Monday, December 30, 2013

Holiday Greetings From Ben Bernanke

The only thing missing from the cartoon below is there is a minimum net worth requirement for "free money" eligibility.
Holiday Greetings From Ben Bernanke

Marc Faber's 2014 Predictions

Marc Faber's 2014 Predictions
Marc Faber has 3 very contrarian predictions for 2014 that we are sure will have the yammering yay-bobs screaming. While "everyone thinks stocks can continue to rise," Faber sees "the US market as expensive," and will return very little over the next few years. Furthermore, he adds, while "some stocks are not terribly expensive; but just like in the year 2000, [social media] stocks are grossly over-valued," and a short basket in the most egregious will return at least 30% next year. Lastly, Faber exclaims, "given all the money printing that is going on globally... physical gold is a good insurance."

 Faber offers what he thinks is next for the world in 2014:
1. The market will decline from current levels
Faber says: "My sense is that at the present time, the US market is relatively expensive compared to foreign markets, especially to European markets and to emerging markets. On a cyclically-adjusted P/E [price-to-earnings] basis, it is actually going to return very little over the next seven to 10 years.
2. Best shorts for 2014: Facebook, Tesla, Twitter, Netflix, and Veeva Systems
Faber says: "If you look at the entire market, some stocks are not terribly expensive and some stocks are very expensive. It's like in year 2000, not every stock was overpriced. At that time, the NASDAQ was grossly overvalued but, say, resource shares and so-called 'old economy' companies were relatively inexpensive or absolutely cheap. In the present instance, I think that stocks like Facebook, Tesla, Twitter, Netflix, [and] Veeva Systems are grossly overvalued and that the basket of shorts in these stocks will return you at least 30% next year."
3. Best longs for 2014: Gold, gold shares, and Vietnamese stocks
Faber says: "Given all the money printing that is going on globally – and not just in the US – and given that the total credit as a percent of the advanced economies is now 30% higher than in 2007 before the crisis hit, I think that gold is a good insurance."
"I'd rather buy something that is reasonably priced. And, I think gold shares are very inexpensive. So a basket of gold shares I think next year could easily appreciate 30%."
"I think the Vietnamese stock market, which this year was up 22% [and] which is not bad for an emerging market, will continue to go up."

Govt allows deduction of CTT as part of business income.

In a relief to commodity exchanges, the government has allowed deduction of Commodity Transaction Tax (CTT) to traders as it forms part of their business income.
The move will benefit Multi Commodity Exchange of India (MCX), National Commodity and Derivatives Exchange (NCDEX), and Universal Commodity Exchange (UCX). The government may withdraw the recognition of these exchanges if found violating specified income tax norms.
This notification will remain in force until the approval granted by the commodity markets regulator Forward Markets Commission is withdrawn or expires.
Reacting on the development MCX said: "Trading on Exchange will get tax benefit deduction under Section 43(5) of the Income Tax Act". This will instill confidence in the market, increase hedgers' participation and put commodity futures trading at par with other exchange-traded asset classes, it said.
CTT of 0.01%, imposed on both buyer and seller of commodity on exchange platform came into effect on July 1. It is applicable on non-agricultural commodities and 11 processed foods. The tax imposed has dampened the business of these exchanges and their turnover has come down by 32% to Rs 74.16 lakh crore so far this fiscal.

Commodity Volumes

India is an elastic market, key fundamental data and announcements can have drastic effects on trading activity. Earlier this year, India’s government put new measures in place to tax commodity trading, the Commodity Transaction Tax (CTT) was implemented despite protest from the chiefs of all major commodity trading venues. As expected, trading volumes slumped with activity believed to be 40% to 50% lower.
Amar Ambani, Head of Research at IIFL, an Indian regulated broker explained to Forex Magnates in a statement: “Levy of 0.01% CTT has definitely dampened the volumes on the commodity bourses, with MCX average daily turnover down by drastic 40%. This can be explained by the fact that jobbers (speculators) which contributed 40-50% of the MCX volumes are out of the business. Jobbers survived on wafer thin margins and proportionately paid very low transaction costs. After the advent of CTT, the costs have dramatically increased, which has made it difficult for the price sensitive jobbers to sustain.”
2014 will be an interesting year for India as the 1.2 billion nation goes to vote. The right-wing BJP is in pole position to overthrow a controversial Congress Government. Asad Hussain a Mumbai-based analyst explained to Forex Magnates:The BJP is a favourite among India’s business community, polls carried out by Team Cvoter show that BJP could win 162 seats next year.”

