Gold Hits $1300, Silver Surges To 3-Month Highs As China Rehypothecation Ponzi Unwinds

But, but, but... Janet Yellen didn't say precious metal valuations were within historical norms? Gold and Silver are surging today (and have done since the FOMC press conference all-clear) with the latter having its best day in months and back at 3-month highs... Intriguingly, just as we warned, gold and silver have been on a significant tear since the Qingdao CCFD probe began (as synthetic hedges are unwound - which dominate pricing in PMs) while copper and iron ore and so on have all fallen (as the reality of no real demand leaks into these commodities).

Is the CCFD unwind having its impact?

As we commented previously:

When we previously contemplated what the end of funding deals (which the PBOC and the China Politburo seems rather set on) may mean for the price of other commodities, we agreed with Goldman that it would be certainly negative. And yet in the case of gold, it just may be that even if China were to dump its physical to some willing 3rd party buyer, its inevitable cover of futures "hedges", i.e. buying gold in the paper market, may not only offset the physical selling, but send the price of gold back to levels seen at the end of 2012 when gold CCFDs really took off in earnest.

In other words, from a purely mechanistical standpoint, the unwind of China's shadow banking system, while negative for all non-precious metals-based commodities, may be just the gift that all those patient gold (and silver) investors have been waiting for.  This of course, excludes the impact of what the bursting of the Chinese credit bubble would do to faith in the globalized, debt-driven status quo. Add that into the picture, and into the future demand for gold, and suddenly things get really exciting.

Here's our previous epxlanation of gold's move... if we are right that somehow China managed to push gold lower via gold CFDs, then the unwind pushes gold higher:

Here's how that might work:

In the gold markets, the paper or synthetic 'demand/supply' dominates pricing as opposed to the non-precious metals which have at least a grain of fundamental sense to them still

Throughout 2012/2013 - as the gold CFDs were booming, Chinese demand for physical gold was soaring as the price plunged (due to the forward hedging required in the CFD transactions which pressured gold swaps/futures lower and thus dominated pricing)

As CFD unwinds hit en masse, these flows must unwind (cover hedges and ensure the underlying physical is there... and if not buy it)

This will pressure gold futures prices higher and because unlike in non-precious commodities where spot markets wag the tail of the futures markets - spot gold will likely be dragged higher also (as we know the demand for the physical has been high).

So unlike in the industrial commodities - where the CCFD unwind drives prices down as the image above shows, thanks to synthetic manipulation and domination of the paper gold (and silver) market, the opposite occurs in PMs.

Who Just Bought Half A Billion Dollars Of Gold Futures?

Presented with little comment aside to note the surge in gold since Yellen gave markets the all-clear yesterday. It seems someone decided the open this morning was an opportune time to take on half a billion dollars of gold exposure...

Gold price on insane surge after massive trade

The gold price scaled $1,300 an ounce for the first time in more than a month, after comments by US Federal Reserve chair Janet Yellen yesterday and a huge buyer lit a fire under traders.

On the Comex division of the New York Mercantile Exchange, gold futures for August delivery – the most active contract – jumped to a day high of $1,322.00 an ounce, up $49.30 or nearly 4% from yesterday's close.

After months of subdued trade on gold futures markets volumes surged on Thursday leaping past 210,000 contracts – double recent daily averages – by mid-afternoon.

As the chart shows, after a steady climb throughout the morning, during lunchtime volumes suddenly spiked with more than 2.9 million ounces (82 tonnes) changing hands in three big chunks in the space of 15 minutes.

Gold built on its gains from there to settle at $1,320.40, the the best one day performance for the metal since September last year.

The chart looks almost like the inverse of the trading pattern on April 15 this year when exactly year to the day of 2013's $200 shocker another strange gold price plunge occurred.

Gold's positive move started yesterday after Yellen, speaking at the latest meeting of the Fed's interest rate committee, said she was comfortable interest rates could stay low for a considerable period, which sent the dollar tumbling against the euro and pound sterling.

Gold and the US dollar usually moves in the opposite directions and gold's perceived status as a hedge against inflation is also burnished when central banks flood markets with money.

Monetary expansion, particularly since the financial crisis, has been a massive boon for the gold price. Gold was trading around $830 an ounce when previous chairman Ben Bernanke announced the first program of quantitative easing in November 2008.

After months of subdued trade on gold futures markets volumes surged on Thursday

The QE program together with other stimulus measures saw the balance sheet of the Fed cross the $4 trillion mark in January, up 400% in seven years.

The US has not been alone in printing money and together with the Bank of Japan, the European Central Bank and the Bank of England, more than $15 trillion of easy money is now sloshing around in the system.

Earlier this month the ECB took the unprecedented step of moving rates into negative territory.

Copper demand to overtake surplus by 2019: Zimtu

Demand for refined copper will overtake the current surplus by 2019, says Zimtu analyst Derek Hamill.

"Copper supplies are likely to exceed demand in 2014 and 2015; we further expect this situation to persist for 2016 and 2017," Hamill writes in a report titled Multi-Year Global Copper Market Outlook.

Copper demand is intensifying due largely to continued urbanization and industrialization in Asia, particularly China and India.

Hamill also notes that copper mining economics are "changing dramatically" because of rising operating costs, higher regulatory hurdles and declining grades, and that should increase prices.

