Gold Bounces Off Key Technical Support On Massive Volume

The last 48 hours has been quite a chaotic one in precious metals markets with massive volumes of "paper" gold flushed in and out of the futures markets. This morning - shortly after the US open failed to spark a panic-bid in stocks - gold futures bounced off their 200-day moving average on huge volume (around $4.5 billion notional) breaking above the 100DMA...

The last day or so has seen a plunge below the 100DMA (on 33,000 contracts - around $4.2 billion notional), then another flush to the 200DMA as Europe opened overnight (on 22,000 contracts - around $2.8 billion notional) and then shortly after the US equity open, a 35,000 contract ($4.5 billion notional) rip higher off the critical moving average...

 

Once again the moves in gold appear to mirror manipulation in USDJPY...

 

Silver is echoing Gold"s moves today but yesterday"s standalone move remains...

New LME gold and silver Reference Prices: Will anyone notice?

Submitted by Ronan Manly, BullionStar.com

On 29 August, the London Metal Exchange (LME) began publication of a set of daily reference prices for gold and silver. These reference prices aim to capture and reflect paper gold and silver market prices as at 10:30 am, 12:00 midday, and 3:00 pm London time.

Anyone familiar with the former London gold and silver fix auctions, or the successor LBMA Gold Price and LBMA Silver Price auctions, will know that the LBMA gold auction is conducted twice daily at 10:30 am and 3.00 pm London time, while the silver auction is held once daily at midday. These auctions are also for unallocated book entry gold and silver (paper gold and silver) in the London market. ICE Benchmark Administration (IBA) is the auction administrator for both of these LBMA auctions.

Peak Liquidity

As these new reference prices published by the London Metal Exchange are timed to report ‘market’ prices for gold and silver at exactly the same times as the LBMA Gold and LBMA Silver auctions, they add an element of future competition between the LME and ICE in the benchmark price provision business. However, the LME’s prices for both gold and silverare calculated at each of the 3 times of the ICE / LBMA auctions, i.e. at 10:30am (LBMA morning gold auction), 12:00 (LBMA silver auction) and 3:00pm (LBMA afternoon gold auction), periods which the LME describes as having ‘peak liquidity’.

In July 2017, the LME launched a suite of gold and silver futures contracts (LME Gold and LME Silver) for the London market, 2 of which are Spot daily contracts in gold and silver, respectively. Under the hood, these new gold and silver daily reference prices published by the LME are just volume weighted average prices (VWAP) of these LME Gold and LME Silver spot contracts calculated over a 2 minute window at the relevant times each day (i.e. 10:30 am, midday, and 3:00 pm) based on trades on  the LMEselect trading platform. These contracts also represent claims on unallocated book entry paper gold and silver in the London market.

Therefore, the LME reference prices are not based on any auction trades, and merely use prices ‘discovered’ (generated) on the LME’s own trading platform at the time of the LBMA / ICE auctions. Given that these new LME reference prices only began to be published on 29 August, there are only about 50 daily data points so far for each of gold and silver. All prices since 29 August can be seen on the LME website for gold and silver.

Different But Similar

But are these LME prices the same as those generated by the ICE / LBMA daily auctions? No, they are not the same, but they are similar. The reason both sets of prices are not the same is that they are derived differently. The LBMA price resulting from an auction is the price derived in the final round of an auction when the imbalance between the auction’s buy and sell volumes is in tolerance (less than 10,000 ounces). The LME reference prices are average prices calculated (and volume weighted) using trades executed on the LME’s trading platform over a 2 minute interval from the start of an auction until 2 minutes after the start of an auction.

The LBMA auction prices and the LME reference prices are similar in that they are both based on market activity over similar time periods within the wholesale gold and silver markets, and in practice (or at least in theory), arbitrage trading should act to keep prices in the OTC market, and in the LBMA auctions, and in COMEX precious metals futures trading, and in LME gold and silver futures trading in line with each other.