Data for the week 28-Dec-13 to 03-Jan-14

Exp.: Expected or Anticipated value calculated from the recent survey conducted.
Prior: Represents the last actual for each indicator. In case there is a revision to the last actual, the prior column reflects the prior figure as revised.
Exp. change today: Exp. - Prior
Avg. change of last 1 year: Average Change in Actual data calculated for last 1 year.
Expected impact on price: This indicator shows the effect of the anticipation of data on the prices of related country’s major indices. We have categorized it as below:
Very Good Good Neutral Bad Very Bad
Actual: Refers to the actual/latest figures after its release.
Data for the week 28-Dec-13 to 03-Jan-14
Date Time (IST) Country Data Exp. Prior Exp. chg today Avg. chg of last 1 year Exp. Impact on Price
31-Dec-2013 08-30 PM United States Consumer Confidence 76.3 70.4 5.90 4.00 Good
01-Jan-2014 06-30 AM China NBS Manufacturing PMI 51.2 51.4 -0.20 0.77 Neutral
02-Jan-2014 07-15 AM China HSBC Manufacturing PMI 50.5 50.8 -0.30 0.97 Neutral
02-Jan-2014 02-30 PM European Monetary Union Markit Manufacturing PMI 52.7 52.7 0.00 0.80 Neutral
02-Jan-2014 08-30 PM United States ISM Manufacturing PMI 56.9 57.3 -0.40 1.35 Neutral
03-Jan-2014 12-30 PM United Kingdom Nationwide Housing Prices s.a (MoM) 0.7% 0.6% 0.10% 0.87 Neutral
03-Jan-2014 02-30 PM European Monetary Union M3 Money Supply (3m) 1.7% 1.9% -0.20% 0.18 Neutral
03-Jan-2013 09-00 PM United States EIA Natural Gas Storage change   -177   33.60  
03-Jan-2014 09-30 PM United States EIA Crude Oil Stocks change   -4.731M   3.45  
04-Jan-2014 01:00:00 United States Fed's Bernanke Speaks at Economics Conference in Philadelphia          

Sunday, December 29, 2013

Technicals MCX Metals And Energy.

Technicals MCX Metals And Energy.

Gold (Rs 28,564)

The year-end holiday season has put the market in silent mode. The MCX gold futures contract stayed flat after declining below its 200-day moving average. For the short-term, Rs 28,200 will be an important support. Failure to decline below this level in the coming weeks can keep the contract in a sideways range between Rs 28,200 and Rs 31,000. Traders with a high risk appetite can go long with a tight stop-loss at Rs 27,950. However, the medium-term trend is down. Rally to Rs 31,000 will be a good opportunity to enter into fresh short positions. The contract can fall to Rs 25,500 in the medium-term. Only a strong rise above Rs 31,000 will turn the outlook bullish.
Silver (Rs 45,154)
The MCX silver contract is trading flat. Its 200-day moving average resistance is currently at Rs 45,680. A break above this resistance can take the contract to Rs 48,500 in the coming weeks. On the other hand, if the contract declines below Rs 43,500, it can fall to Rs 41,000. Traders have to wait for a breakout on either side of Rs 43,500-45,680 to trade on the contract. For the medium-term, Rs 40,000 will be a crucial support. The probability of the contract testing this support remains high till price is below Rs 48,500.
Copper (Rs 468.2)
The MCX copper contract has risen sharply as indicated last week. The short-term bullish outlook remains intact. But a dip to Rs 463-460 cannot be ruled out. Supports are at Rs 462 and at Rs 455. Traders can take fresh long positions now and accumulate more longs on dips to Rs 462 and Rs 455.
Intermediate resistance is at Rs 470. A breach of this resistance will open doors for a rise to Rs 510 in the coming weeks. For the medium-term, Rs 510 is a key resistance level which can halt the current rally. A reversal from here can see the contract declining again.
Crude oil (Rs 6,261)
The MCX crude oil contract closed the week making moderate gains. Traders can hold their long positions taken near Rs 6,100 and retain the stop-loss at Rs 6,040. Supports are at Rs 6,100 and Rs 6,000. But caution is required as the contract is nearing its crucial 21-week moving average resistance at Rs 6,354. Exit longs if there is a reversal after hitting this resistance.
A break above Rs 6,354 can, however, take the contract to Rs 6,500. Failure to breach Rs 6,500 will keep the medium-term downtrend intact and the contract can fall to Rs 5,500. But if the contract manages to break above Rs 6,500 decisively, then it will signal a trend reversal.
Natural gas (Rs 273.4)
The MCX natural gas contract was oscillating between Rs 271 and Rs 281 last week. The previous high of Rs 281.6 recorded in January 2010 will be an important resistance level to watch. Failure to breach this level can take it down to Rs 255 in the coming weeks.
However, if it breaks above Rs 281.6, the contract can target Rs 310 in the short-term. The medium-term trend is up with strong supports are at Rs 240 and Rs 220.

