Thursday, May 26, 2011

Gold priced in Australian Dollars about to soar?

I have mentioned in several previous posts that even if the US price of Gold lulls or pulls back I still expect the AUD price of Gold to perform well soon due to my expectation we will see the Australian Dollar fall against the USD (with the end of QE2 strengthening the USD and resulting in weaker commodity prices, pushing the AUD lower).

I am now even more convinced that we could be on the cusp of a significant move higher for the locally price metal, the magnitude of which could easily be several hundred dollars. 

Capital context provides the following text and chart:
The credit risk of the 30 most systemically critical financial entities in the world just broke an important channel and is at its highest in over four months at 135bps with its largest three-week rise of over 14% since Nov2010.

Before and during the financial crisis, we were crucially involved with the creation of several indices designed to track stability in financial markets with a focus on both liquidity and counterparty risk. While the liquidity measures we designed have been largely disintermediated by government intervention since then, the measures of counterparty risk remain highly visible and appear to have been a successful guage of public perceptions regarding financial systemic risk.

The Financial Stability Board created a list of 30 large global financial entities that represented to it the most systemically worrisome firms in the world. The chart above tracks a weighted average of the 5Y CDS (or credit risk) of these 30 names. The higher the index, the great the credit risk perceived among the world’s most systemically worrisome financial entities. The greater that credit risk, the more concern there should be for another round of potential insolvencies or collapse of the financial industry.

While the currrent level is certainly not in the critical zone, it is rising rapidly and is approaching key levels at which risk managers will begin to start evaluating CVA overlays in our opinion. A 14% rise in the index over the last three weeks is extremely fast and we note that at current levels we are almost twice as risky currently as were prior to the financial crisis and also at the trough post the financial crisis in Jan2010.
What's then interesting to note is how each of the peaks in the above chart correlate similarly with peaks in the Australian price of Gold as the below chart illustrates:

The cause of this is a combination of factors, but is due largely Gold holding steady or rising during times of systematic risk and the Australian Dollar selling off against the USD (combination stronger USD as a safety haven, weaker AUD).

With Greece and the other Eurozone countries once again hitting headlines it would not surprise me to see Gold buying in Europe increase like it did in early 2010:
For weeks buyers have been queuing patiently in the central bank's main downtown Athens office, prepared to shell out nearly €273 ($409) per piece, up from €243 at the start of May and €180 last July.

Persistent worries that Greece could default at least partly on its debts are emptying the Bank of Greece's vaults of at least 700 gold coins a day, giving a whole new meaning to the term sovereign debt. The Australian
Solid physical buying like the above (we are also seeing strong demand in India and China in early 2011) could provide solid fundamental support for US$ Gold reducing the severity of a seasonal pullback which we often see through the middle months of the year.

It seems the recent 'Pascoe Indicator' mentioned several weeks ago was almost spot on with Gold's bottom. In fact he even took another jab at Gold in an article a couple of days ago:
Gold in US dollars is up 28 per cent over the past year, but it's done nothing for Australian investors. As I write, it's trading at $A1,441.03 an ounce – within a few cents of what it was worth this time last year. It's still roughly doubled since the start of 2006 with 2008 the star year as the GFC had its full impact.

Where the speculation in precious metals goes to next is as much a matter of faith as fundamentals, or perhaps fundamentalist faith for the harder core gold bugs, but it has currency plays going for it as long as US economic policy remains an afterthought of a political standoff and Europe fails to face up to its sovereign debt inevitabilities. SMH
Pascoe suggests that Gold has done very little for local investors over the past year (which is true!), but he seems oblivious to the very real possibility that AUD Gold is about to significantly outperform it's US priced counterpart.

Even if we were to see Gold pull back a little to $1450 in US$, if we see the AUD dip at the same time to a level only seen around 8 months ago prior to QE2 at around .85 against the USD this would result in a local Gold price of over AUD$1700. Such a scenario is not beyond the realms of possibility and in my opinion pricing around these levels is somewhat likely later this year.

Don't expect Australian Gold stocks to follow the locally priced metal though, if history is anything to go by they are somewhat driven by sentiment from their US counterparts as we saw last year the XGD (Australian Gold stock index) didn't start to rally strongly until August even though we saw a higher local Gold price early in the year.

In summing up, it's the end of QE2, it's systematic risk stemming from Europe, it's a dicey Australian economy, it's Mabo, it's the vibe and --

No, that's it.

It's the vibe!**


Disclosure: Positions held in Gold. Not investment advice. Do your own research.
** Apologies to any readers who don't get the reference. It's a modified quote from well known Australian movie 'The Castle'.

Friday, May 20, 2011

Why Gold and Silver? Mike Maloney tells all.

Mike Maloney's movie 'Why Gold & Silver?' has been released in full on YouTube. Definitely a worthwhile watch for those new to the metals or those wanting a refresher on the reasons for being invested. It's also a great video to share with others not aware of the precious metals bull market as an easy to understand introduction.


Sunday, May 15, 2011

Bullion Baron Heads for the Bunker

Over the past two months I have put up a couple of posts that highlight the risks we face as a consequence of the Fed discontinuing its QE program (even temporarily, which I believe will be the case, printing will be back in one form or another).

