Interactive Brokers Allows Long-Only Bitcoin Futures Trading (At 50% Margin)

Following the "successful" launch of Bitcoin futures overnight, Interactive Brokers - whose founder had been adamantly against the CME/CBOE product over risk concerns - has enabled clients to trade the crypto-craziness on its platform... but with some notable constraints.

Interactive Brokers began offering clients the ability to trade bitcoin futures at the start of trading on the Cboe Futures Exchange (CFE) on Sunday night, December 10th, 2017.

“Interactive Brokers was on the buy side of the low print of 14,710,” said Thomas Peterffy, founder, Chairman and CEO of Interactive Brokers.

 

“A Registered Investment Advisor on the Interactive Brokers platform purchased two March contracts in the first minute of trading.”

However, as Interactive Brokers explains, there are some notable constraints...

Due to the extreme volatility of cryptocurrencies, clients will be unable to assume a short position.

 

In addition, only limit orders will be accepted.

 

IBKR’s margin requirement on long positions will be at least 50%.

 

The company will continue to monitor concerns surrounding the market"s ability to process bitcoin futures risk.

Billionaire crypto fund manager Mike Novogratz was on tape this morning, speaking positively about the launch of Bitcoin futures,

“The market trades like it wants to go up, not down...We are in a speculative mania and my sense is we are still fairly early.”

For now, Bitcoin futures prices are holding their gains, outperforming spot Bitcoin and spot Gold...

Bitcoin"s Growing Price Gap Between Exchanges Creates Potential Headaches For Futures Trading

On Thursday, as the Bitcoin price made record high after record high, spiking to somewhere between $16,000-19,500, it was one of the top stories across mainstream media outlets, never mind Reuters, Bloomberg and the FT.

However, what exactly was the all-time high for Bitcoin? Because of Bitcoin"s growing "price gap", it depended where you looked. But a price gap of more than $3,000…really? Actually yes, as Bloomberg explains.

Bitcoin traded above $19,000 on Thursday, but you may have missed it. As it was reaching $19,500 just after 11 a.m. on the GDAX exchange, which is run by the popular bitcoin brokerage firm Coinbase, bitcoin was still stuck in the high $15,000"s on other trading platforms. Similarly, most U.S. traders woke up on Thursday to news that bitcoin was above $15,000, unless they were following it on Bitfinex, where it didn"t cross $15,000 until soon before 10 a.m.

This is nothing new. Bitcoin trades on dozens of exchanges, and the prices get out of whack at times. But as the price of bitcoin rises more rapidly into the tens of thousands, the gap seems to be getting worse. It was particularly bad on Thursday, when for several hours in the morning the difference between the price of bitcoin on the exchanges remained thousands of dollars, more than the total price of bitcoin just a few months ago.

The chart below compares the price of Bitcoin on two separate exchanges, GDAX and BitStamp, from 12.00am to 5.00pm yesterday.

To some extent, this might not seem to matter, Bloomberg suggests. So what if you could sell at a higher price on GDAX, it’s likely that you paid a higher price in the first place. As we discussed yesterday, GDAX is Coinbase’s exchange and the higher price probably reflects  Coinbase being the easiest way for new Bitcoin investors to participate. And…let’s face it, most investors in Bitcoin have been making money. Furthermore, yesterday was an unusual day as the whole world seem to be momentarily gripped by Bitcoin mania. Congestion problems on the Gemini exchange, for example, forced it to suspend redemptions for several hours.

While people might not care about the price divergence right now, they might do in the next few days. As we know only too well, Bitcoin trading is about to change dramatically, with the launch of the CBOE and CME Bitcoin futures contracts. The former starts trading on Sunday after which investors will be able to buy, sell and short the Bitcoin price without having to buy the digital currency itself. Unlike the current Bitcoin exchanges, the futures exchanges are heavily regulated (except when it comes to trading gold and silver, of course).

The intersection of trading on "wild west" Bitcoin exchanges with conventional futures exchanges is a potentially dangerous mix. While the CEO of ICE, which owns the NYSE, has lamented that the CBOE and CME have beaten him in launching Bitcoin products. He also said this week that his organisation wouldn’t be offering futures contracts soon due to the lack of transparency and structural integrity in existing Bitcoin markets. Those cautionary words are looking prescient all of a sudden. As Bloomberg notes.

The price gap creates some structural problems for the futures market. Consider hedging. The Cboe and the CME contracts will reference prices on different exchanges. So if investors are trying to hedge a bitcoin purchase, they will have to make sure they buy bitcoins on an exchange that matches up most closely with a particular contract.

But the bigger problem is that the price gap gives some credence to Sprecher"s argument. Large price spreads indicate liquidity problems and a lack of active professional dealers or traders who would normally arbitrage these differences away rapidly. Less liquidity suggests prices will drop more quickly when they inevitability do, though not everyone agrees.

Paul Puey, the CEO of Airbitz, a bitcoin wallet company, told me on Thursday that bitcoin"s fractured market was a feature, not a bug. If a large trade were to start a tumble in one exchange, the prices would be safe elsewhere, the thinking goes, though I"m not sure I believe that the bitcoin whales wouldn"t rush in to sell on a sustained plunge.

On balance, Bloomberg comes down favourably on the introduction of Bitcoin futures trading, expecting it to reduce volatility. However, any conviction is lacking as Bloomberg Gadfly analyst, Stephen Gandel, acknowledges that he might be wrong and it could have the opposite effect.

And more liquidity by way of the futures market should make bitcoin prices less volatile. But it could go the other way, too. A drop in the price could send futures traders heading for the exits, stoking more fears in the traditional bitcoin exchanges. That could create negative feedback loops, like the ones in mortgage markets during the financial crisis. What"s more, if there is some pent-up demand to short bitcoin, a rush of traders could cause futures to plunge when they start trading, pushing down the price of bitcoins.

Exactly.

As the clock running down to futures trading, we are waiting to see whether big banks and “official” interventionists launch a pre-emptive strike in a desperate effort to cool the Bitcoin bull market. Whether or not that happens, we aren’t convinced that Bitcoin’s volatility, or its price, will be tamed for long.