Gold & Silver Are Jumping And WTI Crude Breaks $100

Gold & Silver Are Jumping And WTI Crude Breaks $100

Gold & Silver Are Jumping And WTI Crude Breaks $100
As the 10Y broke solidly through 3.00% so precious metals began to move and after testing $20 in Silver overnight a few times, both gold and silver have just run stops through key levels and are jumping like Twitter (or Bitcoin) for a few minutes. WTI Crude has also just broke $100.

Indian Bitcoin Exchanges Halted As Government Shifts Capital Control Attention Away From Gold

Indian Bitcoin Exchanges Halted As Government Shifts Capital Control Attention Away From Gold
Having failed miserably in the "control" of capital outflows from the Rupee (via Gold), the India government (following a Reserve Bank Of India advisory) has raided one Bitcoin seller and issued a warning cautioning citizens against acquiring and trading virtual currencies. As VentureBeat reports, the RBI did not outright ban the currencies, but it slammed them as risky and potentially illegal. On Thursday, the "Enforcement Division" raided the premises of Mahim Gupta who provides trading platform through his website - - finding it in clear violation of Foreign Exchange Management Act (FEMA) rules. Whether smuggling gold or utilizing Bitcoin, it seems the government is fighting a losing battle...cue confiscation?
India practically "bans" Bitcoin (via VentureBeat)...
Several Bitcoin exchanges in India have suspended operations amid fears they could violate anti-money laundering and financial terrorism laws.
They’re reacting to a warning issued on Tuesday by the Reserve Bank of India, the country’s central bank, which cautions citizens against acquiring and trading virtual currencies. The RBI didn’t outright ban the currencies, but it slammed them as risky and potentially illegal:
It is reported that VCs, such as Bitcoins, are being traded on exchange platforms set up in various jurisdictions whose legal status is also unclear. Hence, the traders of VCs on such platforms are exposed to legal as well as financial risks.

There have been several media reports of the usage of VCs, including Bitcoins, for illicit and illegal activities in several jurisdictions. The absence of information of counterparties in such peer-to-peer anonymous/ pseudonymous systems could subject the users to unintentional breaches of anti-money laundering and combating the financing of terrorism (AML/CFT) laws.
First Bitcoin exchange raid has occurred (via DNA India),
We have found that through the website 400 persons have recorded 1,000 transactions that amount to a few crores of rupees. We are gathering the data of the transactions, name of the people who have transacted in the virtual currency from Gupta’s server that is hired in the US. At present, we believe that this is a violation of foreign exchange regulations of the country. If we are able to establish money laundering aspect then he can be arrested,” said a top ED official.
As per sources, a separate raid was also conducted in Satellite area of the city, however, the person the investigation agency was looking for could not be found. “When we reached his office, he was not there. We have sealed the premises,” the official added.
Sources also added that there are a handful of entities that provide trading in the virtual currency in India. “I think there are only five entities. Of these, we believe two are operating from Ahmedabad. We believe that they have channel of agents or people who promote the use of such currency but entities that provide online platform are few,” official said.
Perhaps it is time to confiscate all the gold, computers, and internet access for anyone not invested in stocks?

Aussie Bank Asks "Will Bitcoin Replace The Dollar?"