The way I see it the Fed's actions have likely been directly responsible for the risk trade continuing as long as it has. With the end of the Fed's QE program approaching fast I think it's worthwhile examining your exposure to assets that may be affected, which includes precious metals (particularly Silver).

See this post from early March
where I discuss a potential scenario if the Fed stops/pauses the QE program (which infact has been reasonably accurate so far, price target for Oil was a little high) and this follow up toward the end of April where I look at the correlation between the growth of commodities and the Fed's monetary base.

In both I talk about the actions I will be taking:
March: I am considering reducing my exposure to junior Gold and Silver mining stocks and will be looking at AUD Gold proxies such as PMGOLD and GOLD on the ASX to cover the above scenario.

Silver has had an extraordinary run and Gold has seen a modest rise over the last 6 months also. I will be looking to reduce my exposure to the metals (and related stocks) throughout this rally we are in. It will be the first time I significantly reduce exposure since I started heavy accumulation in 2008/2009.

With so many mixed signals it's hard to know what sort of outcome we might see post June when the Fed stops expanding their balance sheet. The old saying "Sell in May and go away" might just be a rule to adhere to this year and those familiar with the metals seasonal patterns will know that June through August can often be a slow period.
As indicated I have been reducing my exposure to Gold/Silver equities (reduced capital invested in stocks by around 75%) as there is risk they sell off in the event of a larger market collapse. Whether the precious metals decline to the same degree as other commodities and the markets I can’t say, but I have taken the conservative route to protect my capital incase. I don't often talk about my portfolio on the blog, but presently I am weighted around 25% in precious metal related stocks (two held), 25% physical and 50% cash (AUD).

At the start of 2011 I held 12 different precious metal stocks (number held peaked at around 15 in 2010). This number has slowly been reduced, many of those that I held that aren’t producing risk an unstable market for raising capital should they find the need to do so if the market is thrown into turmoil post June. I have held onto two precious metal stocks, CCU (Cobar Consolidated Resources, Silver) and CGT (Castlemaine Goldfields, Gold). Both of these companies should be capitlised sufficiently until profits from production turn them into self funding miners (first production: CGT aiming for September quarter and CCU by the end of the year).

I have also sold some of my physical Silver position into the rally. Over Easter (during the week before and after) I sold around 15%. It would have been nice to sell a little more, but I held off expecting we might see a short squeeze push the price higher than $50 short term where I would have offloaded another 15%. 

Ultimately I still see higher prices for Silver in the medium/long term, however after previous spikes of this magnitude we have seen severe corrections. followed by long boring consolidation periods The correction in April/May 2004 saw the price retrace to within 10% of the level seen in September 2003. The correction in May/June 2006 saw the price of Silver retrace to around the same level seen in November the year prior. The correction in March 2008 saw the price initially bottom around the high seen in November 2007, but later in 2008 got smashed further back to around the lows seen in the early 2006 correction! If we were to see this correction retrace back in a similar fashion to the last corrections then we may be looking at around $25-$28, but this rally was much stronger than previous years, so the correction might be similar. I wouldn't hold your breath for it, but we may still see Silver head back to test the breakout at around US$20-22. I say this not because I think it's highly likely, not to scare buyers out of the market, not because I think you should sell your Silver, but because I think we should be mentally prepared for a Silver correction that matches the intensity of the rally we've seen.

It's likely there will be a reduction in the number of posts on the blog as I take a step back, reassess the market activity post-QE2 and make a decision on where to direct my capital next. My suggestion would be to sign up using the email subscription box on the top right of the page to get notification of my posts.


Disclosure: Position held in Gold, Silver and mentioned stocks. Not investment advice. Do your own research.

Monday, May 9, 2011

Five reasons FHBs should avoid buying now!

A couple of days ago Chris Zappone wrote a follow up piece to his article on the First Home Buyers Strike (I posted about the original here):
The buyers' strike of Australian property sought by a tax reform group last month has proven to be a fizzer, precisely because some people don't like the idea of lower house prices.

Online activist group GetUp! decided not to pursue a strike of home purchases to protest at the lack of affordability in the housing market because its own members did not like the idea.

"While the issue of housing affordability is clearly an issue that resonates with plenty of people, GetUp! members don't support a boycott campaign," wrote Kelsey Cooke, online community co-ordinator for GetUp! late last week. SMH
Chris is a little late to the party with the news that GetUp! rejected the suggestion, they did so over 3 weeks ago. 

The first comment on the article really says it all though:
The Buyers' Strike is "on", it just doesn't need an official movement to promote what is blatantly obvious to everyone in the market: Prices are falling, and will do so for quite some time to come.

The smart property investors sold up last year. Time is well and truly on the buyers' side now.
I don't think there was ever any doubt that they would reject it, but regardless the strike lives on. Prosper Australia continue to cover related news on their website and social media sites:

Facebook - Don't Buy Now
Twitter - Don't Buy Now

There is some great interest and involvement from the public on the Facebook page and I would encourage you to 'Like' the page in support of the movement.

I think regardless of who is supporting or not supporting the strike, young Australians should make their own decisions about when to buy. Ignore all those with property interests (including parents, colleagues and friends) and do your own research into whether today would be the best time for you to buy.