Like their predecessors the London Gold fix and London Silver fix, the LBMA Gold Price and LBMA Silver Price are used every day to value everything from ISDA contracts to  gold-backed ETFs, and the daily auction prices are also referenced widely in the global precious metals industry to execute trades involving miners, refineries, bullion banks, central banks, jewellers and coin shops. In short, these LBMA gold and silver reference prices are the dominant incumbent reference prices, and they also qualify as Regulated Benchmarks regulated by the UK Financial Conduct Authority. But will anyone end up using these new LME precious metals reference prices? Possibly, but it could it a while.

In 2018, the LME intends to offer trading based on its new gold and reference price reference levels. According to a Reuters article from 10 October:

“As of mid-2018 participants will be able to trade at those prices, Chamberlain [LME CEO] said, with technology being developed to match buy and sell orders for execution at the settlement price.

‘Benchmarks take a long time to evolve,’ he said. ‘What we can do is put in place the infrastructure, show that we have day after day of robust prices, but ultimately it is for end-users to decide what they want to use."”

Being able to trade at the LME reference prices will add more relevance to the published numbers and could add legitimacy in terms of market data and financial media interest.

Conclusion

Right now the LME gold and silver reference prices are published daily and are “available for market participants to use free of charge.” But real world usage in the sense of being used to value precious metals funds, contracts or transactions looks to be a case of “down the road” rather than today.

Ideally the London gold and silver markets do not need an additional benchmark reflecting fractionally-backed unallocated gold and silver trading, but a benchmark and reference price reflecting the trading of real physical gold and silver. However, as the LME has chosen not to upset the status quo of the London unallocated trading system, a system which remains one of the key determinants of the international gold price, then real physical gold and silver reference prices in the London market will unfortunately remain a pipe dream.

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

"Dr.Copper"'s Contango Crushes Economic Hype

We warned two weeks ago that China"s "Bronze Swan" was looming as the crackdown on leverage in the system by Chinese authorities may be forcing unwinds of the CCFDs - thus putting upward pressure on Copper futures (unwinding short positions) and selling physical copper (which would mean procuring the physical metal before passing it on). Those effects were exactly what we had been seeing in the market until the end of August.

And now, it appears, as StockBoardAsset.com notes, exhaustion has started to set in across industry metals...

Barclays has also called the copper rally overhyped, while Bank of America Merrill Lynch said it’s the metal most at risk of a reversal,with the optimism of investors in financial futures disconnected from slow conditions in the physical market.

“When you look at the state of the refined copper market, you certainly question why prices have risen so significantly,” Snowdon said by phone from London.

And finally, bear in mind that the lagged response to China"s credit impulse is about to hit base metals... The rise and fall in China"s credit impulse that has been so highly correlated (on a lagged basis) with copper for the last eight years...

And now, as Frik Els of Mining.com explains, Copper futures trading on the Comex market in New York suffered another sharp decline on Wednesday as analysts warn of a likely correction following weeks of speculative buying.

In massive volumes of 2.7 billion pounds in morning trade alone copper for delivery in December slumped to a low of 2.9710 a pound ($6,550 per tonne), down more than 2% from Tuesday’s close to a three-week low.

A week ago copper hit an intra-day high just shy of $3.18 a pound (more than $7,000 a tonne), the highest since September 2014. But disappointment about imports by China,  responsible for some 46% of global consumption of the metal, and receding supply worries saw the rally come to a screeching halt.

The prospect of a weakening renminbi also emerged as factor for the pullback after Chinese policymakers this week relaxed rules to curb speculation against the yuan which had been in place for nearly two years.

A correction on copper markets may also have been overdue as speculative interest have been running ahead of industry fundamentals. Hedge funds built successive record net long positions – bets on rising prices – in recent weeks which according to the latest report totalled the equivalent of more than $9 billion at today’s prices.

Reports at the end of July that China is planning to ban the importation of scrap copper by the end of next year, sparked the rally from copper’s summer lows, but caught many in the industry by surprise.

