Base metals prices rise on anticipation of positive Chinese PMI

Base metal prices rose during kerb trading on the London Metal Exchange on Monday June 30, on the anticipation of an upbeat reading for the official Chinese manufacturing data for June.

Three-month copper closed at $7,015 per tonne, up $70 from its previous close at $6,945 per tonne. The red metal traded at a low of $6,924.50 per tonne, before hitting a high of $7,025 per tonne. "We had a much more positive than expected HSBC PMI last week which has driven up the expectation for the official PMI," an analyst said.

Copper Surges To 4-Month High

Copper has rallied almost 6% in the last few weeks with a 1.25% surge today sending the 'economic' metal back to near 4-month highs. This must means demand is picking up, right? This must mean the world is ok, right? Chatter is that this morning's home sales 'noise' surprise spike was the catalyst but it appears much more likely that a combination of a continued squeeze of a very-extended spec short position and the ongoing unwind of China's commodity-finance-deals is the real catalyst. As the market comes to terms with synthetic demand (CCFD unwinds buying back hedges) dominating any excess supply in the spot market, futures positioning still has more room to go.

Copper is surging today...

Copper short positioning has tumbled since the Qingdao probe was admitted to...

Which makes sense as Goldman suggest below...

Goldman
concludes that "an unwind of Chinese commodity financing deals would
likely result in an increase in availability of physical inventory
(physical selling), and an increase in futures buying (buying back the
hedge) – thereby resulting in a lower physical price than futures price, as well as resulting in a lower overall price curve (or full carry)." In other words, it would send the price of the underlying commodity lower.

Of course, we assume that no less renowned trader than Dennis Gartman has unwound his short copper trade already at a major gain.

*  *  *

The market's shift appear to point to the fact that - just as in the case of the gold - the synthetic market for copper (futures/forwards) is dominant in the pricing structure for the metal (as opposed to goldman's hope that the spot excess supply would dominate). Although they have been right that near-month spot excess supply has crushed the commodity curve...

So once again - this 'market' signalling is anything but a sign that growth is back; merely speculative shorts/hedges being blown out and a fractional ponzi lending scheme unwinding in China.

Charts: Bloomberg

Gold Spikes To 3-Month Highs

It appears the same 'contagion' that is driving copper prices higher is also impacting gold and silver this morning. As we have noted previously, the CCFD unwind drives synthetic short (hedge) covering and inevitably rolls down the curve to drive spot strength (as the paper gold market tail wags the 'physical' market's dog). Gold is at 3 month highs and silver getting close.

One wonders if the following disclosures from Bank of America early this morning had something to do with the move: 

• Strongest weekly buying of Gold in more than two years
• Large specs increased their Gold and Silver longs at the strongest pace in two years 

Charted:

Forward Markets Commission may get search and seizure powers

Government working on revised Forward Contract Regulation Bill

The Government is considering empowering commodity market regulator Forward Market Commission, with search and seizure powers, similar to that of SEBI. This will be part of proposed Forward Contract Regulation Act (FCRA) Amendment Bill.

“The proposal related to power for search and seizure is based on the suggestions given by the FMC. It is expected to be part of the Bill which is being redrafted,” a senior Government official said.

The Bill, once approved by the Cabinet, will be introduced in Parliament. The regulator was asked to work on the new Bill after which it sent its suggestions to the Finance Ministry late last week.

Though the Bill was introduced in the previous Lok Sabha, it lapsed as the UPA Government failed to get it passed. The earlier Bill was tabled by the Consumer Affairs Ministry, but now it will be introduced by the Finance Ministry as FMC and Commodity trading come under it.

The revised draft will be silent on regulating spot exchanges. FMC is empowered to regulate futures trading. However, last year, the Government empowered the FMC to supervise settlement of all outstanding one day forward contracts at the National Spot Exchange Ltd (NSEL) and also authorised it to issue any order or direction in the wake of Rs. 5,600-crore scam. Earlier, there were three spot exchanges, NSEL, N Spot and National Multi Commodity Exchange. But, now only N Spot is functional.

The Bill aims to make provision for investigation, enforcement and penalty in case of contravention of the provisions of the Act. It also aims to give fresh powers to FMC such as levying fees and registration of intermediaries. There is also talk about allowing banks and foreign institutional investors in commodity trading. This will help deepen the market. The Bill also has provision for corporatisation and demutualisation of the existing commodities exchanges and setting up of a separate Clearing Corporation.