Here are five reasons you should avoid buying right now:


1. Renting is around half the cost of buying

As I recently covered in another post (Rent vs Buy: Cost Comparison) the cost of renting is significantly lower than it is to buy. With mortgage rates at 7% and yields at 4% the cost of renting is almost half that of maintaining the interest on the mortgage interest, let alone rates, building insurance, borrowing costs and maintenance.

Think about the money you could save by renting instead! In a situation where it might cost $500pw to buy, you could expect equivalent rent to be around $250pw. $250pw x 52 weeks in a year = $13,000pa. What could you do with that sort of extra money? That's an overseas holiday every year, a brand new car every 2 years or you could even just squirrel the money away into a term deposit or investments until a time comes that it makes financial sense to buy.

Have you heard the phrase before "rent money is dead money"? Well so is the interest on a mortgage and if the interest exceeds the rent you would pay for an equivalent home then you are paying more "dead money" to buy than you are to rent!

2. Falling prices will continue

The Herald Sun recently reported that, "Melbourne's property bubble is bursting, with $400 a day wiped off the average house price in the past three months."

There is no guarantee that prices will continue to fall that quickly, however even after a 6 percent slump (according to the REIV) in the first quarter of 2011, Melbourne prices and in capital cities all over the country continue to sit at ridiculous levels.

The credit bubble has inflated prices to a point where First Home Buyers are even struggling to afford prices in the new fringe suburbs. That begs the question, who is buying? With volumes having dipped significantly and stock on market up 50% on last years levels the answer is "not many".

Eventually vendors will realise they are going to have to start discounting more heavily to sell, that's when the real declines begin. This is likely to suck in even more sellers who have speculated on house prices increasing, they will leap frog over eachother on the way down just as they did on the way up, putting further pressure on prices and adding even more stock to the already over saturated market.

3. You may quickly outgrow your first home

One idea that I seem to hear repeated often is that you should just 'buy whatever you can afford' when it comes to your first home, just 'get your foot in the door' they say and work your way up the property ladder. What the older generations might be failing to remember is that you may outgrow your first home very quickly.

Imagine the situation where you've bought a 2 bedroom unit as your first home. Two years down the track and the casual relationship with your partner has taken a serious turn and you are looking to start a family (have kids). You may then be in a situation where you have to sell the existing property to fund the larger one. That likely means real estate commission costs (usually around 2% of sales price), stamp duty on the new home, possibly LMI (Lenders Mortgage Insurance) on the new loan if you will be borrowing on a LVR greater than 80% again. Not only that, but as per reason 1, you've possibly been paying a great deal more than renting to buy.

Do the sums. Make sure you consider all possibilities that arise. You may be a lot better off by renting until you can afford a home that will last years no matter what life throws at you.

4. Ownership ain't all it's cracked up to be

What are the benefits of owning? I mean besides bragging to your friends that you're now a proud home owner... can you really justify the extra cost?

The answer may be yes for some. For those that like to get hands on with their home, landscaping the garden, painting and renovations, extending the house & for those that need the security ownership (not relying on the landlord to renew a lease) then buying may be the best option. For me personally (and I'm sure many others) the benefits of ownership just do not outweigh the extra cost that comes with buying.

Personally I love the peace of mind that comes with renting. I know that if something breaks (aircon, heating, stove, plumbing, etc) then it's just a matter of calling the landlord to organise a fix.

Having owned before I know that owning isn't all it's cracked up to be. Council rates, water rates, building insurance, emergency levies, maintenance costs, fixing things when they break... it all adds up!

5. Living at home/renting = Freedom

Taking out a large mortgage is a yoke around the neck of the young. You should enjoy the freedom that renting/living at home provides while you can. Of course it would be prudent to put some of your income away for a rainy day or making a house purchase later in life, but don't give up your youth just so that you can say you own property.

Travel. See the world! You will find this much more difficult to do once you have a 30 year binding commitment to pay the mortgage on a house. You've got youth, money and an opportunity you may never have again in your life. Don't waste it!


All that said, if you understand the risks associated with buying at the peak of the market, the excessive cost of buying over renting is no bother, you've got long term plans to stay in the property, you've got a large deposit and you aren't stretching the budget to buy then I wouldn't discourage you from buying, just make sure you know what you are getting yourself into.

So there you have it, my top five reasons Australians should put off buying their first house. Of course this doesn't only relate to First Home Buyers. I've been there and done that (owning my first home) and most of the reasons above are core to why I am yet to buy again after renting for the last 18 months.

When it makes financial sense again to buy I will be cashed up and ready having saved a fortune by renting and investing in appreciating assets. This reminds me of a Dilbert cartoon that I saw sometime ago:


Friday, May 6, 2011

Did increasing margins break Silver in 2006?

You can read my previous posts on CME Margin changes here:

Yesterday - CME gets aggressive with Silver margins!
1 Week Ago - CME Increases Silver Margin Requirements
6 Weeks Ago - CME Hikes Silver Margin Requirements‏ (Again!)

I certainly didn't intend on covering Silver margin changes again so soon, but I stumbled across something very interesting and thought I would share.