Investment banks and institutions are now catching up and according to the September survey by FocusEconomics released yesterday eight of the 24 analysts polled upgraded their fourth quarter forecasts compared to projections made the month before.

While no-one downgraded the outlook for copper, consensus forecasts remain well below ruling prices however.

Analysts project that prices will average $5,870 per tonne in Q4 2017 and $5,844 per tonne in Q4 2018. The lowest forecast for Q4 2017 is $4,899 per tonne, while the maximum forecast is $6,674 per tonne. Among the pessimists. Barclays, Deutsche Bank, JP Morgan and Macquarie all saw a prices average more than 15% below today’s price going into 2018.

The price forecasts for Q4 2017 were raised for nine metals and minerals, including aluminium, lead and iron ore. Tin was the only exception with economics lowering their price expectations for the rest of the year.

*  *  *

And finally, as Bloomberg details, here’s some more grist for the doubters who scoffed at copper’s rally to a three-year high earlier this month.

The metal for immediate delivery on the London Metal Exchange cost $40.75 less than benchmark three-month futures on Tuesday, the biggest discount since 2009.

That market structure, known ascontango, shows “there’s no part of the world where copper is really scarce,” said Rene van der Kam, Singapore-based managing director of trader Viant Commodities Pte Ltd. He says to expect more losses after a pullback in prices this week.

It appears "Dr.Copper" is about to be relegated to "ignore" status once again.

And why your average joe American should care... the Copper/Gold Ratio is misfiring and more likely to revert back to UST10Y levels. The correlation broke in late August.

Did China's Bronze Swan Just Arrive? Copper Inventories Crash Most In History

Buyers withdrew more copper from the London Metal Exchange’s global warehouse network on Wednesday than at any time since daily records began in 1996, extending a 19-day drop.

As Bloomberg notes, while the net decline in percentage terms was also the biggest since the height of China’s raw-materials boom in 2006, some have warned against reading such moves as an end to a years-long supply glut. A tug of war between financial traders with opposing views of the market has led to sharp swings in metal moving in and out of storage in the past year.

However, stockpiles also slumped 8.2% on the Shanghai Futures Exchange, which is notable because last year we saw the London and Shanghai inventories see-sawing (up in London, down in Shanghai, and vice versa)...

A question that emerged is what China is spending all this newly created money on. One answer emerged overnight when Bloomberg reported that after tumbling in the first half of 2015, copper inventories at the Shanghai Futures Exchange had been steadily rising, and in the most recent week soared by 11% to an all time high of 305,106 tons.

At the same time reserves at the London Metals Exchange declined for 11 days to the lowest level in more than a year, in other words China is shifting idle inventory from Point A to Point B.

But, this most recent withdrawal surge (the largest in history) suggests a sudden failure of the long-running commodity "collateralization" transaction - or CCFD - regime implemented in China years ago, as described in this post and summarized in the chart below...

Copper, as China pundits may know, is the key shadow interest rate arbitrage tool, through the use of financing deals that use commodities with high value-to-density ratios such as gold, copper, nickel, which in turn are used as collateral against which USD-denominated China-domestic Letters of Credit are pleged, in what can often result in a seemingly infinite rehypothecation loop (see explanation below) between related onshore and offshore entities, allowing loop participants to pick up virtually risk-free arbitrage (i.e., profits), which however boosts China"s FX lending and leads to upward pressure on the CNY.

And sure enough, we have seen USDCNY surging in recent months... (even if the RMB basket against global currencies has stabilized)

An example of a typical, simplified, CCFD

In this section we present an example of how a typical Chinese Copper Financing Deal (CCFD) works, and then discuss how the various parties involved are affected if the deals are forced to unwind. Exhibit 3 is a ‘simplified’ example of a CCFD, including specific reference to how the process places upward pressure on the RMB/USD. We believe this is the predominant structure of CCFDs, with other forms of Chinese copper financing deals much less profitable and likely only a small proportion of total deal volumes.

To summarize, Goldman notes that these shadow banking vehicles - CCFDs - involve a long copper physical positions and a short futures position on the LME.

