottom line, which will be open until 9:15 am Eastern, shows a lot of red, with ES down nearly 10 ticks (Shanghai down again as the same old realization seeps day after day - no major easing from the PBOC means Bernanke and company is on their own) as the Friday overnight summary is back on again: Johnny 5 must defend 1400 in ES and 1.2900 in EURUSD at all costs for just two more hours.

 
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Daily US Opening News And Market Re-Cap: October 24





After absorbing the latest PMI reports from Europe, as well as yet another disappointing German IFO survey which in turn was followed by a sharp rise in volatility, saw equity markets in Europe print lows of the day. However ever since, equities staged an impressive recovery and are now in positive territory, supported by investors looking to capitalise on oversold conditions and in part by short-positions being squeezed. The sharp and unpredictable mood swings resemble one suffering manic depression and it remains to be seen whether stocks will be able to hold onto gains. The move higher in stocks has been led by the tech sector, which has been one of the worst performing sectors over the recent weeks. Looking elsewhere, EUR underperformed its peers, largely driven by a lower EUR/GBP (by-product of deterioration in EU credit markets, as well as good sized buying by a UK bank in GBP/USD).

 
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Daily US Opening News And Market Re-Cap: October 23





The Mañana approach endorsed by the Spanish government is finally beginning to have its toll on investor confidence and after being contained by the so-called Draghi put, 2y bond yields are up over 20bps for the second consecutive day. The decoupling that is being observed is being driven by yesterday’s downgrade of several Spanish regions by Moody’s, citing deterioration in their liquidity positions. As a result, Spain runs a risk of being forced to raise the size of its regional bailout fund which stands at EUR 18bln, with EUR 17.2bln already tapped, as the latest downgrade will likely put an upward pressure on borrowing costs. Major equity markets in Europe are down close to 1%, led by basic materials and oil & gas sectors, as WTI continues to consolidate below the key USD 90 level, while spot Gold continues to lose its shine and is looking to make a test USD 1700. The second half of the session sees the release of the latest Richmond Fed report, as well as the weekly API report.

 
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Daily US Opening News And Market Re-Cap: October 19





Yet again Germany was forced to compromise and agree on what can only be viewed as a partial agreement on EU banking supervision. Under the agreed timetable, a legal framework for the new ECB-based supervisor would be finalised by the end of this year and then it would take six to 12 months to get the supervisor up and running. Still, German Chancellor Merkel insisted that direct recapitalisation of banks by the ESM will only be available once fully fledged supervision is in place and ruled out retroactive bank recapitalisation. This, together with the fact that Spain is yet to ask for monetary assistance prompted market participants to book profits. In particular, selling pressure was most evident across the financial sector, where Italian and Spanish banks underperforming for much of the session. As a result, EUR/USD traded lower, with large option expiries today and on Monday between 1.3000 and 1.3050 preventing the pair from posting large losses. Going forward, the second half of the session sees the release of the latest Existing Home Sales from the US and Canadian CPI.

 
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Goldman Closes Nat Gas Long, Says "Time To Take Profits"





Back when everyone had given up on natgas in April when John Arnold was liquidating the Centaurus Master Fund and everyone thought it was an indication of the collapse in nattie end demand (it wasn't), the general peanut gallery said the time of bidless gas is coming. It didn't. Instead, as we then said expected, and as Goldman recommended, it was the time to buy natgas. We are now nearly 100% higher from those April lows. For those who listened to ZH and Goldman, the time to be greedy is over, and as David Greely from Goldman says, it is now "time to take profits." Feel free to sell to all those other banks who are once again about 6 months late to the party.

 
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Wholesale Gasoline Shortage In California Causes Gas Stations To Shut Down: Hoarding Next?





"The squeeze is on, and people are doing desperate things," is how one independent described the situation in California. As Bloomberg reports, a shortage of supply along with drastically higher wholesale prices of gasoline has caused 'mom-and-pop' gas stations to close down as their margins are destroyed. 

  • *VALERO SAYS SUPPLY IN CALIFORNIA HAS TIGHTENED
  • *VALERO SAYS IT HAS TEMPORARILY HALTED SPOT SALES IN CALIFORNIA

The problem is likely a short-term one, according to some, thanks to the temporary shutdown of local refineries (after Chevron's Richmond refinery fire) and maintenance but it is clear that even a short-term blip in wholesale prices (whether driven by local supply or global geopolitics) causes pain as it would appear we are close to 'inelastic' levels of demand.

 
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Daily US Opening News And Market Re-Cap: October 4





Markets were in sleep mode for most of the session, ahead of the BoE monetary policy decision, as well as the ECB’s press conference where the President is unlikely to outline any new measures and instead reiterate that the ECB stands ready to do whatever is necessary. The BoE held both their rates and asset purchase target unchanged, however it is widely expected that the central bank will boost the facility by another GBP 50bln in November. Today’s supply from both Spain and France was easily absorbed by the market, both were supported by the recent decline in bond yields. Going forward, apart from digesting comments from Draghi, market participants will get to see the release of the latest weekly jobs report, durables revisions and the minutes from the FOMC.

 
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