Daily Market Reports | Nov 10 2010
By Greg Peel
The Dow fell 60 points or 0.5% while the S&P dropped 0.8% to 1213 and the Nasdaq lost 0.7%.
It is important to appreciate that the volume of metals traded as paper each day, via the Comex and other futures exchange markets across the globe, exponentially exceeds the amount of physical metal traded. Typically, some 97% of all futures contracts are closed out or rolled over before expiry, leaving only about 3% which result in actual physical delivery. It is also important to note that metals futures markets close at 2pm New York time (as does final trade in London base metals).
While exchange-traded funds, which are supposed to be backed by actual metal, have become extremely popular in recent years, futures contracts are still the instrument of choice for the experienced speculator. To trade futures, one need only put down an initial deposit, and then face a margin requirement each day if price moves are adverse. Futures can thus be used to promote leveraged positions.
Before 2pm NY last night, spot gold had gained around another US$16 to US$1424/oz and spot silver another US$1.70 to US$29.40/oz as momentum in precious metals demand rolled on. But after the Comex bell, the exchange informed members that as at the close of trade tonight increases in deposits and margins on silver contracts would come into place. The deposit on speculative positions would rise from US$6750 to US$8775 and the daily margin from US$5000 to US$6500. Margins on hedge positions were also raised.
Exchanges increase margins every now and again when anxiety rises over futures open interest vis a vis underlying metal inventories and the subsequent danger of default if delivery requests were to surge. Obviously precious metal speculation has hit euphoric highs recently. Hence the margin changes.
On the announcement, spot silver began to plummet and at 8am Sydney time was down over US$2.80 to be down US$1.18 in 24 hours to US$26.54/oz. Gold took silver's lead and fell near US$35 to be down US$18.60 in 24 hours to US$1389.60/oz. With speculation, and indeed hedging, via futures markets about to become a lot more expensive, spot markets will suffer the impact accordingly.
When the precious metals were hitting their highs so too were base metals in London. Copper was up 1.6% in a session which saw gains of 1.5% to 4% across the spectrum. But base metals do not trade around the clock and so there was no sympathy flow-through from the precious metal announcement. It is not beyond the realms, nevertheless, that copper futures could also be hit with similar margin increases.
Strength in London base metals was put down to Chinese buying ahead of this week's data releases and the resultant speculation that chimes in afterward. Precious metal momentum was driven by more worry over Europe. The euro and pound both fell last night to send the US dollar index up another 0.9% to 77.72.
The Aussie fell a cent to US$1.0025.
US stocks had struggled all session as profit-taking continued post QE2. Financial stocks, which had been driven up most ahead of the Fed announcement, led the falls. Late in the session, metal stocks began to respond to movements in the spot metal markets. Hence the weak close on Wall Street.
Last night's Treasury auction of US$24bn of ten-year notes was very well received and the 2.63% settlement was lower than expected. Foreign central banks bought 57% compared to the 43% running average – the highest ratio since 2003. However the ten-year yield finished 10 basis points higher on the night at 2.67% as the bond market worried about tonight's auction of US$16bn of thirty years. With the Fed not intending to buy the longest bond, traders fear demand may be very weak.
The SPI Overnight fell 12 points or 0.3%.
Today sees the release of Australian housing finance data and the Chinese trade balance.
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