The below chart is from 2006, the numbers above the candlesticks relate to events which I will detail below:

1. Silver Margin Change Announced - April 13th, 2006
2. Silver Margin Change Effective - April 17th, 2006
3. Silver Margin Change Announced - April 20th, 2006
4. Silver Margin Change Effective - April 21st, 2006
5. Silver Margin Change Announced - May 15th, 2006
6. Silver Margin Change Effective - May 16th, 2006

The first of the three increases saw the initial margin rise from $2,430 to $3,510, a whopping 44% increase (link), however the price of Silver continued to climb.

The second saw an increase in the initial margin from $3,510 to $4,725, an increase of 35% (link). This announcement saw sellers flee Silver in droves sending the price from a $14.69 intraday high on April 20th to an intraday low of $11.60 on April 21st, a 21% fall in 2 trading sessions, on April 20th alone Silver fell 18.5% (price figures from Incredible Charts).

I found this blog entry from April 20th, 2006:
Gold/Silver Smack down

Wow! Gold and silver took a beating today, to put it lightly. Gold spot ended Comex trading at $619.60, off 2.07% from yesterday. It went down another $7.90 in the Access market. If you think that's bad, look at silver: down $2.13 or a whopping 14.65% in Comex trading, and another 49 cents to end at $11.92 in the Access market. For the day, HUI was down 25.90 to 359.40. Several of my stocks were down double digits.

Well, why do I sound almost giddy? A correction was due, to be fair. This sell-off was most likely precipitated by the new margin requirements. To be fair, the Nymex has been steadily raising margin requirements as can be seen from its new archive, although the pace is picking up. Whatever the reason, I consider this sell-off enormously healthy for the golden bull. Investing the Middle Way
The third of the Silver margin increases that I found saw initial margins move from $5,400 to $7,020 (link), a 30% increase. Based on the gap between the second and third examples I assume there was another in the middle (I was unable to source the date it occurred). On the day of the announcement Silver fell almost 9% in one day. This was the tipping point that saw Silver fall from just over $15 to under $10 in around 1 month.

Silver margin increases aren't the only similarities between the 2006 Silver spike and today's. There is some similar activity by the commercial entities in the commitment of traders reports. This from May 9th, 2006 (only a couple of days before the final May 2006 peak):
It looks like we are getting close to a low risk buy point in silver. The latest COMEX Commitment of Traders data related to the short position of the Commercial Traders (commercials) shows that the commercials have closed out a large portion of their short position. Silver Seek
This from April 29th, 2011 (the peak of the recent run):
Yesterday's Commitment of Traders Report [for positions held at the end of trading on Tuesday, April 26th] was shockingly bullish for both metals.

In silver, the Commercial net short position shrank by a whopping 10,158 contracts...50.8 million ounces...possibly the biggest one-week decline in open interest in silver, ever.  Ted says that it was mostly the '4 or less' traders [read JPMorgan] and the raptors [the '8 or more' small traders in the Commercial category that were covering short positions and/or going long. Casey Research
Another similarity is that we have some big names selling Silver. In 2006 it was the Buffet family, this from May 7th, 2006:
With the market abuzz with anticipation of what Wall Street legend Warren Buffett intends to do with Berkshire Hathaway’s $40 billion in cash, a small, but perhaps very significant little bit of news may have been overshadowed.

At the company’s shareholder meeting in Omaha, Nebraska on Saturday, Chairman Warren Buffett announced that the company has divested its silver holdings.

David Morgan, author of “The Morgan Report,” sent a note to clients quoting an anonymous source at the Berkshire meeting who confirmed the sale.

According to the source, no sell price, date or addition data were given other than the announcement that the company not longer owned any silver. Resource Investor
Today we have Carlos Slim (world's wealthiest man according to Forbes Magazine) actively selling Silver futures, this from May 4th, 2011:
Billionaire Carlos Slim has been selling silver futures for "weeks" in an effort to actively hedge the production of his silver mine, a spokesperson confirmed to CNBC Wednesday.

Slim, recently designated the world's richest man by Forbes magazine, has been selling futures contracts dated out two to three years, a spokesperson also confirmed. CNBC
What's more is that the timing between the 2006 top and the current one are very similar. Both started around August the year prior. Both look to be topping around April/May the following year. The 2005/2006 run saw Silver increase from $6.75 in August 2005 to around $15 in May 2006 (roughly 120% move). The 2010/2011 run saw Silver increase from $18 in August 2010 to almost $50 in April 2011 (roughly 175% move).

If we saw similar trading activity to that in 2006, then we could soon see Silver rally hard back to test that $50 area before another sharp correction and long consolidation occurs. Of course there are no guarantee, but at the minimum a small bounce from these levels seems likely given how oversold Silver is looking.

Disclosure: Position held in Silver. Not investment advice. Do your own research.

Precious Metals: Gold and Silver Capitulate!

Gold and Silver both had a large fall last night. 

Silver plunging through it's 50 day moving average, falling to a low of less than US$34.30 ($5 lower than the May 4th close). 

Gold fell to a low of US$1462 after closing in NY at $1516 on May 4th. It's now trading slightly higher at $1475.

Some support areas pointed out yesterday did little to hold Silver higher (although Silver did bounce off $36 before continuing down). The Global Silver Miners ETF was well in the red closing 6.62% down, a smaller percentage fall than Silver itself.