CME Unveils Bitcoin Futures Circuit Breakers

Having taken a gamble on bitcoin futures, which are set to begin trading by the end of the year, the CME is now seeking to avoid the consequences of what has emerged as both the cryptocurrency"s best and worst selling point: its unprecedented volatility. To do that, the Chicago-based exchange will do what it does to virtually every other asset class traded under its roof, and impose limits on how much prices of bitcoin futures can fluctuate within a day.

While the CME already uses daily vol limits on most other markets, including crude, gold and market futures, to temporarily halt trading when price swings get out of control, the CME has never before dealt with something like bitcoin, which in addition to being the world"s best performing asset classes in recent years, is also its most volatile. And, as the WSJ adds, it is also unclear how much impact CME’s limits will have on bitcoin, since its futures market has yet to emerge and most trading in the digital currency is on exchanges outside of CME’s control.

In any case, based on the CME"s preliminary term sheet, bitcoin trading limits would kick in when the price of its bitcoin futures move 7%, 13% or 20% up or down from the previous day’s closing price. The first two thresholds, for 7% and 13% moves, are “soft” limits, which would trigger a two-minute pause in trading of bitcoin futures. The 20% limit would be a “hard” stop on how far CME’s bitcoin futures could swing on any day.

By comparison, the CME has similar staggered volatility control on its popular E-mini S&P 500 futures contract, which also has three successive price-fluctuation limits at 7%, 13% and 20% during regular trading hours. A nighttime limit of 5% was hit in the S&P 500 futures on Nov. 8, 2016, when news of Donald Trump’s upset win in the U.S. presidential election triggered wild volatility in stock-market futures, only for the S&P to surge 21% in the 12 months since.

Of course, bitcoin will be a far "wilder" and more volatile instrument than the S&P 500 (one hopes). According to Coindesk calculations, so far in 2017 there have been two days in which bitcoin’s price swung more than 20% in a single day. There were 11 days in which it moved at least 13%, and 69 in which it moved at least 7%.

The full bitcoin contract specsheet is below.

ScotiaMocatta Put For Sale After Multibillion Money-Laundering Scandal

The world"s oldest gold trader is for sale after a massive money laundering scandal may have terminally crippled one of the most iconic names in the business.

Canada’s Bank of Nova Scotia is exploring options for its gold business ScotiaMocatta, the Financial Times reported, which include a possible sale of Canada"s most popular precious metals trader. Scotiabank made a decision to sell ScotiaMocatta following a massive money laundering scandal centered on a U.S. refinery that involved smuggled gold from South America. The ScotiaMocatta business, a mainstay in PM trading, is one of London’s main gold trading banks and is being sold by JPMorgan.

According to the FT sources, ScotiaMocatta’s future had been underway for several months, with ScotiaBank allegedly seeking a buyer for up to a year and was likely to shrink the business if a sale is not completed, although according to the article Chinese buyers - the world"s dumbest money these days - are rumoured to be the key targets of the sale.

While gold trading has been in a cyclical decline in recent years, the “straw that broke the camel’s back” in prompting the sale was Scotiabank’s lending to Elemetal, a precious metals refinery in Dallas. Scotiabank was one of its biggest lenders, they said. The problem emerged in March, when US prosecutors accused workers at a subsidiary of Elemetal, NTR Metals in Florida, of a money laundering scheme using “billions of dollars of criminally derived gold” mostly from Peru.

Here the story take a turn into a slightly surreal detour:

NTR imported more than $3.6bn of gold from Latin America between 2012 and 2015, the court documents allege. Two of the accused, Samer Barrage and Juan Granda, pleaded guilty last month to a charge of money laundering in plea deals.

 

After the story came to light in March, Elemetal was kicked off the London Bullion Market Association’s “Good Delivery List” of gold refiners;

This was an almost instant death sentence for the company as buyers will usually only buy gold from a refiner on the list. Indeed, in the same month, New York’s Comex futures exchange said it was no longer taking gold from Elemetal for delivery against futures contracts in the world’s biggest gold futures market.

And this is where the scourge of gold rehypothecation emerged, as in the scandal surrounding Elemetal, it became impossible for holders of Elemetal gold to sell the gold bars on, leaving them sitting in bank vaults, according to traders quoted by the FT. Buyers are reluctant to take the gold, given the investigations.

This means that hundreds of millions in loans made to Elemetal by ScotiaMocatta are suddenly stuck in limbo. It also means that one of five bullion banks that settle gold trades in the London market, the world’s largest, has effectively been blackballed. It was built on the 1997 purchase by Scotiabank of Mocatta Bullion, which traces its roots back to 1671. And with Mocatta crippled, Scotiabank, which has the biggest foreign presence of any Canadian bank, is focusing its international strategy on the Pacific Alliance, a Latin American trade bloc comprising Mexico, Peru, Chile and Colombia. It will also hope to find a willing Chinese buyer for the gold trading operation.

Mocatta"s exit will be good news for HSBC and JPMorgan, which dominate the London market; their large balance sheets enable them to provide credit to clients and refiners around the world. Additionally, and unlike Scotiabank, they also have vaults in London. Gold trading in London is estimated to be worth more than $5tn a year, although as the FT notes, there are no precise figures on how much gold is traded there every day.

The Single Biggest Bullish Catalyst For Oil

Authored by Nick Cunningham via OilPrice.com,

One of the key objectives for OPEC is to bring down inventories, a goal that has been elusive this year. But if the oil futures curve is anything to go by, the oil market is showing signs of tightening.

Brent futures have recently begun to exhibit a state of backwardation, which is when near-term oil futures trade at a premium to contracts dated further off into the future. This is the first time in years that backwardation has occurred, and most analysts are taking it as a sign that the oil market finally could be getting closer to rebalancing. In the past, backwardations have accompanied a rebound in the oil market after a bust, while a contango (the opposite of backwardation) tends to occur when the market crashes because of a supply glut.

There are several reasons why backwardation is bullish, which has been discussed in previous articles. A declining futures curve makes it uneconomical to store oil, so backwardation could accelerate the drawdown in inventories. It also complicates the hedging strategies of shale producers, which could hold back expansion plans. It also is a symptom of tightening near-term supplies, although, to be sure, the flip side of that argument is that it could merely be a reflection of expectations that the supply glut will reemerge at some point in the future.    