And so, the current crackdown on leverage in the system by Chinese authorities may be forcing unwinds of the CCFDs - thus putting upward pressure on Copper futures (unwinding short positions) and selling physical copper (which would mean procuring the physical metal before passing it on). These are exactly what we are seeing in the market currently.

So is this the bronze swan?

*  *  *

Barclays has also called the copper rally overhyped, while Bank of America Merrill Lynch said it’s the metal most at risk of a reversal, with the optimism of investors in financial futures disconnected from slow conditions in the physical market.

“When you look at the state of the refined copper market, you certainly question why prices have risen so significantly,” Snowdon said by phone from London.

And finally, bear in mind that the lagged response to China"s credit impulse is about to hit base metals...The rise and fall in China"s credit impulse that has been so highly correlated (on a lagged basis) with copper for the last eight years...

However, as one analyst noted,

“Getting short in any base metal is risky right now when you have this broad positive macro theme and increasing investor participation, particularly in China’s onshore market."

“This is probably one to stand back from and wait for Chinese macro sentiment to turn.”

And finally, bringing the narrative back to American shores, DoubleLine"s Jeff Gundlach tweeted recently about the "Copper/Gold ratio soaring to the high of the year!"...

Adding

"Not good news for the "1.50% 10 year" crowd. Neither is 10 year Bund holding above 50 bp."

If China"s legged credit impulse is about to have its peak effect on Copper (as we showed above) then perhaps, just perhaps, the real pain trade (given the surging shorts in T-Bonds), is a 1.50% 10Y yield after all... driven by a plunge in copper prices.

Palladium Pandemonium - Short Squeeze Sends Precious Metal Spreads Parabolic

Authored by Kevin Muir via The Macro Tourist blog,

I know just enough about the palladium market to get myself into some serious trouble - which means, I don’t know much. But this morning, the popular trader Kid Dynamite tweeted about a surprising development in the palladium futures market.

Usually, metals’ futures markets trade in contangos. The future price is higher than the spot price to account for the opportunity cost of holding (or financing) the long position in the underlying metal.

There is also a cost of storage which needs to be incorporated into this calculation. Arbitrageurs keep the prices in line, and whenever the futures price rises too much, they sell the future, buy the spot, finance the position and arrange for storage. On expiry, they deliver into the futures contract, earning their profit. If the future prices are too cheap, then either arbitrageurs unwind, or might even borrow the metal short to sell in the spot market, and cover by taking delivery for their futures long position. Also natural long buyers who are willing to wait, could buy the forward contract, content to own their metal at a discount to spot later. Assuming there is a properly functioning metals market, the futures price should not deviate too far from the cost of carry.

Which is why today’s action in the palladium market is so interesting. Buyers are willing to pay a large premium for the contracts that expire earlier (which is the exact opposite of what should occur).

Have a look at the prices for the different palladium contracts.

The volumes are small at the front end of the curve, so I can already hear the complaints - that’s not a real market, someone just got squeezed on delivery.

Yet, if there was simply a problem with the June delivery, then we would see the June contract trading at a big premium, and the rest of the curve would be in contango. Instead, the whole curve has inverted.

Here is the chart of the September 2017 versus December 2017 palladium spread.

This is a real spread market that you can trade. So right now, you can enter into a contract to sell palladium in September, receive it back in December, and pocket $24 extra dollars for your work. It’s not just a June delivery problem, the whole curve is inverted.

So what’s going on? Well, let’s take a peek of the spot price of palladium.

It’s up on a stick and breaking out to new highs. Not only that, it’s doing this as the rest of the precious metals are sucking wind.

I realize palladium is more of an industrial metal than a pure precious metal, but not only is it breaking to new highs for this move, but it is actually pushing up against the highs that were hit during the great precious metals bull market of 2011.

One of my trading buddies, the always insightful Ari Pine trades a ton of precious metals, and has been encouraging me to watch the palladium/platinum spread for some time now.

