Futures market

It started early this morning as Asia really went to bed - when gold markets were temporariliy halted. Someone decided that was the perfect time to sneak a few thousand contracts through the futures market (and clearly has no fiduciary duty to a client for best execution). As the US day-session opened, it was silver's turn totake a hiding (and gold less so that time); and then into the close, with both precious metals (and copper) heading towards their lows, Silver nose-dived (now -8% on the week) and its worst day in almost 3 months. Away from precious metals, Oil surged back over $109 as Syria chatter hotted up again (from Assad this time), the USD slid further (though ended flat on the day after an opening dump), and Treasuries shrugged off early gains to close red even as stocks closed lower (despite a late-day ramp effort) - breaking the streak and stunning a few TV anchors as VIX-slam and the 'short squeeze' seems over for now.

It is somewhat ironic that none other than CNBC is reporting the news (which was suggested here months ago in "Will JPMorgan's "Enron" Be The End Of Blythe Masters?") that as part of its divestment of its physical commodities unit announced previously, JPMorgan may also seek to cover up any trace of market manipulation in the division recently embroiled in the aluminum cartel scandal (which we reported on in June 2011 and which story recently rose to prominence as a result of follow up reporting by the NYT) by getting rid of none other than Blythe Masters.

There is a tradable approach to analyzing the fundamentals of supply and demand in the monetary metals markets. This article is a brief summary of the approach we take...

In yet another in our series of taxpayer-funded Federal Reserve research that has achieved so much over the years, the New York Fed blog has released its perspectives on the Tulip-mania bubble of 1633-37. Hot on the heels of SF Fed's Williams comments that bubbles can only be seen in rear view mirror and then of course - and that there's always an exogenous factor to blame' - in the case of tulips, the New York Fed cites "beers" as the catalyst since 'shares' were exchanged in pubs... Ironically then, it seems even 380 years ago, the only thing that mattered was liquidity.

Price action in the foreign exchange market in the context of fundamental developments.  Disappointing US jobs data clouds the near-term outlook for the greenback,  

• Summers Faces Key 'No' Votes if Picked for Fed (WSJ)
• NYT Editorial Board Says Summers Would Be Wrong Fed Choice (NYT)
• Russia says it's compiled 100-page report blaming Syrian rebels for a chemical weapons attack (McClatchy)
• China says Syria crisis can't be resolved with military strike (Reuters)
• G-20 Faces Growth Threats as Syria Adds to QE Exit Risks (Bloomberg)
• Apple Supplier Fire Spurs Biggest Chip Price Rise in 3 Years (BBG)
• U.S. Decided Not to Horse-Trade With Russia on Assad (WSJ)
• Financial Crisis: For Corporations and Investors, Debt Makes a Comeback (WSJ)
• Gorman Says Chance of Another Financial Crisis ‘Close to Zero’ (BBG) and in other news, "no risk of a Us downgrade" -  Tim Geithner
• A Biotech King, Dethroned (NYT)

Much data and events next week.  Politics risks trumping economics.  

This week will see the end of August trading and September is, along with November, one of the strongest months to own gold. This is seen in the charts showing gold’s monthly performance over different time frames - 1975 to 2011, 2000 to 2011 and our Bloomberg Gold Seasonality table  from 2003 to 2013 (10 years is the maximum that can be used).

Thackray's 2011 Investor's Guide notes that the optimal period to own gold bullion is from July 12 to October 9. During the past 25 periods, gold bullion has outperformed the S&P 500 Index by 4.7%.

It’s ironic, or it seems that way to us, that two of the least understood financial markets by equity investors are two of the most systemically important – repos and gold. Even more ironic is how so many investors don’t even consider them to be all that important. In our view, stability in both markets is a pre-requisite for maintaining confidence in the financial system and keeping the credit/asset bubble inflated. The significance of these markets is not lost on governments, central banks and regulators, although the definition of “stability” in each of them is slightly different. Looking underneath the bonnet/hood, we are doubtful that either of these markets, repos or gold, can reasonably be described as “stable” right now. There also seems to be a paradox where the current low repo rates and gold prices are, we suspect, fooling people into a false sense of complacency. What’s really piqued our interest, however, is whether there is a similar issue which is increasingly impacting both of these systemically important markets? This issue relates to the availability of sufficient collateral...

From the historical perspective, concentrating virtually all systemic risk into the state is a Grand Experiment. Cheap, abundant oil, expanding working-age populations and rapidly increasing productivity conjured the illusion that the state was large enough and powerful enough to absorb infinite risk with no real consequence. The problem is the state's ability to tax/print/borrow money to cover payouts and losses is not infinite. Having transferred virtually all systemic risks to the state, we presume the state is so large and powerful that a virtually limitless amount of risk can be piled onto the state with no consequences. Offloading risk onto the state does not make the risk vanish; it simply concentrates the risk of collapse into the state itself.

Gold traded near a two-month high after holdings in the largest ETP posted the first weekly expansion this year and markets digested the very robust global physical demand data reported last week . Demand from China and India is projected to to soar to 1,000 tonnes each in 2013 and mixed U.S. data has boosted gold’s safe haven appeal.  Gold forward offered rates (GOFO),  remain negative and are becoming more negative. This shows that physical demand is leading to supply issues in the highly leveraged LBMA gold market. GOFO  rates are those which  contributors may use to lend  gold on a swap for  dollars, according to the  London Bullion Market  Association and the negative gold interest rates show a preference to own gold over dollars by bullion banks.  Negative 1, 2 and 3 month GOFO rates mean that bullion banks lent their customers, including other bullion banks,  gold to obtain a positive return, thereby increasing the "paper" gold supply. Some may now may be struggling to get their gold  back which may explain the significant decline in COMEX gold holdings of certain bullion banks (see commentary).  This is creating significant supply demand issues in the physical gold market which should lead to higher gold prices.

How do we protect the mining operation so that it can operate in both good times and bad while at the same time generating profits that grow with the gold price?

The latest World Gold Council Gold Demand Trends report, which covers the period April-June 2013, confirms again how recent falls in the gold price were due to speculators selling paper gold rather than a decline in actual demand for physical gold.

It highlights, once again, that the price falls have generated significant increases in demand, most notably from store of wealth, jewelry, bullion coin and bar buyers  in Turkey, Dubai and the Middle East, Vietnam, India, China and the rest of Asia.

Meanwhile speculators, primarily banks and hedge funds, exited their positions in the gold ETFs and futures markets. This led to liquidations of just 402 tonnes of ETF gold worth only $18.3 billion.

Sales of silver coins by the U.S. Mint have set a record high in the first half of 2013 seeing the best start to a year ever. 

Year to date Silver Eagle sales are at 30.3 million, a record pace that was supported by soaring July sales. Silver Eagle sales had a record year in 2011. That year, it took until September 21, 2011, to reach above 30 million in sales for the year.

Therefore, 2013 looks set to be a record year for Silver Eagle sales.

Next month promises to be more volatile than this month.  Consensus views are unlikely to be challenged by the data in the week ahead.