Still, backwardation is occurring at a time when there are other bullish indicators starting to crop up. The U.S. has seen a sharp drawdown in inventories in recent months, down more than 60 million barrels since March. The IEA and OPEC both recently upgraded their oil demand estimates. "World economic growth has gained momentum," OPEC said. "With the ongoing growth momentum and an expected continued dynamic in second-half 2017, there is still some room to the upside."

The view of Wall Street is also becoming more bullish. Hedge funds and other money managers have amassed a large number of long positions on recent weeks. For the week ending on August 8, investors stepped up their bullish bets on Brent by the equivalent of 58 million barrels, according to the FT, which was the largest weekly increase towards net length since December.

“It’s hard to be aggressively negative if every week you’re getting stronger numbers,” Paul Horsnell, global head of commodities research at Standard Chartered, told the FT, although he added that “there is still resistance. The market is not willing to push prices too far up.”

Indeed, there is little prospect of oil prices moving much beyond $50 per barrel. Not everyone is even sold on the notion that the market is tightening. OPEC production is at its highest point so far in 2017, U.S. shale continues to rise, and some long-planned projects are coming online later this year in Canada and Brazil, for example. “There is no way this oil can be accommodated into the market so prices are going to have to give at some point,” Mr Dei-Michei of JBC Energy told the FT. “This bullish sentiment cannot last.”

In fact, swings in sentiment, like a pendulum, are typical. More than once this year, the bullish positions have built up too far, only to be undone when sentiment shifted, causing a steep selloff in oil prices. Following the price crash in June, the profoundly bearish positioning amongst hedge funds and other money managers also went too far, causing shorts to be liquidated and bullish bets to remerge – which, again, accompanied a rebound in prices.

All of that is to say that the most recent shift towards long bets on oil futures probably can’t carry oil prices all that far. The underlying fundamentals simply don’t justify significant price gains…at least for now. “They’re going to have to dig in for the long haul,” Neil Atkinson, head of the IEA’s oil markets and industry division, said on Bloomberg TV, referring to the OPEC cuts. “Re-balancing is a stubborn process.”

In short, the shift into backwardation in the futures market suggests that the supply balance is heading in the right direction, and it probably puts a floor beneath prices for the time being. But it doesn’t necessarily mean that oil be heading much higher than $50 per barrel anytime soon.

Gold Price: USD 65,000/oz in 5 years?

Financial market prices are generally set by the trading venues which command the highest trading volumes and liquidity. This is also true of the gold market where the venues with the highest gold trading volumes - the London over-the-counter and COMEX gold futures markets – establish the international gold price.

However, these two gold markets merely trade paper gold claims in the form of unallocated gold positions (London Gold Market) and gold futures derivatives (COMEX). This trading creates paper gold supply out of thin air and is also highly leveraged and fractional in nature since the paper gold claims are only fractionally backed by real physical gold.

Although these highly leveraged synthetic gold trades have nothing to do with the transacting of physical gold, perversely they still establish the international gold price because physical gold markets merely inherit the gold prices derived in these ‘high liquidity’ paper gold markets.

BullionStar maintains that these paper gold markets cannot price physical gold accurately because they don’t trade physical gold, instead they trade infinitely scalable fractional claims on a smaller amount of physical gold. The international gold price is thus an artificial gold price totally removed from supply and demand in the physical gold markets.

Drawbacks of paper gold / Benefits of physical gold

Each trading day in the London OTC gold market, the equivalent of a staggering 6500 tonnes of gold is traded.

To put this into perspective, less than 7500 tonnes of physical gold vaulted in the entire London gold vaulting network, most of which is owned by central banks and Exchange Traded Funds.

Nearly all trading in the London OTC gold market is speculate activity based on unallocated gold positions. Unallocated gold positions are just book-keeping entries where the holder of the position is an unsecured creditor to a counterparty bullion bank, and the position just represents indebtedness between the two transacting parties.

Likewise, on the COMEX futures exchange during 2017, only 1 in every 2650 gold futures contracts actually reached delivery via a transfer of underlying gold. The remainder (99.96%) of gold futures are cash-settled. There is very little physical gold backing COMEX gold trading i.e. Registered physical gold inventories in COMEX approved gold vaults represent only a tiny fraction of the total volume of gold futures traded at any given time.

Conversely, real physical gold is a tangible asset that exists in limited quantities, it is inherently valuable, difficult to produce, difficult to counterfeit, and most importantly when held in the form of fully allocated, segregated and unencumbered gold bars and gold coins, it has no counterparty risk and so is no one else’s liability.

Real physical gold is not a claim on gold. It is gold. Real physical gold is real money, and is the ultimate form of saving and store of value due to its ability to retain its purchasing power over time. Unfortunately, the proliferation of paper gold trading dwarfs the volume of physical gold traded, and thus the gold price is set on these huge paper gold trading volumes.

Price Disconnect

But given the dominance of gold pricing by the paper gold markets, can this situation continue, and if so for how long?

BullionStar would contend that this situation can only continue while the bulk of paper gold market participants are happy to continue trading paper gold claims and in the absence of a shock to the physical gold demand-supply balance.

Conversely, a shift in the trading behaviour of paper gold traders away from paper gold towards physical gold, or a scenario in which physical gold demand overwhelms available physical gold supply, could cause a disconnect between gold pricing in the paper gold and physical gold markets, with the paper price falling while the physical price simultaneously rises.

Physical Gold flows West to East

As Western institutional and retail investors continue to speculate and trade staggering volumes of paper gold instruments, Eastern buyers in Asia continue to accumulate real physical gold, physical gold which is in limited supply.

These flows of physical gold from West to East have been ongoing for some time and can even be viewed as a slow and silent bank run on the physical gold market.

Classic commercial bank runs either begin when a subset of a bank’s customers suspect that the bank may not have sufficient liquid cash to repay all depositors, or else suspect that the bank’s loan base has soured. Since commercial banks employ fractional reserve banking where only a fraction of depositors’ money is kept in reserve (the majority being lent out in the form of loans), depositors with early suspicions begin withdrawing their money first.