Beside, empowerment, enactment of the Bill will facilitate introduction of new trading product such as option. Option is a derivative product, like futures, but with some difference. Option gives right, but not the obligation, to buy or sell a specific commodity at a certain price, while future prescribes obligation for the buyer to buy and for seller to sell at a specific future date.

Gold Duty Cut on Card, Wait till 10th July

The government is likely to reduce the import duty on gold and ease restrictions on the gems and jewelry sector in the budget on July 10.

There are indications that the budget can announce a marginal cut in duties to prevent a sudden surge in imports. Gold duty has been raised to 10 per cent from 4 per cent.

The government is also keeping a close eye on the developments in Iraq. A senior finance ministry official said the rise in global crude oil prices following the unrest in Iraq was unlikely to stall the move to cut duties.

“There have been discussions on Iraq and the spike in crude price. The current account deficit (CAD) will be very much in control this fiscal,” the official said, indicating the assessment of the government on the current geopolitical situation and its impact on the economy.

If the unrest in Iraq escalates, it can push up crude oil prices, resulting in higher diesel and fuel rates.

Besides, the high oil import bill will result in dollar outflows and hurt the rupee’s value and the current account deficit (CAD).

According to some estimates, even if the crude prices move up to $120-$125 (the worst-case scenario), CAD will still be below 3 per cent of GDP (gross domestic product) in 2014-15.

CAD had dropped sharply to 1.7 per cent of GDP, or $32.4 billion, in 2013-14, on the back of plunging gold imports.

Analysts said the below-normal monsoon could also weaken demand as much of the yellow metal is purchased by farmers.

“If crop production is lower because of poor monsoon, it will mean less money for farmers to put towards gold purchases. Already the demand is subdued because of high duties. There are hopes that the government may relax those duties, but if the farmer income falls because of a poor harvest, it is possible gold demand may not get much of a bounce,” analysts said.

“Going forward, we expect some widening of trade deficit on the back of gold demand picking up on expectation of a reduction in import duties. However, the extent of trade gap is unlikely to be worrisome as we expect exports to maintain good performance,” Yes Bank chief economist Shubhada Rao said.

Gems and jewelry

The government is also set to ease the 80:20 scheme for the gems and jewellery sector. Under the scheme, nominated agencies are allowed to import gold on the condition that 20 per cent of the inward shipment will be exported.

Gems and jewellery exports account for about 15 per cent of India’s total outbound shipments and exporters have been urging the government to lift the import curbs.

Vipul Shah, chairman of the Gems and Jewellery Export Promotion Council, said, “The 10 per cent duty makes the operations of smuggling economically viable. Also, it is an appropriate time to scrap the 80:20 scheme as the CAD is under control.”

Hedge funds add record 61% to bullish gold bets

The gold price added $3 to end at $1,320 on Friday, making it the third straight week of gains for the precious metal.

Gold's $50 an ounce surge on June 19 startled what had been a sleepy market forcing the smart money to play catch up.

Data released after the close on Friday showed hedge funds and other large gold investors adding a record amount of ounces to their bullish positions.

According to Commodity Futures Trading Commission data bearish or short positions held by so-called managed money fell by nearly 25,000 contracts in the week to June 24.

Speculators added almost the same number bullish or long positions – bets that the price will go up – translating into a 61% net gain of 47,784 contracts or 4.8 million ounces.

This is probably the biggest weekly increase on record or at least since 2007 when the CFTC changed the way data is collected says Ole Hansen, head of commodity strategy at Saxo Bank.

It is also the the first time during the recent rally the increase was not only driven by short covering

Significantly, it is also the the first time during the recent rally the increase was not only driven by short covering but also the addition of new longs, according to the Danish bank.

On a net basis hedge funds now own net longs of over 120,000 lots or 12.1 million ounces, levels last seen in March when gold hit its 2014 high of $1,380.

Managed money is also moving heavily into silver with net longs increasing almost four-fold by 19,623 contracts to 24,757 almost equaling the February high of 25,090 contracts, CFTC data shows.

Precious metals have outperformed other commodities this year with double digit gains for palladium and gold and a strong performance for platinum and silver.

The positive momentum may now be spilling over to other sectors.

A  new survey by investment bank Credit Suisse of 350 investors, including institutions, hedge funds, large corporations and mutual funds show a change in sentiment to commodities:

"When asked 'What do you expect your level of investment to be over the coming 12 months?', 42% of respondents said 'overweight,'" – up sharply from the 19 percent who expressed such optimism in 2013 according to Credit Suisse.

Commodities futures: A mixed report card