It wasn't just the metals selling off, Bloomberg reports:
May 5 (Bloomberg) -- Commodities plunged the most since 2009, led by oil and silver, and stocks posted the biggest three-day drop since March as selling of energy futures drove down equities. The dollar strengthened and Treasuries jumped.

The Standard & Poor’s GSCI index of 24 commodities sank 6.5 percent at 4:32 p.m. in New York and has lost 9.9 percent this week. Oil tumbled 8.6 percent, the most in two years, to $99.80 a barrel. Silver dropped 8 percent, extending the biggest four- day slump since 1983 to 25 percent. The MSCI All-Country World Index of shares in 45 nations fell 1.1 percent. The dollar rose 2 percent versus the euro, making commodities quoted in the greenback more expensive for holders of other currencies.

“It’s panic,” said Michael Shaoul, chairman of Marketfield Asset Management, which oversees $1 billion in New York. “You have those super crowded trades. Now you’re in liquidation mode. There’s nothing to do with weak U.S. economic data. It’s not a global financial crisis. It’s a classic liquidation move in a crowded trade.”

Selling swept commodities markets as investors sold positions following gains of more than 23 percent in 2011 through April 29 by silver, oil, gasoline, coffee and cotton. The dollar, which slumped 13 percent versus the euro between Jan. 7 and May 2 as the S&P 500 Index rallied 7.2 percent, strengthened against all 16 major counterparts except the yen after European Central Bank President Jean-Claude Trichet signaled he will wait until after June to raise interest rates.
Futures on Brent crude, crude oil, gas oil, heating oil, gasoline and natural gas plunged more than 6.9 percent today. Crude oil dropped below $100 a barrel for the first time since March 17. Copper futures slumped 3.3 percent, falling below $4 a pound for the first time in five months. Among agricultural commodities, cocoa, cotton, corn and weak retreated more than 2.3 percent in futures trading. Bloomberg
An interview I stumbled across this morning that seems well worth a listen:
EXCLUSIVE ALERT: Peter Grandich Now Moves 100% BACK Into Gold & Silver


Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

Thursday, May 5, 2011

CME gets aggressive with Silver margins!

Firstly if you aren't a regular reader of the blog, you can see my previous posts on CME margin increases here (from 1 week ago) and here (from 6 weeks ago). In the article from 6 weeks ago I explain the need for margin increases (as Silver increases so does the contracts value, hence the CME needs to raise margins so that market participants do not over leverage), in the more recent article I show that the margin increases are still only "keeping up" with the price of Silver.

In a very short period of time we have seen the CME load up the margin requirements for Silver, 5 times in 8 days according to Zero Hedge.

As I have explained in the previous posts the CME seems to be keeping the leverage steady, it has fluctuated though with the average being around 15 to 1 (for spec traders).

Silver has taken a fairly large hit since the news of the latest round of margin increases, but at the time of the announcement Silver was $42. So each 5000 ounce Silver contract was worth $210,000. The CME announced the initial margin for spec traders would rise to $18,900 as of May 5th and $21,600 as of May 9th. At $42 Silver this would have allowed 11 to 1 leverage from May 5th and 10 to 1 leverage from May 9th. Both these numbers are well below the average level of leverage that the CME has allowed in the previous 6 months.

I can only speculate on why the CME has chosen to reduce the level of leverage allowed in the Silver market. It's possible they just want to get ahead of the curve and are expecting a further rise in the price of Silver. Perhaps their data is pointing to a large number of traders being stopped out of the market and wanted to reduce volatility. Perhaps Blythe Masters (head of JPM Commodities unit) called up the head of the CME and asked them to 'hit' Silver because they wanted to cover some shorts (joking on that last one by the way!).

Here is what the CME has to say about the recent increases:

With recent geopolitical events and natural disasters driving volatility in financial markets, margins – good-faith deposits to guarantee performance on open positions – have spent more time than usual under the limelight.

So we thought it might help to provide a very brief primer on margins as part of this conversation.

At CME Group, we’re intently focused on risk management. In over a century, we have not experienced a default. In more than a century, there has never been a failure by a clearing member to meet a performance bond call or its delivery obligations; nor has there been a failure of a clearing member firm resulting in a loss of customer funds. As part of our overall risk management program, margins are adjusted frequently across all of our products based on market volatility. When daily price moves become more volatile, we typically raise margins to account for the increased risk. Likewise, when daily price moves become less volatile, margins typically go down because the risk of the position also decreases.

Margins are set as part of the neutral risk management services we provide. They aren’t a means to move a market one way or another, or to encourage or discourage participation from one kind of market participant or another. Rather, margin is one of many risk management tools that help us assess overall portfolio risk to protect market participants and the market as a whole.

There are two main margin philosophies that clearing houses can have. First, a clearing house could set margins sufficiently high to cover all possible volatility environments. Changes are less frequent, but margins are higher. Second, and the CME Clearing approach, is to ensure that margins are set to cover 99 percent of the potential price moves. Margins then are lower in less volatile periods and higher in more volatile periods. Changes are often made when the volatility environment experiences a sustained change.

Who determines margin, and what goes into setting margin levels?