Word spreads that the bank is having trouble meeting withdrawal requests and more and more depositors follow suit attempting to make withdrawals. Panic soon sets in with the bank forced to limit withdrawals and request emergency assistance from regulators.

The same end-game could be said to be true of fractional-reserve gold banking where holders of claims on physical gold rush to be the first to convert their claims into physical gold. Since the early 2000s, there has been a continual and substantial flow of physical gold from West to East. For example, since 2001, India has net imported over 11,000 tonnes of gold. This imported gold has for the most part stayed within India.

Likewise, since 2001, China has imported over 7,000 tonnes of gold. Because exports of gold are prohibited from the Chinese gold market, this gold cannot leave China mainland. In addition, the Chinese central bank has reported a 1400 tonne increase in its gold holdings since 2001. This is gold that the People"s Bank of China buys exclusively on international gold markets in the form of wholesale gold bars and imports secretively into China, and is above and beyond reported Chinese gold import figures.

In the global gold market, Eastern buyers of physical gold are analogous to the early depositors of a commercial bank withdrawing their cash. In this scenario, a gold market ‘depositor shock’ prompting further withdrawals from the global stock of gold would be analogous to a widespread realization that the outstanding set of traded gold claims is far larger than the dwindling quantity of physical gold backing those claims. This realization would prompt further rotation out of paper gold into physical gold.

If at the margin, paper gold market players (later adopters) begin converting their paper gold claims into physical gold, or more realistically cash settle their paper claims and then try to use the proceeds to buy physical gold, this could set the scene for a disconnect between physical gold prices and paper gold prices.

On the one hand, a shift towards physical gold would overwhelm available physical gold supply, a situation which could only be rectified via an increase in the physical gold price to induce supply from existing above ground stocks. On the other hand, selling pressure in the paper gold markets to release proceeds to convert into physical gold would drive the paper gold price lower, thus also reinforcing this gold price disconnect.

Gold Price $65,000 +

But what would the real price of physical gold be in the absence of the subduing influence of the fractional and limitless paper gold market, or how do we even approach calculating a range of such physical gold prices?

Throughout history, gold has been the ultimate money and ultimate store of value. Until 1971, physical gold backed the international monetary system. Throughout monetary history and up until the latter half of the 20th century, gold played a critical role in backing paper currencies and in backing monetary debt. It is thus still appropriate to analyse the value of gold in relation to the value of currencies and the value of outstanding debt.

Approximately 190,000 metric tonnes of gold have been mined throughout history. Nearly all of this gold can still be accounted for in one form or another and is known as "above-ground gold". About 90,000 tonnes of this gold is held in the form of jewellery, 33,000 tonnes of gold are (supposedly) held by central banks, 40,000 tonnes are attributed to private gold holders, with the remainder having been used in industrial and other fabrication uses.

While 190,000 tonnes may sound like a lot, at the current gold price of USD 1250 per ounce, all the gold ever mined in the world is valued at less than $8 trillion, and official central bank gold holdings (monetary gold) are valued at just $1.3 trillion. The US Treasury claims to hold 8133 tonnes (or 261.5 million troy ounces) in its official gold reserves (a figure which, by the way, could be far lower since it has never been independently audited). At the current gold price, these US Treasury gold reserves are worth just under $320 billion.

Compare these gold valuations to total outstanding money supply figures. The total broad US money supply is currently running in excess of $18 trillion (using a "continuation M3" measure).  For the US money supply of $18 trillion to be fully backed by the US Treasury’s gold, this would require a gold price of $68,840 per troy ounce.

Even at a 40% gold-backing, a backing which was historically in place for the US money supply in a recent period in US monetary history, this would imply a gold price of $27,500 per ounce.

Gold Holdings, Money Supply, Global Debt, and Implied Gold Prices

Beyond the US money supply, total world money supply is currently running at over $85 trillion [source: broad money supply CIA World Factbook]. This global money supply of $85 trillion is approximately 11 times more than the current "valuation" of all the gold ever mined.

For the world’s money supply to be fully backed by total worldwide central bank gold holdings [33,000 tonnes] would require a gold price of $82,600 per troy ounce. Even if world money supply was 100% backed by all the gold ever mined, this would require a gold price of $13,900 per ounce.

According to a recent study by the high-profile consultancy McKinsey, the world’s total outstanding debt is currently $200 trillion (of which government debt is $58 trillion). For the total outstanding stock of global debt to be backed by all the gold ever mined would require a gold price of $32,700 per ounce. For all government debt to be backed by the world’s official central bank gold reserves would require a gold price of $56,000 per troy ounce.

While extrapolating implied prices for physical gold in a world absent of paper gold market distortions will always be estimates, if and when the fractionally-backed paper gold market does cease to function, then ownership of allocated and unencumbered physical gold will become the only way to take advantage of the potential price movements in the physical gold market.

This article originally appeared on the website BullionStar.com under the same title.

Gold and Silver Price Drop of 3 July, 2017

The price of gold dropped from $1,241 as of Friday’s close to $1,219 on the close Monday, or -1.8%. The price of silver fell from $16.58 to $16.11, or -2.9%. It is being called a gold and silver “smash” (implication being that one party or a conspiracy is doing the smashing).

Our goal is to help you develop a clear understanding. The move today is no mystery. Monetary Metals makes an intensive study of the spread between the spot market—where metal is bought and sold—and the futures market.

Much analysis treats these market moves as mysterious, literally inexplicable except by reference to nefarious actors who are variously trying to make illicit profits or who act not-for-profit to somehow protect the dollar. Which they do by somehow pushing down “paper” gold. Which they do by sheer size, size being the critical characteristic to manipulate markets. However, ask anyone who has ever run a multibillion dollar fund and you will get the opposite picture. Size is a disadvantage, because when you buy, you end up with a higher price and when you sell you get a lower. At least if you are trying to make money.

In this conspiracy view, people who hold gold are long suffering, waiting for the “signal failure” when the banks can no longer hold the price down. And then it will be a moonshot to $13,000 gold (or whatever the magic number is supposed to be).

This same story has been used to explain market moves when the price was $250 and when it was almost $2,000 and today at $1,220. Don’t hold your breath. Instead, use your faculties of critical thinking. Does this make sense? And which is it, anyways? Are these conspirators supposed to be a for-profit racket? Manipulating gold and silver for their gain (in dollars) and your loss?