Aussie Bank Asks "Will Bitcoin Replace The Dollar?"
Bitcoin is rapidly becoming part of the everyday lexicon. Following David Woo's investigation, National Australia Bank's Emma Lawson looks at its creation, use, and quality as "currency," and find that Bitcoin meets most, but not all the conditions required to be a currency. Lawson concludes Bitcoin may not be the most efficient monetary system, given the costs to create, and that the supply set-up can be seen as both an advantage (hyperinflation is not possible) but also a disadvantage (there are conditions which may create deflation). But, if enough people believe in it, and use it, it may be here to stay as a payment system. Simply put, its success (or failure) will depend on establishing trust and adoption.
Via National Australia Bank's Emma Lawson,
The Rise In Crypto-Currency
What are Bitcoin?
Definition of a currency:
Noun: a system of money in general use in a particular country: the fact or quality of being generally accepted or in use.
“Bitcoin” has entered the popular lexicon, challenging our idea of what makes a currency, currency. The definition of currency above does not mention the physical characteristics of the same but that it must be generally accepted.
There have been different forms of currency over the centuries, but what is important is that users believe it to be currency. Banknotes themselves were introduced in China in 118BC as a promissory note. Marco Polo, in the 13th Century recorded that paper bark was used in the place of gold or silver. The first colony in New South Wales used rum for currency, in the absence of printing presses. These examples show that currency or money can be different things, they are not static and they do not have to be physically valuable in themselves (like gold).
As such, Bitcoins can indeed be currency, as could anything labelled as such. As long as you believe it is.
Firstly, what are crypto-currencies? Bitcoin is one of around 50 crypto-currencies, albeit the most well-known, traded and first established in 2009. These are de-centralised digital (or electronic) medium of exchange. They are not backed by physical assets but rather peer security.
Primary issuance of Bitcoin is determined by computer algorithms which require large amounts of computer power, to validate sequences (blocks) and proof-of-work. As more “miners” participate in calculating blocks, the required computer power and sequence of blocks increase; thus not allowing an increase in the speed of Bitcoin issuance despite more mining. Participants become Bitcoin miners to claim transaction fees and initial Bitcoin.
Indeed one claimed benefit of Bitcoin is that in a world of quantitative easing, this alternative is designed not to increase above the scheduled path. Bitcoin are created at a “decreasing and predictable rate…issuance halts completely with a total of 21 million Bitcoins in existence."
The secondary market for Bitcoin is where most participants will acquire them for their digital “wallets” i.e. accounts. The price is determined on exchange via demand and supply, similar to the broader FX market.
At present there are eight dominant exchanges but there have been more and the number changes (Chart 1). In a study of 40 Bitcoin exchanges, 18 were found to have closed and taken customer accounts. Popular exchanges were also found more likely to experience security breaches2.Prices may also vary between exchanges. The most popular in the USD market is Mt Gox, which constitutes 52% of USD volume (based on the latest month average volume); closely followed by Bitstamp at 46%.
Trading of Bitcoin is most popular in CNY, at 46% of the total Bitcoin market by currency, closely followed by USD at 45%, EUR takes up a small percentage at 4%. This makes the China Bitcoin exchange the largest available; it makes up 47% of total Bitcoin trading (Chart 1).
Aussie Bank Asks "Will Bitcoin Replace The Dollar?"
The price on a singular exchange has been particularly volatile recently (Chart 2). There have been calls of a bubble in the Bitcoin price. The price tracked an average of $5.44 in 2011 and $8.29 in 2012 but has risen exponentially from October 2013. It peaked at $1200, and has dropped back to $575 more recently, after regulatory changes in China.
The fact that there are multiple exchanges but only 1723 registered businesses worldwide advertised as using Bitcoin (no doubt there are more in reality), suggests there may be something in the idea that there is currently more people buying Bitcoin in anticipation of an increase in Bitcoin value, rather than buying Bitcoin in order to use them as a payment method. That strongly suggests a bubble in the present value of Bitcoin.
Aussie Bank Asks "Will Bitcoin Replace The Dollar?"
Be that as it may, it does not discount the idea of Bitcoin as a currency or payment system, albeit a presently volatile one.
Bitcoin as a desirable currency
There are a number of qualities that a currency must have to be effective and sustainable. The NSW colony’s use of rum fit the bill by being recognisable but it arguably wasn’t durable when holders got thirsty! Bitcoin has certainly captured the attention of markets and the media, but if it is to have longevity, these tried and tested qualities must be in existence. These are necessary but not sufficient conditions to qualify as currency.