At CME Group, CME Clearing is responsible for setting margins. In doing so, we consider several factors to compute the gains and losses a portfolio would incur under different market conditions. Then we calculate the worst possible loss a portfolio might reasonably incur in a set time (usually one trading day for futures markets).

CME Clearing determines “initial margin,” which is the margin that market participants must pay when they initiate their position with their clearing firm, as well as “maintenance margin,” the level at which market participants must maintain their margin over time. We mark positions to market twice a day to prevent losses from accumulating over time. We typically change margins after a market closes because we have a full view of the market liquidity of that trading day. And, we also provide at least 24 hours notice of margin changes to give market participants time to assess the impact on their position and make arrangements for funding.

In the case of silver, we have made several changes in margin in recent weeks to adjust to volatility in the marketplace. By the close of business Thursday, May 5, the margin when a position is initiated will be $18,900; throughout the life of that trade, we would expect $14,000 in maintenance margin would be kept at the clearing house. By the close of business Monday, May 9, the margin when a position is initiated will be $21,600, and we would expect open positions to keep $16,000 in maintenance margin at the clearing house. This is similar to when you sign up for a checking account – a bank will typically require a minimum initial deposit and can then stipulate that you maintain a certain balance going forward.

It also is important to mention that the way margins are calculated has to be tailored to the market served. For example, portfolio margins for our listed derivatives are based on the CME Standard Portfolio Analysis of Risk (SPAN). CME SPAN is the industry standard for portfolio margins used by more than 50 other global exchanges, clearing organizations, service bureaus and regulatory agencies. Margins for credit default swaps and interest rate swaps are quite different because those markets behave differently and have different kinds of variables that produce risk.

As an industry-leading clearing provider, our risk management methodologies have to work to protect the markets we serve. Our interest is in providing security for the entire market – no matter which way it moves. CME
It's worth noting that as of 8.30pm tonight in Adelaide the price of Silver is currently US$37.50, giving a 5000 ounce contract a $187,500 value. If we were at the same Silver price or lower come Monday when the CME increases the initial margin to $21,600 then we'd be looking at initial margins allowing around 8.5 to 1 leverage (almost half the average). If Silver continues to consolidate around this level or falls lower then it's likely that the CME will start to LOWER margins as they did on multiple occasions in 2009 and 2010.

I still don't think there is a conspiracy here.

Although the correction in price has been steep, I feel it has been a healthy correction. It has cleared out a lot of speculative traders. Many short term technical indicators have been reset back to oversold (from overbought) levels. As per my post early this morning I still believe the bottom of this correction will lie between $36 to $38. I think a move significantly below $36 is unlikely before we see $50 again.

Of course I could be wrong. Silver could fall further.

Hopefully this correction gets investors minds in the right place. If you thought a correction as significant as this wasn't possible, now you know it is. If you feel uncomfortable with such a correction then maybe you should question your investment in precious metals at all. Perhaps Gold should form a larger part of your portfolio if the volatility in Silver doesn't let you sleep at night.

I have only been investing in precious metals for 3 years. The last time I saw a correction as volatile as this was in 2008. I bought my first kilo of Silver within days of the March 2008 top. I welcomed the correction as I was buying hand over fist into the lows later that year. For me the correction was a miracle. A chance to buy a quality asset for ridiculously low prices. Although this correction may have further to go I also believe that there will be many that are buying the correction today that will look back in a year or two and realise that this was an opportunity. Will you be one of those people?


Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

What next for metals, markets and currencies?

It has been interesting to note an apparent correlation between the XJO (ASX200 Index) and the AUD/USD currency pair over 2009 and first half of 2010 with the XJO usually leading significant moves. From August 2010 we've seen the AUD disconnect somewhat and put in a stronger move to the upside, although some of the up and down swings continue to occur in tandem.

I believe there are two main causes for the recent disconnect. 

The first being that the USD has weakened significantly against many major currencies (especially over the last 4 months), so it's perhaps not so much AUD strength as it has been USD weakness.

The other reason being that the XJO is once again fighting up against strong overhead resistance at 5000 (so has effectively been capped).  As The Prince notes in his latest weekly wrap on Macro Business:
The S&P/ASX200 Index continues to baffle observers as being out performed by poorer and more debt-laden economies like the US, UK and Europe. The Chinese and commodity markets (but I repeat myself) are weighing on the local market and it appears the grand old correlation of AUS to US is slipping away.

The monthly and weekly charts support a continued bear market rally thesis, with increased volatility compared to an out and out bull market (or Ponzi market as it appears in the US at the moment).

Resistance at 5000 points and support at 4600 points create a probable channel where prices will gravitate for the time being. There maybe some short term price movements to be had, but on the whole, investors should stay away from the market – the old adage, “sell in May and stay away”, seems to be self-fulfilling. MB
Analysis from Deus Forex Machina suggests the AUD might be overvalued with a short term top in place:
On Monday I posted a technical piece saying the the Australian Dollar had hit resistance and so far it appears that the 1.1014 level has proved to be the ceiling that I thought it was going to be. It was tested on two distinctly seperate occasions on Monday Sydney time and then again in New York for 2 hours that night. So technically it looks fairly solid for now. MB
Another trader that I follow, Gary Savage at Smart Money Tracker is expecting only short term weakness in Gold and Silver before they blast off into a final (for this cycle) run away move that takes them significantly higher as the US Dollar collapses down into a 3 year cycle low.
The coming parabolic move will be significantly more powerful than what happened in `09 as this will be a final C-wave move. We should easily see a 300- 350 point move in gold and it's anyone's guess as to how far silver rallies during the final parabolic finish. $65 or even $70 isn't out of the question.