I wish I had listened. Ari was spot on correct that something was happening in the palladium market that deserved our attention (for Ari’s views on gold, click here for his interview on the great Futures Radio Show Podcast).

Palladium has been gaining versus platinum for the past year. Why do we care about this spread? Well, palladium and platinum’s main use is in the fabrication of catalytic converters for automobiles.

And maybe this offers a clue as to why palladium is soaring. I grabbed this palladium FAQ off the web that explains the two metals’ use in cars.

Palladium is mainly used in gasoline engines, while platinum plays a larger role in diesel cars. The Volkswagen emissions scandal effectively killed diesel’s future in passenger vehicles, so maybe this palladium outperformance can be explained by the dramatic switch from diesel to gasoline.

Combine this extra demand with the fact that palladium is a small market that was already suffering from challenging global supply, you had the recipe for a squeeze.

This slide is from North American Palladium’s website presentation from 2015 (it’s tough to find up to date information about palladium):

When I was discussing palladium with Ari this morning, he wryly commented, “now that we have noticed the big curve inversion, the move is probably over.” That’s part of the reason I enjoy talking with him. Ari is probably even more cynical than me.

But I told him that this palladium move was a high standard deviation event. And I reminded him of one of my favourite lines. You know the problem with fading a 4 standard deviation move? It’s almost always right, but not before it becomes a 6 or 7 standard deviation move…

*  *  *

P.S.: For those gold bugs out there, some day I envision this same inversion occurring in the gold futures market, and this palladium episode should be filed away in the playbook for what to expect.

"It's Alive" - Copper Algo Goes Wild While No One Was Watching

"Twas the eve of President"s Day and nothing was stirring (in Europe, China, or US markets) except that is, a wild algo in the LME copper pits...

Late Monday evening in London, with all but a few die-hard traders in China were asleep, the European workday was ending and Americans had a public holiday, "Franken-copper" was born.

As Bloomberg reports, for traders still watching their screens, the reason behind whipsawing moves in London copper was obvious: an algorithmic trading system had gone off the rails, said Guy Wolf, global head of market analytics at commodities brokerage Marex Spectron Group Ltd.

For half an hour, copper zigzagged by almost $100 on the London Metal Exchange. More than 2,200 contracts traded between 6 p.m. and 6:35 p.m., the most for that time of day since 2012.

Sudden jolts in markets, often called flash crashes, are becoming more frequent as markets become increasingly complex and fragmented.

In recent years, the LME has tried to attract more high-frequency traders and modernize its systems to boost liquidity and trading on the exchange. The move has attracted some criticism from veterans such as Michael Farmer, co-founder of hedge fund Red Kite, who warned last year that algorithmic funds were creating an uneven playing field.

“Algorithms will blindly follow the tasks they are set within the parameters they are given,” said Wolf. “As markets become increasingly electronic, we often see high levels of intraday volatility for brief periods that ultimately result in little overall price movement.”

World's Purest Silver Producer To Join Class Action Lawsuit Against Bullion Banks For Price Rigging

Submitted by Mac Slavo via SHTFPlan.com,

Though Wall Street regulators and the mega-banks they purport to regulate have long said that there exists no manipulation in markets and that anyone making claims to the contrary is nothing short of a conspiracy theorist, recent revelations suggest that even the most well known financial institutions on the planet have been actively involved in rigging asset prices. We need look no further for confirmation of this fact than Deutsche Bank, which last year admitted the precious metals market has been rigged all along and agreed to pay nearly $100 million in settlements resulting from their direct involvement in the manipulation of gold and silver prices.

Now that the cat is out of the bag and Deutsche Bank has agreed to turn over documents implicating other banks in related schemes, major mining companies are preparing lawsuits of their own. Straight-shooting First Majestic Silver CEO Keith Neumeyer, who in 2015 was the first mining company head to issue a public statement on the manipulation of precious metals prices by a small concentration of players, has said that the company’s legal team is closely monitoring the situation.