Durability: the unique feature of Bitcoin is that they are electronic, and not physical money. The concept of electronic funds has grown, and examples of electronic units of exchange have been around for some time in the shape of, arguably, credit cards, but also PayPal. Stories of throwing the hard-drive at the local tip aside, crypto-currencies are durable in their electronic records. Computer back-ups are recommended.
Portability: similar to durability, with an electronic version of currency, the portability of Bitcoin is less of an issue. As long as you have a smart-phone. Clearly there are some issues here, with access to smart phones or portable technology not universal. There may be restrictions on use by age or location for example. Anyone trying to just make a mobile phone call in a remote area in Australia could perhaps attest to that.
Fungibility: or the ability to exchange Bitcoins for other Bitcoin without cost. For example, swapping a $10 note for two $5’s. Bitcoin are fungible, although as they come in only one denomination it is less of a concern.
Divisibility: the ability to split a whole Bitcoin. This is possible. It is this ability to split into fraction of Bitcoin that the proponents of the crypto-currency believe will solve the problem of there being a finite amount ever minted. They believe that when there is expanded use and demand for Bitcoin, combined with a limited supply (at 21 million), that Bitcoin will become increasingly divided or fractionalised.
The clear flaw of that plan is the concern regarding deflation. If one Bitcoin can provide the owner with increasingly more goods or services over time (ie. demand outstrips supply for Bitcoin, not goods and services), that means the price of goods and services are falling. This tends to dampen consumption. This may occur only when the final Bitcoin is minted and if demand for Bitcoin use continues to rise.
Scarcity: Bitcoins are scarce as they require expensive and time-consuming computing resources to create. Hacking or counterfeiting is claimed to be prevented by peer pressure or game theory to prevent an invalid increase in minting. This has not been entirely successful, with breaches in June and August 2011 and April 2013. The security features are being adapted over time to address problems as the system matures.
The scarcity can also be considered a flaw. The supply of Bitcoin is inelastic. There are periods of time at which an increase in the money supply is warranted, to meet demand and then cyclically reduced. Bitcoin does not allow for that. The current spike in Bitcoin is an example. Demand for it has risen (arguably on speculative grounds), and supply cannot match it; hence the rise from $100 to $1200 over four months.
One factor is that there are a number of alternative crypt-currencies. Bitcoin is the dominant system now but that is not to say that it will remain that way. Crypto-currencies may stay around and thrive as a payment system but not Bitcoin.
Recognisability: there is a growing awareness of Bitcoin as a payment system. But, its use is limited. Some might suggest that its recognisability at present is concentrated on its own price, rather than a medium of exhcange.
The Bitcoin website shows 1723 sites worldwide that advertise their use. In Australia, there is a café in Adelaide, a website services firm in Melbourne, a juice bar in Sydney and a currency exchange on the Gold Coast. There are likely to be more than that and it is growing. But it is not yet universal.
Mention Bitcoin at present and many would discuss its use as a store of value before its use as a medium of exchange. And this takes us to the other properties of being a currency.
Trust and Adoption are Critical
“Bitcoins have value because they are useful as a form of money”
In a discussion about Bitcoin with a computer engineer I asked “how is it created?” and had the spiel about computing power, energy and the resources needed to identify prime numbers. Ok, that’s great, I may never understand the maths but I get that it requires substantial resources to compute. The next question “so what does it produce that is valuable?” answer – nothing.
Bitcoin are valuable because they exist, because people believe that it may be so. It’s a self-fulfilling prophecy. There must be trust in the system, for Bitcoin to retain any value. This is how it differs from other payment methods like credit cards and PayPal, which have a pool of funds backing them. Crypto-currencies may be cheaper as a payment method because they do not have that asset backing, but it thus relies more on trust than alternatives.
Bitcoin comes about as a response to quantitative easing and concern regarding central banks’ printing money. But what it cannot replicate is the revenue generating abilities of central banks and the governments that control them, or their inflation fighting credentials. Neither does it have the centuries of history that gold is backed by.