Now for the downside. The final dollar collapse is also going to drive the rest of the commodity markets wildly higher. That will include the energy markets. Oil is due for a brief move down into its cycle low this week too. Once that has run it's course we will see oil soar higher, possibly even reaching the `07 high of $150.

$150 oil collapsed the global economy in `07 and the economy was in much better shape with much lower unemployment than it is now. In an environment of already high unemployment $150 oil and soaring food prices are going to drive the global economy into a recession even worse than what we suffered in `08. Smart Money Tracker
With this scenario in mind, we could look to try and pick a bottom in Silver. If the bottom wasn't already put in last night (4th May US trade) at just under $39 then we might see support at either $38 or in my opinion worst case $36. Silver is also trading very close to the 50 day moving average which may also act as support around the higher of these two levels.

Another indication that we may have hit the bottom of this Silver and Gold correction (or if not be very close to it) is the miners last night did fall during overnight trade, but closed strongly with the Global Silver Miners ETF (SIL) closing only -.19% in the red, Gold Miners Index (HUI) closing slightly higher (+.07%) and Gold Miners ETF (GDX) closing +.21% in the green.
Based on all the above and some previous prediction I made around 2 months ago I am expecting that:
- The AUD is close to a top against the USD (if infact it isn't already in).
- US Dollar Index will fall short term, but bounce strongly into the latter half of the year as the Fed stops increasing the size of their monetary base with the end of QE2 (end of June).

- The ASX200 is unlikely to surpass the 5000 level. Either the financial sector (as the housing market continues to flail) or the resource sector (as the Fed eases the money printing and commodities fall), maybe a combination of both, will weigh heavily on the index so I'm expecting medium term weakness.

- The metals could still head higher short term. If Gold had gone parabolic in that recent Silver blow off then I might have suggested a short term top is in, but with Gold still looking like it could head higher and the miners now stabilising, we could be in for an interesting few weeks ahead.

As mentioned recently in previous posts, I will be looking to take profits on some miners into this rally, but will be looking to put some of this into AUD Gold. If Gold (in USD) does peak early this year, a correction in the AUD has the potential to offset this.

Disclosure: Positions held in Gold & Silver. Not investment advice. Do your own research.

Monday, May 2, 2011

Silver: Buy the dip or start of a larger correction?

Silver took a hammering this morning on open. A fall of over 10% in a matter of minutes.

Silver recoups some losses after plunging

Gold & oil where also hit, but to nowhere near the same degree.

The commercial shorts took an opportunity to start covering last week during a similar sized sell off. One has to wonder whether this weeks COT report will show the same again (further short covering).

Several suggestions have been made about what might have caused the larger drop in Silver and these include reference to recent changes in margin requirements (after CME raised them a second time last week) as well as the news that Bolivia would not be nationalising it's Silver mines as was reported a couple of weeks ago.

Silver has recouped some of it's losses following the earlier drop and is now trading back above US$45.

It wouldn't be surprising to see Silver continue to make ground over the rest of the week with another attempt at $50 in the short term.

A lot of top callers have come out of the woodwork the last week with Silver investor David Morgan announcing that he had sold 25% of his holdings:
Well-known silver investor David Morgan said he sold his speculative silver position following Monday’s rally to over $49 an ounce on the futures market and is “happy to be in cash.”

“I’m out of my speculative silver position,” Morgan said, which includes futures, options and equities positions.

He said he is sitting on 25% cash, but keeping his core 75% position in silver. Kitco News
Mike Shedlock claims his move from Silver into Gold wasn't a 'top call', but actions speak louder than words and his comment that he will be looking to get back into Silver through another swap suggests to me that he does believe a top is in (or very close):
I have held physical silver and gold investments continuously for 5 years, and on and off before that. Today I cashed out of silver, trading it for an equal dollar value of gold.

For the sake of full disclosure, my physical precious metals holdings are now entirely at GoldMoney and I have an affiliate relationship with them.

As a result of that relationship, I will likely be back in silver soon, but in small amounts, and hopefully at decreasing prices. If silver crashes, I will consider switching a considerable percentage of my gold for an equal dollar value of silver. Mish's GETA
John Christian from the stellaconcepts YouTube channel (and the man behind a new metals trading site SPOTMEX) advised watchers that he had liquidated the 'investment' portion of his Silver, leaving just a core position.

John made some good points in this video and subsequent ones about the level of attention Silver is currently getting, but I disagree with the importance he has given to the short term blow off top seen on the Easter long weekend. Not all the regular metal markets were open when this occurred and it was on light volume.

I think we will see a much more spectacular blowoff top at some point over the next month or two, but ultimately this is just speculation on my part as were the top calls above. 