Or are they not-for-profit, acting without regard to their own balance sheets simply to protect the dollar… protect it from what? What bad, exactly, was supposed to happen when gold reached $1,000? That was the topic of conversation in the late 1990’s, $1,000 was a line in the sand and far away. What happened when gold hit nearly $2,000?

And what is the mechanism of this manipulation? Do they sell metal or futures? If futures, then what happens at contract expiry? If they were truly naked short, they would have to buy back the expiring contract and sell the next one. That would have a distinct signature, with each contract rising sharply into a great contango as it neared expiry (the opposite of what actually happens).

And this brings us back to the market action on Monday July 3, and the spread between spot and futures. Let’s take a look at the price of gold overlaid with the basis.

We see they are remarkably correlated. As the price drops, so does the basis from -0.2% to -0.4%, or -20bps.

This is a picture of selling primarily in futures. Speculators got flushed for whatever reason. The price fell, but our calculated fundamental price barely moved from $1,334 to $1,331.

Incidentally, in the Supply and Demand Report yesterday we noted that the cobasis of the August contract was 0. It is now +0.2%, aka backwardated.

Here is the graph of the silver action.

The silver basis fell from -0.36% to -0.92%. Like gold, the selling in silver was predominantly futures.

A word on this is appropriate. When we say “primarily” or “predominantly” we refer to which market was leading. The absolute change in the spread is very small relative to price. If there had been no selling in spot, and the futures price had dropped by 47 cents, then there would be a 47-cent backwardation. In such case, we would be bellowing from the rooftops about the broken silver market!

Paraphrasing our old buddy Aragorn, the day will come when there is 47 cents of backwardation in silver. But today is not that day!

There was plenty of selling of metal also. It’s simply that the selling of metal was trailing the selling of futures, pulled along by arbitrage and lagging behind.

It makes sense that most big price moves are driven by the futures market. Futures are made for trading: they have low costs, great liquidity—and leverage.

The silver cobasis was also 0 on Friday. It is now +0.6%. Our calculated fundamental price of silver is up 9 cents to $17.94.

Monetary Metals will be exhibiting at FreedomFest in Las Vegas in July. If you are an investor and would like a meeting there, please click here.

© 2017 Monetary Metals

Commodity Carnage Crushes Trumpflation Hopes: "Everyone's Nervous The Bottom Is Falling Out"

Another night of ugliness in Asia as the "froth" is blasted out of the exuberant hot-money-chased commodity markets. Chinese steel and iron ore futures tumbled on Wednesday to the lowest prices in months as market sentiment turned bearish on the demand outlook.

As Reuters reports, China"s producer price inflation cooled for the first time in seven months in March, pressured by fears that Chinese steel production is higher than demand, leaving a glut of the metal later this year.

"We"re not seeing much interest on the buy side, everyone is nervous that the bottom is falling out," said a commodities trader in Perth, Australia, who closely monitors activity on China"s Dalian and Shanghai Futures Exchanges for overseas clients.

The most active rebar contract on the Shanghai Futures Exchange settled 3.5 percent down at 2,893 yuan ($420), the lowest since Feb. 2. The sharp decline in steel futures has tamed buying interest in the physical market as well. Iron ore for delivery to China"s Qingdao port has swung into a bear market, with the price sinking more than 20 percent from its 2017 high in February to $74.38 a tonne, according to Metal Bulletin.

It seems the hopes of Trumpflation (and the fading China credit impulse) has erased growth hope...

Technical vs. Fundamental, Report 19 Mar, 2017

Every week we talk about the supply and demand fundamentals. We were surprised to see an article about us this week. The writer thought that our technical analysis cannot see what’s going on in the market. We don’t want to fight with people, we prefer to focus on ideas. So let’s compare and contrast ordinary technical analysis with what Monetary Metals does.

Technical analysis, in all of its forms, uses the past price movements to predict the future price movements. In some cases (e.g. momentum analysis) it calculates an intermediate signal from the price signal (momentum is the first derivative of price). But no matter the style, one analyzes price history to guess the next price move.

This is necessarily probabilistic. There is no way to know that a particular price move will follow the chart pattern you see on the screen. There is no certainty. And when it does work, it is often because of self-fulfilling expectations. Since all traders have access to the same charts, and the same chart-reading theories, they can buy or sell en masse when the chart signals them to do so.

We are not here to argue for or against technical analysis. We simply want to say that it’s not what we are doing. Not at all.

Our analysis is based on different ideas. The key idea is that there is a connection between the spot and futures market. That connection is arbitrage. Think of each market as a platform that moves up and down on its own vertical track. The two tracks are close together. And the platforms are connected to each other by a spring. Suppose platform A is a bit above platform B. If you push up on A, then the spring stretches a bit more and will pull B up, though perhaps not as much. The same happens if you push down on B.

Conversely, if you push down on A, then it will compress the spring and platform B will tend to go down, though not as much.

A and B are the futures and spot markets for gold (the same analogy applies to silver). Arbitrage works just like a spring. If the price in the futures market is greater than the price in the spot market, then there is a profit to carry gold—to buy metal in the spot market and sell a futures contract. If the price of spot is higher, then the profit is to be made by decarrying—to sell metal and buy a future.

There are two keys to understanding this. One, when leveraged speculators push up the price of gold futures contracts, then that increases the basis spread. A greater basis is a greater incentive to the arbitrageur to take the trade. Two, when the arbitrageur buys spot and sells a future, the very act of putting on this trade compresses the spread.

If someone were to come along and sell enough futures contracts to push down the price of gold by $50 or $150 or whatever amount is alleged, then this selling would be on futures only. It would push the price of futures below the price of spot, a condition called backwardation.

Backwardation just has not happened at the times when the stories of the big “smash downs” have claimed. Monetary Metals has published intraday basis charts during these events many times.

The above does not describe technical analysis. It describes physics—how the market functions at a mechanical level.

There are other ways to check this. If there was a large naked short position in a contract that was headed into expiry, how would the basis behave? The arbitrage theory predicts the opposite basis move. We will leave the answer out as an exercise for the interested reader, as thinking this through is really good work to understand the dynamics of the gold and silver markets (and you can Google our past articles, where we discuss it).