"Over the 10 year forecast period, copper price are likely to rise as capital costs and regulatory risks for large scale mining development projects have become significant hurdles deterring investment into future production."

Read the full report below or download the PDF.

Aluminum Rising Production Cuts Creating Demand

A strong demand outlook for aluminum will offset oversupply and lend support to prices in 2015, according to Caroline Bain, senior commodities economist at Capital Economics.

BNAmericas reported that the aluminum market has been in surplus from 2007 to the present due to large increases in capacity in China and the Middle East. Chinese production grew 6% last year and output is expected to grow by 10% to slightly more than 26Mt compared with demand of 25.8Mt in 2014, according to CRU Group. Major manufacturers UC Rusal and Alcoa have been cutting back their own production to deal with the Chinese oversupply

Rising 1.7 percent to close at INR 111.35 ($1.85) per kilogram, the cash price of primary Indian aluminum experienced the biggest change for Tuesday, June 17. The cash price of primary aluminum weakened by 1.1 percent on the LME, settling at $1,802 per metric ton. On the LME, the aluminum 3-month price declined 1.0 percent to $1,843 per metric ton.

Chinese aluminum prices were mixed for the day. The cash price of Chinese aluminum moved yesterday. After a few changeless days, prices dropped 0.8 percent to CNY 13,260 ($2,129) per metric ton. The price of Chinese aluminum scrap held steady at CNY 12,250 ($1,967) per metric ton. The price of Chinese aluminum billet continues hovering around CNY 13,590 ($2,182) per metric ton for the fifth day in a row. The price of Chinese aluminum bar saw little movement at CNY 14,200 ($2,280) per metric ton.

Lead Price: Bearish Signals Mean No Need to Make Commitments

Lead remains near its lowest levels of the last year. This doesn’t come as a surprise after the bearish signals that lead gave in March and the industrial metals sector, in general, remaining weak.

“Lead prices might keep gaining support during the coming months. However, the uptrend is far from strong, and we still don’t see lead trading above $2,500 per metric ton on the LME. It might make sense to wait until prices show real strength before making long-term commitments.”

Indeed, the technical picture looks more bearish than it looked at the beginning of the year. We recommend lead buyers not to take long-term positions unless prices break above $2,250/ton. Attempting to purchase on the dips when there is no foreseen risk is not a good buying strategy.

By reading the market and understanding when a metal is likely to have upside momentum, buyers can set price targets, manage their risk exposure and reduce costs without depending on subjective opinions that try to guess which direction prices will take.

 What This Means For Metal Buyers

Lead seems incapable of reaching new highs. Buyers might not need to take long-term positions through the rest of the year. We would recommend that buyers not worry about price fluctuations unless prices break above $2,250/t.

What Modi recommended on futures trade in essential items

Heading a panel, the Prime Minister had called for integration of spot and futures markets

 

More than three year ago, Narendra Modi, chairing a working committee to suggest steps for reducing gap between the farmgate and retail prices and recommending an action plan for better implementation and amendment to Essential Commodity Act (ECA) had submitted a report.

This report is insightful, constructive and radical in its approach.

The highlights are: speedy reform of APMC Act across the country and liberalisation of agri-markets; explore unbundling of FCI operation in terms of procurement, storage and distribution functions; to set up a ministerial level coordination mechanism at the national and the regional level for coordinated policy making for evolving single national agriculture market; recommended that offences under Section 10-A under the Essential Commodities Act should be made non-bailable and special courts should be set up for speedy trial of offences under the ECA.

The report had touched on the issue of information asymmetry both on the demand as well as on the supply side.

Data flow

It had pointed that if the collation and capturing of data is supplemented with the flow of information then it would fundamentally change the face of market. If necessary, it could done by creating a dedicated agency for the purpose.

Needless to mention that India’s commodity futures market has brought in a significant change in the last ten years where “reference price” are often used by the trade for purchase as well as production decisions. The report had observed that “until effective integration of futures and spot markets is achieved, we should be cautious about the futures trade in essential commodities.”

The report further said: “Since food security being the utmost concern, for the time being there should be a ban on the trading of essential commodities in the futures market” ( Point 2.7, Page 8).

Futures market

Today, as Modi is the Prime Minister of the country and embarking on a paradigm shift what does one expect? Does this mean that the futures market should keep the essential commodities such as wheat on the watch list for possible trade suspension? The report has, however, said that futures of the other commodities can be permitted. (Page 17, Point e.4)

The report also mentions about the “market failure” and traders making excessive profits. However, no evidence or empirical data has been provided to substantiate the point.

The report talks about the creation of agri-infrastructure and, in its recommendation, has laid emphasis on post harvest linkages. It talks about the Government providing financial assistance for construction of godowns at village levels along with godowns at PACS (Primary Agricultural Co-operatives Societies). While it is appreciated that the recommendation has looked at “small is workable,” it has may have erred in recommendation of PACs in the role which does not have any specialised functional expertise.

This report is a document which gives 20 recommendations with 64 detailed actionable points that will facilitate expeditious implementation.

The report has largely been ignored till now, however, the committee needs to be complimented for taking the bull by its horns and addressing the issue which will have significant impact during the tenure of the current government.