Citing loss of revenue, jobs and shareholder value Neumeyer said in an interview with SGT Report that his company will likely be preparing legal action against the bullion banks involved in the rigging of prices.

I have an intimate knowledge of what goes on on the trading floors… how front running occurs, how wash trading occurs, how spoofing occurs… I’ve been looking for an opportunity to step in… I’ve been very vocal… I’ve talked to many executives that are running other silver companies… When the Deutsche news came out I sent an email to the law firm that’s responsible for this lawsuit and I had a conference call with two lawyers… we spoke about this case… I can tell you that a couple of the CEO’s of some very prominent silver companies in the States have no interest in pursuing this… Other CEOs have said that they are interested in pursuing this with First Majestic.

We’re monitoring this. We’re going to follow it. We’re likely going to, at some point, add our name to the class action lawsuit. 

Watch the full interview detailing Neumeyer’s views on global cash bans, what silver prices may do once the manipulation comes to an end, how precious metals will be affected by the incoming Trump administration, current supply and demand fundamentals and an update on his latest projects including Silver One Resources:

Neumeyer and what appears to be a handful of other CEO’s in the industry are preparing to declare war on the banks that have been responsible for the price suppression schemes many knew to exist but couldn’t prove until now.

The problem was that the fox was left to guard the hen house, which of course led to an inevitable bloodbath:

It’s quite shocking to me… It’s very harmful to the shareholders…

…It is manipulation and it’s used frequently. There’s ways that the regulators can monitor it. They can see it happening. The exchanges know when false bids and offers get put into the system… Yet, the exchanges don’t step in because the exchanges are owned by the banks… and the banks are doing that kind of trading… It’s the self policing system, which doesn’t work because no one wants to police themselves because they’re all making too much money.

How does Bank of America or JP Morgan not have a losing day year-after-year of trading… it’s actually impossible… traders lose money… it happens all the time… yet they have not had a single losing day for at least a couple of years as far as I know.

As Neumeyer correctly highlights, it’s impossible for a trader or firm to have such a perfect record, unless of course they are working the system, which certainly appears to be the case based on the evidence.

Now that market manipulations have been proven at the highest levels of the bullion banking system, and with the pressure of lawsuits mounting, there is a distinct possibility that precious metals prices will be allowed to trade freely on the open market.

Such a development bodes well for precious metals investors, especially with Donald Trump set to take over the Presidency in a few short weeks. Neumeyer notes that several Trump appointees are gold-friendly, which could add further upside potential:

On a positive note regarding Trump, he’s got a couple of pro-gold individuals that he’s appointed to his inner circle and I’m looking forward to them starting to make some gold favored policies that will help us as a mining company and our investors as well.

Summing up, Neumeyer hints that precious metals could do very well in the years to come:

We’re in very uncertain times… the world is changing.

If history is any guide, global changes of this magnitude mean that the entrenched systems run by central banks and Deep State politics are set to be destabilized on a level we may have not witnessed in our lifetimes, which means assets like bitcoin, gold, and silver could become the safe havens of choice for investors.

Palladium, Platinum, Gold, Silver, Copper, Bonds and the Dollar Market Correlations (Video)

By EconMatters

We go over some viewer questions in this video regarding trading theory, and then go over a question regarding market correlations of assets in the metals market. Blame the programmers for overly simplistic market correlations, they are just being lazy! But know the nuances of each specific market because you are giving away too much edge to just lump everything into general trade baskets.

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Gold Crashes To 5 Month Lows As 'Someone' Dumps Over $10 Billion (On A Bond Market Holiday)

Over 85,000 gold futures contracts (over $10 billion) just traded as gold plunged from $1260 to $1230 as US equity markets opened. This is the worst 7-day run for gold since November as Dec rate hikes were jawboned more likely.

Down 5 days in a row, today"s crash has dumped the precious metal to its lowest price since June...

Of course, this makes perfect sense, as EM FX collapses, inflation expectations spike most in years, and Trump"s debt-funded fiscal spending plan means more QE.