25 March 2010

NY Precious Metals Prices Pressured into Futures Options Expiration

As gold and silver trading in the states moves into another futures option expiration and the rollover from the April contract with first delivery notice time approaching, the paper gold market deviates once again from the world market for bullion.

As John Brimelow notes:

Intriguingly, so also may be China. Mitsui-HK today explicitly says:
“While euro tried to pull the yellow metal lower, Chinese buying wanted to push it higher”

More concretely, the Shanghai market closed at a $6.08 premium to world gold of $1,091.98, the second day of unusually high premiums. At the equivalent of 8,469 NY lots, volume actually exceeded TOCOM for the first time I can remember. Andy Smith of Bache suggested the other day that China might resort to buying gold to groom its foreign trade statistics, which he pointed out was done by Japan in the 80s and Taiwan in the 90s. Official action would not show in Shanghai, of course, but maybe the hive mind is at work.

Local Vietnam gold stood at a $27.89 premium to world gold of $1,087.20 early today (Wednesday $24.41/$1,104.20).

While on day session volume equivalent to 7,804 NY contracts TOCOM open interest slipped 2.9 tonnes (900 NY), the public added 3.67 tonnes (6.8%) to their long. The active contract added 15 yen and world gold rose $1.25 during the session to go out $3 above NY’s depressed Wednesday 4PM level.

Gold in Euros rallied fairly smoothly from the end of yesterdays’ NY aftermarket until the European open, then moved approximately sideways until 10AM NY. $US gold did the same, but more erratically. At its intraday high around 7-30 AM it was up $6.80. A raid seems now to be underway. Estimated volume at 9AM is reported to be an eye-popping 206,132 lots which if not an error will need some explaining; the CME website indicates volume at 10 AM was roughly 87,000 of which about half was done before the floor session.

With the option expiry still pending price resistance in NY is to be expected, which will greatly please the now clearly activated Eastern physical buyers.

Do you think they were banging the price lower with heavy short selling in the early hours to depress the price below the key strike prices around 1090 and more importantly, 1100? When there are no limits on positions and you have deep pockets in a fairly thin market, the opportunities for manipulating price action becomes a rather compelling temptation, especially if you think the Fed 'has your back' and expect to be bailed out by them or the Exchanges if you are ever cornered for delivery of what you have already sold.

While traders can make money just following the momentum of the big trading desks on this obvious price pattern, it does not foster confidence to see the markets so obviously pushed around, and for the regulators to be so obviously asleep at their desks (or surfing porn, as the recent investigations of the SEC have disclosed).

This is not to say that there are no government officials and regulators trying to do the right thing for the public which they serve and the oaths which they have taken. Elizabeth Warren, Chair of the TARP Oversight Program, and Bart Chilton, a CFTC Commissioner, and a Bush nominee no less, who are providing outstanding leadership on the subject of market reforms. It is would be good to see them receive more visible support from this Administration, to encourage the many in government who would be more than wiling to act, given the appropriate encouragement and leadership.

Gold April Futures Hourly Chart

Gold June Futures Hourly Chart

Gold Weekly Chart

Silver Weekly Chart

Mining Index