This check can be observed every month, as either gold or silver has a contract expiring (right now it’s gold, as the April contract is close to First Notice Day).

This week, the prices of the metals both rose. The price of gold is almost back to where it was the prior week, but that of silver is not.

Below, we will show the only true picture of the gold and silver supply and demand. But first, the price and ratio charts.

The Prices of Gold and Silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It moved sideways this week.

The Ratio of the Gold Price to the Silver Price

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

The Gold Basis and Cobasis and the Dollar Price

NB: we switched from the April to the June gold contract.

As the price of the dollar fell (inverse of the rising price of gold, measured in dollars) we see the cobasis (our measure of scarcity) increased a bit. This means the buying in gold, which pushed up the price, was buying more of physical than of futures. This seems to be the new pattern of late, though it is sputtering a bit like an engine trying to start up and run at a steady RPM.

Our calculated fundamental price of gold is up nearly $50. It is now over $1,400.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

The story is the same in silver. Rising price accompanied by rising scarcity.

The silver fundamental price rose 50 cents. It is now aboit $1.30 over market.

© 2017 Monetary Metals

Meet The Singapore Futures Trader Who Has Bought 3,000 Swimming Pools Worth Of Sugar

There is a new powerhouse dominating the U.S. futures market for raw sugar contracts and it"s creating a bit of confusion among the the more established trading houses of the world"s most volatile commodity markets.  The firm is Wilmar International, a Singapore-based agribusiness whose major shareholders include the family of Malaysian billionaire Robert Kuok and Chicago-based Archer Daniels Midland.  Founded 26 years ago, Wilmar is one of the world"s largest palm-oil producers but was essentially non-existent in the sugar market until just a couple of years ago.

Now, in just two short years, Wilmar has scooped up more than 6 million tons of raw sugar, enough to fill roughly 3,000 Olympic-size swimming pools at a cost of some $2.3 billion, by physically settling tens of thousands of futures contracts and collecting the commodity from ports across South America and elsewhere.  

The timing and size of the purchases have raised some concerns among other futures traders that Wilmar may be looking to manipulate global sugar prices.  As the Wall Street Journal points out, purchases made by Wilmar in 2015 were large enough soak up the entire global supply glut that pushed sugar prices to multi-year lows. 

The effects of Wilmar"s moves have been the subject of debate among traders. At one point in 2015, when sugar prices were at multiyear lows because of a world-wide glut, Wilmar bought so much that traders say the company in effect mopped up that year"s global oversupply. In the rally that followed, sugar prices more than doubled.

Then, as prices peaked in September last year, Wilmar changed course and delivered excess sugar it owned to other traders on the exchange. Sugar prices fell 24% in the ensuing months.

The company"s size and scale, however, are sowing concerns among some traders that it could control a large amount of the world"s tradable sugar and influence prices.

"They are a market mover," Nick Gentile, head trader of New York commodities trading firm Nickjen Capital, said of Wilmar. Around two-thirds of the world"s sugar production is consumed in the countries that produce it, and the rest is traded internationally.

Of course, Wilmar denies the importance of their massive trades in determining global sugar prices saying they represent just a small component of a very fragmented commodity market.

Jean-Luc Bohbot, the 48-year-old Frenchman who runs Wilmar"s sugar business, said there is no evidence that the company"s trades affect market prices. That is "very much an incorrect view," he said in a recent interview. "Sugar is an extremely fragmented commodity, with a very large number of players around the globe."

While Wilmar"s sugar purchases and sales appear in some cases to have preceded rising and falling prices, Mr. Bohbot said, "There is no clear correlation" between the two. Over the past few decades, sugar prices have gone in both directions when there were large physical deliveries, he added.

But perhaps even more rare than Wilmar"s quick rise to become one of the world"s largest sugar traders, is their propensity to take physical delivery of the sweet stuff and ship it to refineries in Asia and the Middle East, often at a loss. 

Physical settlements of futures trades, however, are rare. Exchange operator Intercontinental Exchange Inc. estimates that fewer than 0.5% of trades result in the actual delivery of commodities. The vast majority of futures contracts are unwound by traders before they expire because most firms want to avoid the hassle of transporting commodities to or from inconvenient locations. With sugar futures, buyers don"t know where in the world they will have to pick up the sweetener until after the contracts expire.

That hasn"t deterred Wilmar. Mr. Bohbot said the company has found it economical to purchase sugar in bulk using futures contracts, because the exchange"s rules require sellers to deliver the sugar on board buyers" ships, which facilitates international trading. In other commodity markets, such as grains or metals, the handover usually happens inside warehouses in locations that often might not be easily accessible.

Mr. Bohbot said Wilmar ships and sells most of the raw sugar it buys to refineries in Asia and the Middle East, where consumption is growing. This sort of trading, however, is often barely profitable when shipping and other costs are factored in, he said, noting, "There is very little margin, and sometimes no margin."

And while their strategy may be confusing to other large trading houses, it certainly seems to be working as the company"s sugar division posted a 33% year-over-year increase in revenue in 2016 on the back of substantially higher sugar prices...which we"re sure has nothing to do with their massive trading volume but rather was just the result of a little bit of "luck".

Massive Silver Options Block Trade in June $21 Calls

Via Soren K. and MarketSlant

We received an interesting note from George Gero at RBC today for which we thank him. First the facts.

• Today, someone traded a large block of  Silver Options


• The options were June $21.00 calls


• Number of contracts traded was 3,100 lots at a price of 16.3 cents


• Volume is approximately 2.56% of the aggregate open interest.


• Initiating interest was apparently from the sell side as the price was a full Vol under previous.


• Option delta was 15 and  is not typical of vanilla producer hedge  choice. 


• Strike price is right where Silver miserably failed last July.

Heres the Tape:

Here"s the Option Value Charted. OUCH 

Here"s The Market

Interactive Chart HERE

Analysis

If the initiating interest was from the sell side, the knee jerk reaction from people is to call it a bearish trade. This could be true. But history and experience tell us that is not the case in a large majority of the instances where calls are slammed. Frequently we test the strike at least before dumping. Here are the most probable reasons someone would sell silver calls in this fashion and a quick analysis in italics after each

1. Bearish Speculation- this is not a smart thing to do. Silver options are a roach motel, and it is almost impossible to exit when one has to. 