Bitcoin will work as a medium of exchange as long as participants believe in the security of the triple-counting system and peer-to-peer security. But this takes time. Given this, we shall likely not know for a prolonged period of time how successful the crypto-currency experiment will be.
The other condition that Bitcoin needs to be successful is adoption. It needs to become broadly used and accepted. Its (short) history so far has mostly encapsulated illegal activity characterised by the deep-web site Silkroad; subsequently shut-down. As already noted, there are only four businesses in Australia registered on the Bitcoin User site showing they accept it as a medium of exchange.
The connection between Bitcoin and illegal activity will have to be broken before it becomes widely trusted and accepted. Again, this takes a long time to establish. So while we cannot say that Bitcoin will definitely not become a medium of exchange, what we can say is that it will take a prolonged period of time to prove.
The Regulatory Environment
The increased focus on Bitcoin has led to a wealth of commentary and legal stance on its use from central banks and regulators. A few are outlined below, no country has wholeheartedly adopted its use:
Australia – RBA’s Stevens: “maybe there will be a world in which currencies based on some computer algorithm to limit supply as opposed to physical gold or something. There have been many such currencies through the ages…the ones that will survive will be the ones that hold their value which is why we have an inflation target which we’re hitting.”.
China’s PBoC have banned the use of Bitcoin by commercial banks and the clearing of payments in Bitcoin by third-party providers. China has been the most vocal and proactive in preventing the use of Bitcoin as an alternative to local currency in the major nations using (or investing in) Bitcoin. With the Chinese market for Bitcoin the largest so far, this may be a natural response to protect the central bank’s authority on the money system. Needless to say, the price of Bitcoin in CNY fell sharply on the latest announcement (18 December 2013).
The Swiss have taken a slightly different tack, by preparing to declare Bitcoin as a foreign currency. This ensures that it is not a domestic alternative but that it can be tracked and must be declared so as to meet tax and money-laundering laws, but not banning it altogether.
Germany has acknowledged its existence by declaring it a “unit of account” for tax purposes. It is not a foreign currency but “private money.” It now attracts a 25% capital gains tax.
The EU banking regulator has warned on the use of Bitcoin, in regards to theft, price fluctuations and the lack of central bank backing or security on the same. This has been followed by the French Central Bank which said its use is highly speculative and poses a financial risk to users. Dutch Central Bank President Wellink noted that Bitcoin hype was akin to the 17th century tulip bubble (but didn’t result in a flower at the end of it). The Dutch central bank has warned against their use as they are not regulated and there was no underlying liability. There is no deposit guarantee scheme.
Most jurisdictions treat Bitcoin as assets and require tax to be paid on capital gains. The Norwegian government said that Bitcoin were not considered money or currency and will tax it as an asset, similar to Germany, at 25%,
Thailand was the first country to ban its use as it was ruled not to be a currency.
In November, the US held a Senate hearing on the use of crypto-currencies. Much of the discussion was positive and upheld their use as “legal means of exchange’” There are ongoing concerns about its use in illegal activity.
In a world that is used to being bailed out when the financial system fails, Bitcoin’s decentralised system is a benefit to those in favour of limited government control, but is a distinct disadvantage to those who are used to the final bill being picked up by governments. If the present leap in Bitcoin price proves to be a bubble, it will be the individuals picking up the tab, not governments. There is no deposit scheme or any “too big to fail.” While investment in Bitcoin is small, that poses individual risk. If Bitcoin use becomes much broader, that becomes a risk to financial stability. Caveat emptor.
Bitcoin to replace the AUD? Not Now
We have established that Bitcoin meet most, but not all the conditions required to be a currency. The rest may follow, but that it will take a very long time to be proven. Its success (or failure) will depend on establishing trust and adoption.
Bitcoin may not be the most efficient monetary system, given the costs to create, and that the supply set-up can be seen as both an advantage (hyperinflation is not possible) but also a disadvantage (there are conditions which may create deflation). But, if enough people believe in it, and use it, it may be here to stay as a payment system.
Aussie Bank Asks "Will Bitcoin Replace The Dollar?"
However, there is a large red flag saying buyer beware at current levels of price and use. With no macroeconomic backing, it is impossible to determine fair value for Bitcoin aside from demand and supply – but the chart of AUD/BTC (Chart 3) above shows, BTC’s trajectory is not one of a stable currency.

