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The off exchange traders, particularly those trading in currencies, had expanded their markets into various commodities, offering non-product backed paper trading at very high rates of leverage.
The Congress and CFTC started taking a dim view of this sort of activity, and has tentative prohibited it as of July 15.
This does not curtail any on-exchange trading, such as the CME, or any ETFs, or any other product with a leverage of less than 10:1 or actually involving substantial physical backing or intended delivery of product within 28 days.
I have not quite gotten the time to assess the impact if any this might have on retail trading in forex itself. I have included a few forex related documents below. My initial take was that this is targeted at retail currency speculation, and gold and oil fall into it as a secondary effect. I have relatives visiting this weekend to celebrate my wife's recovery from her recent illness so I have not had time to inquire further.
This is my reading of the situation, subject to additional information. I am trying to obtain the forex type contracts detail to understand customer rights, if any, in obtaining delivery of spot commodities.
There *could* be something to this if there is in fact a means to obtain delivery in some reasonable way. But otherwise it looks like a crackdown on speculation by smaller specs in off exchange products and push to move them to exchanges for all but the larger 'exempt few' who enjoy privileged access to almost everything.
I am a little surprised that people were not screaming about 'currency controls' which might be a little more to the point that talk about prohibiting the trading in gold, oil, and silver.
For the most part it seems like much ado about nothing with regard to gold and silver and oil etc., but its good for clicks, and it helps to cheer up those sitting in depreciating paper on the sidelines who have missed the commodity bull markets.
Gold money was not private property in the 1930's, it was an instrument of the state, and subject to the state's disposal. That is not the case now.
Forex.com reportedly sent out this notice to customers on Friday.
Date: Fri, Jun 17, 2011 at 6:11 PM
Subject: Important Account Notice Re: Metals Trading
Important Account Notice Re: Metals Trading
We wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.
In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.
We encourage you to wind down your trading activity in these products over the next month in anticipation of the new rule, as any open XAU or XAG positions that remain open prior to July 15, 2011 at approximately 5:00 pm ET will be automatically liquidated.
We sincerely regret any inconvenience complying with the new U.S. regulation may cause you. Should you have any questions, please feel free to contact our customer service team.
Sincerely,
The Team at FOREX.com
Here is one of the relevant products offered by Forex.com:
How Leverage for Spot Gold Works
Leverage for spot gold trading is set at 100:1. This means that for every $1 you have in your account balance, you have $100 in buying and selling power for gold trading. As a result, leverage increase a client's buying and selling power and enables clients to participate in a market that may otherwise be cost prohibitive. Keep in mind that increasing leverage increases risk.
This is the long and short of it. If you want to trade paper, there are still plenty of ways to do it. But you might not be able to do it in the US unless you are using an exchange with structured counter party risk and contracts, and regulated leverage.
Here are some related documents, that interestingly enough deal with the Forex aspects of this ruling.
CFTC: Final Retail Foreign Exchange Rules
Hedge Funds Trading FX May Be Caught Out By Dodd-Frank
Dodd-Frank Dispatch: Retail Forex Transactions Rule for National Banks
Time Running Out On Retail Currency Business
Obama Threatens Forex; Says Goodbye to OTC Gold Trading
Gold and silver bullion are looking resilient here.
The miners continue to underperform rather badly. See the intraday commentary for a graph of this, and some speculation on why it is happening.
I think this is why some metal bulls have started to shift sector allocation from bullion to miners, but it brings a different set of risks with it.
See the intraday commentary for a size up of the market positioning and next week's events that may move it.
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Watch the US-EUR and EUR-CHF crosses.
Even better if you are able watch the bond spreads since they are leading the currency moves these days.
The remainder of today's trade is a bit of a throw away because of the option expiration, but next week on Wednesday the Fed should announce some decision relative to son of QE2, and on Friday the Russell is rebalanced.
Plenty of volatility coming for the traders, and headaches for investors and producers seeking a stable income. That is the US casino economy.
Moody's Press Release
Frankfurt am Main, June 17, 2011 — Moody’s Investors Service has today placed Italy’s Aa2 local and foreign currency government bond ratings on review for possible downgrade, while affirming its short-term ratings at Prime-1.
The main drivers that prompted the rating review are:
(1) Economic growth challenges due to macroeconomic structural weaknesses and a likely rise in interest rates over time;
(2) Implementation risks surrounding the fiscal consolidation plans that are required to reduce Italy’s stock of debt and keep it at affordable levels; and
(3) Risks posed by changing funding conditions for European sovereigns with high levels of debt.
Moody’s review will evaluate the weight of these growing risks in light of the country’s high rating but also relative to some credit-strengthening trends that have been observed in recent years and are expected over the coming years, such as improved fiscal governance, lower budget deficits and a modest economic recovery.
RATIONALE FOR REVIEW
First, the Italian economy faces growth challenges in an environment characterized by long-term structural impediments to growth and potentially rising interest rates. Structural economic weaknesses — mainly low productivity and important labour and product market rigidities — have been a major impediment to growth in the last decade and continue to hinder the economy’s recovery from the severe recession it experienced in 2009. Italy has so far only recovered a fraction of the nearly seven percentage points in GDP that it lost during the global crisis, despite low interest rates, which are likely to rise in the medium term. Growth prospects for the Italian economy in the coming years will be a crucial factor that will determine the government’s revenues and the achievement of fiscal consolidation targets.
Second, there are implementation risks to the fiscal consolidation plans that are required to reduce Italy’s stock of public debt to more affordable levels. Against a backdrop of rising interest rates and weak economic growth, the government may find it difficult to generate the primary surpluses that are needed to place the public debt-to-GDP ratio and the interest burden on a solid downward trend. The adoption of additional conservative fiscal policies may prove more difficult in the near future because the current government’s electoral support is weakening, with the government facing challenges in gaining public approval for its policies. For example, the government’s recent energy and water supply proposals were rejected by popular vote.
Third, the fragile market sentiment that continues to surround European sovereigns with high levels of debt poses additional risks for Italy. The continued stability of market demand for Italy’s debt is uncertain at current yields. Although future policy actions within the euro area could reduce investors’ concerns and stabilize funding costs, the opposite is also possible. In any event, going forward, investors appear likely to differentiate more among euro area sovereign borrowers than they did prior to the financial crisis, to the disadvantage of euro area countries with higher-than-average debt burdens, like Italy.