2. Informed Player Trade- a dealer with flow on his book like a massive sell order in futures. He  can take a punt knowing he has a brick wall above the market to use- this is unlikely as prop desks do not take that kind of indirect risk these days. Selling calls because of a futures sell order is not advised 


3. Informed Flow Trade 2- a client has options to sell or did sell on a deal to hedge production, the dealer merely added an implicit fee and scalped his client- less likely than in the past, due to screen transparency. If true, more likely from a foreign client with no tech or option savvy.


4. Bullish Fund- a long fund with a price target of (say..) $20.00 decides they will sell $21 calls to create a dividend and if the market spikes above their target, they will either hold their futures or roll their short call higher- covered call writing essentially

 

Here are the Leading Candidates Based on Experience and Info

The Strangle Seller:

For years there was a Fund/ CTO/ CTA who made his living selling strangles and collecting premiums. This "fund" would grind out a decent return for years at a time for his investors with no real accounting for VaR of his clients. Every 6 months or so, he"d blow up. Then he"d raise new money and start over.Here is how he"d execute/manage risk

• ??sell calls at an opportune moment- sometimes in a rally, sometimes in a sell-off


• Sell puts using the same approach, thereby legging into a strangle short


• If an option became dangerously close to blowing him up, he"s roll the short higher (calls) or lower (puts)


• He would sometimes sell more puts in a rally to raise premium while rolling his short call higher. essentially a 3-way trade.


• He would throw in the towel by just covering the short option causing him grief and hoping the other leg was worthless.

What to watch for: If a similar size block trades on the put side, you have your confirmation that this is a strangle seller. And you have a likely path of future behavior if things go poorly for the short.

The Massive Futures Sell Order By Captive Client or Fund:

No conspiracies here. a fund, dealer, or some player is long (or not). There is a sizeable order above the market near $21.00 to sell futures. Even better, a Market-if-Touched type of order. An options trader at the firm decides to sell calls knowing this, and he has access to take the other side of the sell order if the market gets away from him. Classic "non conflict" flow trade (if a dealing bank) as the futures desk is not selling in front of the CAPTIVE client order.

What to watch for: the market hits $21.00 and several things may happen. 1) a massive selloff at least the first time up. 2) if no options trade then assume the short does not care 3) next time up, the selling might not be there as the short option guy took it out, and now wants the market to go higher so his negative gamma doesn"t force him to turn seller.

The Investor Covered Call Game

Nothing happens.

The Smart Producer Hedge

Miner wants stock to continue to perform on upside with Silver price and has large operating leverage. Therefore he decides not to hedge production in futures but instead sells calls. Likely candidates include miners whose CEO gets stock as bonus. Also not uncommon for producer  to buy teeny calls against a sale of meaty calls to participate in the Armageddon trade.

The Player Covered Call Game

Or alternatively, this is a Player who is long futures from a much lower price, and 3,100 calls are a tiny portion of his long position. A firm like PhiBro in the past would be happy to buy those calls back as sloppily as they could, knowing the marketmaker hedges would drive their futures up substantially. They made their living in energy doing things like this. They also liked to buy calls hard when they were selling their long futures to create exit liquidity. In the end they"d be long synthetic puts, and short an additional boatload of futures.

The Producer Hedge Trade Pinned Strike:

We will pin 21 at expiry at best. Why? Because the seller had a ton of futures more to sell than the calls he sold. And the chart suggests that may be the case still.

The Producer Sap Trade

This is a fun one, but very rare. The producer has decided to not hedge production via futures but instead sells calls to lower his cost basis. Simple idea. Usually makes sense if the miner has free cash flow.

Problems arise in a rally when he has the silver for delivery but can"t make the margin call on the short options. A classic example was the Ashanti-Cambior fiasco in 1999. These miners needed financing and the banks that gave it to them also took the other side of their short calls. Then, Y2K nonsense caused a rally. Ashanti can"t make the margin call, their credit line is closed, the bank prop desk buys futures for itself, and the client pays 99% vol covering its short options through the same bank. Bonus: The bank oversees the liquidation and sale of Ashanti to its new owner, Anglo Gold. At least Vampires can"t drink the blood of the dead.

Unknown Unknowns and JP Morgan

To be sure we do not know every possibility. The most important thing to know is the type of seller.Producer, Intermediary, Fund, or Player. The future market behavior helps narrow the choices of the trader. Right now, we"d assume nothing and look for a massive put sale. If one comes in, then we know that the short is a non-Player spec susceptible to being wrong, and will act if he is.

One should also remember that if a massive trade in Silver goes down, JP Morgan either is involved or knows about it. So watch their behavior, and assume nothing directionally.

Good Luck

A Hint of Gold Backwardation - Rising Gold Scarcity

Last month, we noted that there could be a trend change in progress. Not only are the prices of the metals rising (which is just a mirror-image of the dollar falling, from 27.6 milligrams of gold just before Christmas to currently under 26mg). But the scarcity of gold as we measure it, using the spread between the price of gold in the spot and futures markets, has been rising.

What could cause this? One thing is for sure. It is not about the quantity of dollars. This theory is as popular as ever, despite the absolute lack of a rising gold price from September 2011-2016. The quantity of dollars has risen steadily since then.

We write much about the frequent cases when traders place big bets on something which is wrong. But the fact of their big bets drives up the price. Suppose speculators were betting on a big increase in the quantity of dollars under Trump. Then we would see a rising price alright, but we would see a rising basis—our measure of abundance of gold to the market. This cannot explain the current market either.

So what can? Recall Keith Weiner’s gold backwardation thesis. In times of stress or crisis, it is always the bid, and never the offer, which is withdrawn. Suppose the US Geological Survey were to make a dire announcement—THEY ARE NOT SAYING THIS, SO DO NOT MISCONSTRUE!! Suppose they said that there will be an earthquake in LA, an 11 on the Richter Scale. Nothing taller than a dollhouse will be left standing.

There would be no lack of offers to sell real estate. Some would hold out hope of getting “their price”. Others would generously offer to discount it 10% or 25% from the previous level.