I added to my Silver position this morning during the dip at $40.18 via ETPMAG, an ASX listed ETF which tracks the price of Silver priced in AUD.


Disclosure: Positions held in Silver. Not investment advice. Do your own research.

Sunday, May 1, 2011

The AUD Gold 'Pascoe Indicator'

Michael Pascoe is an Australian financial journalist. Well known and respected with more than 30 years reporting in Newspapers, on TV, Radio and Online.

Something he has made obvious over the last several years is that he's a Gold hater!

All the way up the bull market Pascoe has continued to berate and ridicule Gold and it's investors (or 'Gold bugs', a term he uses to paint us in a negative light).

Of course anyone following his articles might note that many have come around low points in the AUD price of Gold, so much so that his articles could almost be seen as a contrarian indicator (e.g. time to buy AUD Gold when he posts a negative Gold article), see the chart below:

Here is a list of the 5 points labeled on the chart and the article written by Pascoe at the time.

1. On September 27th, 2007, Pascoe had the following to say about Gold:
Gold bugs losing their bite

Of course, you can still find bugs who think the rally above US$1000 an ounce is only a stock market away – but other commentators don't think there's any meaningful correlation between the metal's price and wobbly equity markets.

The more reliable truth is that gold is really just another commodity, albeit one with a rich history. The good news is that demand for gold continues to rise and production doesn't keep up – but there's still a big overhang, thanks mainly to European central banks that still want to sell down their holdings. Super Living
2. This was followed by the below, 2 years later on September 14th, 2009:
Gold drops 25%!

Gold did finish in New York at a record high of $US1006.50 an ounce – which is all very entertaining if you happen to be American or have most of your assets in US dollars or a currency more-or-less pegged to the greenback.

But if your assets are Australian dollar denominated, it doesn't really mean much at all. Our overwhelmingly American-centric media tends to ignore that.

As gold sceptics know, the yellow stuff occasionally has a day in the sun when there's fear and loathing in the financial system or when the herd decides to make gold the next candidate for a speculative bubble, but its price is mainly a reflex currency play for the US dollar. The Age
3. Pascoe was still talking Gold down 10 months later on July 28th, 2010:
Time for gold bulls to feel a little fear

Nearly three years of fear and loathing have been very kind to gold bugs as worry about financial crises helped drive investors into the alleged safety of the yellow metal, whereupon the gold price rose further because the gold price was rising – the momentum players chiming in.

But there are signs that the tide of fear might be about to turn – an event that would be precipitous for the gold price and all who ride on her. It could be the gold bulls' turn to feel fear as pain instead of pleasure. The Age
 4. New year, another negative Gold articlefrom Pascoe. March 18th, 2011:
Buy iodine, sell gold and forget the Aussie

With all the present volatility in the markets, what’s perhaps most surprising is how very little gold has done. If I was a gold bug – and I’m clearly not – that might be a worry. Of course, the hard-core gold believers think life as we know it is coming to an end anyway and therefore are unshakeable in their strange faith.

I have been wrong about the gold price for the past several years [At least he's honest! BB], but that still remains more a matter of timing than fundamentals. The major leg of the gold rally was based on a reasonable reason – the need for those with US dollars to get out of them as the American economy and the greenback plunged.

Since that first leg, gold has risen primarily because gold had risen. The momentum trade kicked in, the exchange traded funds (ETFs) took off to capitalise on that and the great gold bubble bubbled on. There’s an entire industry devoted to justifying the rise – at any one time you can find people who will tell you that gold is a great hedge against inflation, a great hedge against deflation, a safe haven and a cure for baldness. Well, maybe not a safe haven. The Age
5. Only a month later and Pascoe is again laying in the boot. April 27th, 2011:
Rich rust beats dull old gold

Don't know why there's been so much excitement over the price of gold in US dollars - it's even better in Vietnamese Dong or Ugandan Shillings. The Australian dollar gold price though is terribly boring, but don't try telling gold bugs that they would have been much better off falling in love with rust than the yellow metal.

The uninvolved might be under the impression that the price of gold has been soaring to record highs lately, some using that as an excuse to bid up the price of shares in Australian gold miners in the hope that higher gold price might flow through to them.

Wrong. Gold actually has been doing nothing much for the best part of a year and remains well below its record high. That's gold in Australian dollars, of course – the only measurement that means something if you're wealth is in Australian dollars to start with. SMH
The above examples are just some of Pascoe's articles that highlight his negative outlook for Gold. There are others that can be found with a Google search, many of those also in dips or at lows as Gold in AUD continues to inch along it's long term trend line (marked on the chart above).
Pascoe is right in his latest article though, Gold in AUD has been boring for sometime, but one can't help but wonder whether the overvalued (in my opinion) AUD will correct back below parity against the USD at some stage in the near future. A move like this could give Gold a quick 10%+ boost in price and take us to new highs, surpassing the last high set 2 years ago in February 2009.
With any luck Silver's recent rise might also catch Pascoe's eye so he can start commenting negatively on this metal at it's lows as well. Keep some dry powder for that purchase point just in case!


Disclosure: Positions held in Gold. Not investment advice. Do your own research.

Thanks goes to user SaturnV on the Hot Copper forums (suspect registration required to view) for this posts inspiration.