China is buying physical gold in unprecedented volumes at least 70-75% of world mining production this year.

China is buying physical gold in unprecedented volumes at least 70-75% of world mining production this year.

The gold price is approaching production cost again.
We have the physical versus paper demarcation again (most commentators are clueless on this - the paper market is still determining the screen price, but it will probably die once and for all this time around – the question is at what level?).
The Asians are being underestimated again when the price is declining (although not by the BIS - China is buying physical gold in unprecedented volumes – at least 70-75% of world mining production this year).

Thursday, December 26, 2013

The Big Squeeze - Mystery Hand Scoops Up Copper.

The Big Squeeze - mystery hand scoops up copper.
* One investor held over 90 pct of copper contracts
* Further squeezes seen amid shortage of inventories

* Exchange says rules robust against manipulation

Someone has made a near billion-dollar bet on copper this week, virtually cornering the world's key stocks of the metal.
That has stoked worries of a supply squeeze, as warehouses run low on a raw material vital to global industry, and has raised questions about commodity exchanges' efforts to curb attempts to manipulate prices by aggressively heavy trading.

The London Metal Exchange does not identify investors holding positions but data <0#LME-WHT> on Friday showed that a single participant was holding 50-80 percent of available copper stocks on the LME, which handles the bulk of trade in the metal. The position was nominally worth up to $753 million.
Earlier in the week, one investor - presumably the same - had held over 90 percent of short-term trading instruments <0#LME-WHC> on LME copper - a position worth at least $862 million on paper. Traders have no clear idea who is behind it.
The firm doing the buying would not have had to put up all the cash up front and may well have had hedging positions and real requirements for physical copper. But it appears nonetheless to be a substantial gamble on prices rising.
And since the very fact of building up such a dominant position fuels fears of scarcity, it was little surprise that prices did in fact increase - LME cash copper gained 5 percent through December as the long position grew, hitting a four-month high on Monday before shedding about 1 percent.
That link between an aggressive, large buyer and fears of supply shortages driving prices higher is one that exchanges, including the LME, have historically tried to contain.
But the LME, under scrutiny from government regulators, said it has no plans to cap the size of investors' positions - though it does have other mechanisms to thwart manipulation.
"The LME has a robust position management system in place to deal with dominant positions," said spokeswoman Miriam Heywood, adding there was no plan to change those rules.
The world's oldest metals marketplace has already been overhauling practices on warehousing - its system of ensuring physical stocks exist to back trades concluded on the exchange.
It has done so in response to allegations of manipulation in its larger aluminium market, which industrialists say has distorted global supply and inflated prices. [ID:nL5N0IS61E]
With its copper stocks shrinking, the impact of any future squeeze could be more severe than what happened this week, said analysts, who noted a 19-month high in the key price spread between copper for immediate delivery and that for future delivery - a measure of fears that ready supply may run short.
"The tightness is there. It's bubbling underneath," said Wiktor Bielski, head of commodities research at VTB Capital.
"There are just a lot of things that could all of sudden turn quite nasty for anybody who needs spot copper and doesn't have any cover."
The low stocks combined with an outage at a smelter in the Philippines, Chinese demand that has been running more strongly than expected and concern about Indonesia's plans to boost its own industry by banning the export of unprocessed ore could all contribute to a volatile mix.
Among those potentially hardest hit by a spike in prices are the numerous speculators who have taken short positions on the LME - selling copper for future delivery in the hope of buying it more cheaply later, before the contracts fall due.
They were betting that the copper market would move into surplus as new mines churn out more supply. But backlogs in processing the ore have limited the amount of refined metal being produced and prices have failed to fall significantly.
"I don't see this situation abating," said one trader.
"There's really no copper around at the moment."
The crunch may come in the new year, said analyst Leon Westgate at Standard Bank in London: "It looks like in the early part of next year there's going to be a bit of a battle on the cards in copper," he said.
Copper stocks in LME-registered warehouses have declined by 44 percent since June to 382,550 tonnes. Moreover, much of that has already been earmarked for delivery or is located at warehouses suffering from delivery backlogs.
Two thirds of the total copper stock has been "cancelled" in preparation to be shipped out to buyers.
Most of the rest is in three warehouses - at New Orleans, Antwerp and Johor in Malaysia - where queues for other metals makes in hard to secure their copper for rapid delivery.
Bielski said that, of the nearly 400,000 tonnes in official LME stocks, only about 16,000 were actually available now.
The owner of Grasberg in Indonesia, the world's second largest copper mine, warned this month that output could slide 60 percent next year if the government strictly implements a planned ban on unprocessed ore exports. [ID:nL3N0JR0YJ]
That could tempt speculative buying, Bielski said: "Someone, somewhere is going to see this as an opportunity in the next couple of months."
In the United States, the commodities derivatives regulator has stepped up its efforts to limit speculation, proposing a cap on the number of contracts that a single trader can hold in U.S. energy, metal and agricultural markets.
The LME’s smaller U.S. rival in copper, the CME, has set a limit of 1,200 lots. Each contract is worth over 11 tonnes.
The LME does not intend to follow. It already has rules to limit the profit a speculator can make by scooping up so much supply on any day that traders with short positions are unable to cover them at the close. Any party holding a position worth over half of LME available stocks must supply metal to short-position holders at very modest price premiums.
The copper market, trading an annual output of about 20 million tonnes, is smaller than aluminium, theoretically making it easier to squeeze. In a scandal in the 1990s, a Japanese trader was jailed for trying to corner the market in the metal in a gamble that cost his employers over $2 billion.
American billionaires the Hunt brothers also lost heavily when an attempt to drive up the price of silver collapsed in 1980 after a change in exchange rules to curb manipulation.
On the LME last week, as short holders scrambled to cover, the benchmark cash to three-month spread flipped into backwardation - meaning copper for immediate delivery is more expensive that later-dated contracts. The premium surged to $30 per tonne on Monday, the highest since May 2012.
That is a $46 turnaround from last month, when the market was in contango, with cash copper $16 a tonne cheaper than metal for delivery in three months.
While benchmark LME copper prices also surged this week and may see further volatility, the greatest impact of any future squeeze could be a strong backwardation, analysts said.
Westgate said his research showed that there was strong potential for further spikes in spreads since historically when available copper stocks declined to levels of around 130,000 tonnes, spreads are more volatile and can trade anywhere from a $50 contango to a $250 backwardation.
(Writing by Eric Onstad; Editing by Alastair Macdonald)