However, what would be conspicuously absent would be a bid. Most likely from Santiago Chile to Vancouver, British Columbia and as far east as the Mississippi River. At least until the quake hit and the danger was passed.

It is gold that will withdraw its bid on the dollar. The bid sputtered 8 years ago, and intermittently since then. Then it has mostly been steady in the past few years. And now there is a hint of it, in the February gold contract. It’s just what we call temporary backwardation—a short term blip confined to the near contract that is heading into expiry.

However, we think it is notable. It means someone or many someones are switching their preference to gold, in spite of the higher yields available in the market now. Or maybe because of it. This preference, unlike speculators buying futures with leverage, is not about betting on price. It is about safety. Gold, unlike a bond, does not default.

Is this the explanation, and the whole explanation? We don’t know. We can only report that there is a change in behavior in the market. Whereas previously—this was the pattern for years—a rising price was accompanied by rising basis. And now we have rising price and the cobasis is rising instead. Rising scarcity rather than rising abundance.

To be sure, it is still a nascent trend. There is no guarantee that this won’t go poof like it has in the past. We will keep showing the data, and calling it like we see it.

Indeed, look for a new website soon. We plan to have more charts, many more, and updated daily. Including one data series that all the experts said could not be calculated.

Below, we will look at the supply and demand fundamentals for gold and silver. But first, the price action.

The Prices of Gold and Silver

Next, this is a graph of the gold price measured in silver, otherwise known as the gold to silver ratio. It fell a bit this week.

The Ratio of the Gold Price to the Silver Price

For each metal, we will look at a graph of the basis and cobasis overlaid with the price of the dollar in terms of the respective metal. It will make it easier to provide brief commentary. The dollar will be represented in green, the basis in blue and cobasis in red.

Here is the gold graph.

The Gold Basis and Cobasis and the Dollar Price

Look at that rising red line, the cobasis (our measure of scarcity). Since mid-December, it has moved opposite to the green line, which is the price of the dollar. Previously, they had moved together. That is, a rising dollar (i.e. falling price of gold, as measured in dollars) went with rising scarcity of gold, and a falling dollar had falling scarcity.

And now they are opposite. The more the price of gold is bid up (i.e. the more the dollar is sold), the scarcer gold becomes.

On Friday, our calculated fundamental price was just about $100 over the market price.

The February cobasis is +0.12%. That is, the Feb contract is backwardated.

Now let’s look at silver.

The Silver Basis and Cobasis and the Dollar Price

In silver the cobasis is rising a bit, though it is at a much lower level. Far from backwardation, it is -.90%.

Our calculated fundamental price moved up 3 cents from last week. It is no longer above the market price, as that moved up a lot more.

© 2016 Monetary Metals

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42 Years of Fractional Reserve Alchemy

Hold your real assets outside of the banking system in one of many private international facilities  -->    https://www.sprottmoney.com/intlstorage 

Posted with permission and written by Craig Hemke (CLICK HERE FOR ORIGINAL)

It has now been 42 years since The Global Bankers successfully alchemized gold through the advent of futures trading, so we begin the new year by looking back at how we got into this position in the first place.

 

To that end, let"s start 2017 by going back to 1974.

 

Over the past few years, you"ve often heard me reference the HISTORY and FACT of gold price suppression and manipulation. Whenever it comes up in an interview or presentation, it often goes like this:

 

• After Bretton Woods, the US tried to go it alone in managing the price of gold to $35/ounce. By the late 1950s, this caused a mini-crisis when US gold reserves fell by a third as countries around the world exchanged their dollars for gold. There were hearings on Capitol Hill and decisions were made to change the way that $35 gold would be managed.


• This led to the formation of The London Gold Pool in 1961. No longer would the US go it alone in providing physical metal at the $35/ounce price. Seven other countries were recruited to the effort in order to lessen the burden and drawdown of US reserves. This effort to manage the $35 price worked for nearly seven years until global gold demand finally overwhelmed the Gold Pool and the effort collapsed in 1968.


• The US was suddenly on its own again and demand for gold in exchange for dollars soon grew to such an extreme that President Nixon was forced to cancel the dollar"s convertibility into gold on August 15, 1971. This is the "closing of the gold window" that you"ve heard so much about.

 

A new movement to allow private gold ownership in the US soon began...recall that FDR had outlawed private gold ownership in 1933...and on January 1, 1975, US citizens were finally allowed to once again own and hold physical gold.

 

But something very important happened the day before, on December 31, 1974. On that date, the Commodity Exchange Inc., also known as The Comex, began trading gold futures contracts and, as you"ll see below, it was through these gold derivative contracts that the global bankers and governments finally perfected alchemy...a pursuit which had foiled and baffled scientists for centuries.

 

You may recall that a few years back, Wikileaks unveiled a whole assortment of previously-classified US government cables and transmissions. Wikileaks documented them all together and posted them to their website under the category of "Public Library of US Diplomacy". From the site, please read through this cable from December 10, 1974:

 

 

The entire document lays bare the intention behind the manufacture of gold derivatives to replace physical metal. However, in case you missed it, here"s the key paragraph:

 

 

And there you have it. Laid bare for all to see. The "Dealers" expectations" of 1974 are manifest in 2017. The futures market is "of significant proportion" and physical trading is "miniscule by comparison". Price suppression, manipulation and volatility has "negated long-term hoarding" of gold by US citizens and very few even consider gold as money at all with the vast majority seeing it only as a commodity or a "hedge".

 

However, the fraud of the Banker"s alchemy will one day come to an end as confidence in fiat currency collapses and physical demand for real money overwhelms this fractional reserve system. Will/can this occur in 2017? It"s certainly possible as negative interest rates and currency devaluations lead to all sorts of unexpected consequences. But the timing hardly matters when the end result is a foregone conclusion. No system built upon a foundation of deceit and fraud can stand the test of time, and the Banker"s fractional reserve alchemy is no different. It will one day collapse. Of that you can be certain.

 

(A major h/t to James Henry Anderson for reposting the Wikileak page to Twitter on January 1.)

 

 

Please email with any questions about this article or precious metals HERE

Posted with permission and written by Craig Hemke (CLICK HERE FOR ORIGINAL)