Friday, December 20, 2013

Japan Q1 aluminium premiums up, mostly set at $255 -sources

* Q1 premiums in line with offers from some producers
* Premiums up from $245-247 in Q4, match 2012 record high
* Higher premiums reflect firm demand, high overseas premiums (Adds quotes, details of negotiations)
By Yuka Obayashi
TOKYO, Dec 19 (Reuters) - Japan's aluminium premiums for January-March shipments were mostly set at $255 per tonne, up at least 3 percent from the prior quarter and matching a 2012 record high, on strong demand and high overseas rates, four sources close to the deals said.
Japan is Asia's No.1 importer of aluminium and the premiums for primary metal shipments it agrees to pay each quarter over London Metal Exchange (LME) cash prices set the benchmark for the region.
"Producers were bolder this time as China has stepped up purchases of the metal lately for arbitrage, with some paying hefty premiums above $260," a buyer at trading house said.
"To secure stable supply, Japanese buyers felt they need to accept the higher premiums," he said.
A source at one of the end-users said most deals were done at $255 this week. Another source at a producer agreed, saying most deals were booked at $255 while some were done at $256.
The first quarter premium is up about 3-4 percent from the fourth quarter's $245-247 per tonne and matches the record high of $254 to $255 hit in the fourth quarter of 2012.
Recovering demand in Japan on increased automobile output and a rush to build homes ahead of a sales tax hike next April, as well as concerns about supply were also among reasons for the higher premium, traders said.
The latest quarterly pricing negotiations began late last month between Japanese buyers and global miners including Rio Tinto Ltd , Alcoa Inc, BHP Billiton and United Company Rusal .
The premiums agreed are mostly in line with offers from some big aluminium firms of $255 to $256 per tonne, but significantly below the offer from the world's top producer Rusal.
Rusal had asked for $270, citing tight supply and healthy demand in Asia, but then decided to lower the offer for competitive reasons, a company sales official said.
Some buyers are still continuing talks, with an aim to come to an agreement this week, three other sources said.
The high Japan aluminium premiums come after a recovery in spot premiums in Europe and the United States as the metal continues to be used as collateral for financing deals, making it unavailable to the market.
The LME, the world's biggest industrial metals marketplace, announced a tougher warehouse policy on Nov. 7 to cut queues for delivery to a maximum of 50 days from over a year in some cases, after persistent complaints from metal buyers about the high premiums they had to pay.
But it may take several years for the queues to disappear, lending support to premiums.
Duty-paid aluminium premiums in Rotterdam, which have risen steadily since late October, traded at a high of $250-275 a tonne in December from around $235-255 in September.
The U.S. premiums paid on top of the LME benchmark for physical delivery AL-PREM are also heading to historic highs around 11.25 cents per lb or $248 per tonne, after falling to 9 cents a few months ago on uncertainty about the impact of the LME's overhaul of its warehousing policy, according to traders.
"Many producers are apparently suffering because the metal price at LME has been hovering at around $1,800 per tonne. They are charging a higher premium to offset cheaper metal price," a trader said. LME aluminium prices have lost almost 14 percent so far this year.

"It looks like the premiums will be staying at high levels next year unless the metal prices recover in a big way."