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Position Limits in Gold Futures

Was US regulator the CFTC right this week to discuss position limits in Gold Futures and options...?

this week, US regulator the Commodity Futures Trading Commission (CFTC) held a daylong hearing to discuss the possibility of enacting position limits in the gold, silver and copper markets, writes Lara Crigger at Hard Assets Investor.

That might sound a little strange, considering the general lack of evidence or even public outcry on the matter. Apart from Gold Futures manipulation theorists, such as the Gold Anti-Trust Action Committee (GATA) – which was represented by founder Bill Murphy at this week's meeting – few have even publicly raised the question of curbs on speculation in the metals markets.

That hasn't deterred the CFTC or Commissioner Bart Chilton, however. He recently called out a need for "professional-grade regulatory tools" in the base metals and Gold Futures markets. But CFTC-managed position limits would be a very bad idea, says precious metals expert Jeffrey Christian. Managing director and founder of the CPM Group, and a well-known authority on gold, silver and base metals, Christian has worked with the United Nations, World Bank, International Monetary Fund, as well as dozens of miners, industrial companies, investment banks and investors.

Here Jeffrey Christian speaks to Hard Assets Investor about position limits, bona fide hedgers, and why gold manipulation theorists shouldn't be so quick to call for more regulation...
HAI: Even though Bart Chilton was quoted as saying we need "professional-grade regulatory tools" in the metals markets, there really hasn't been much of an outcry in favor of position limits in the metals markets. What are your thoughts?

Jeffrey Christian: Well, the exchanges impose and manage them already; there are position limits in the metals markets now that the exchanges run. And the exchanges' position limits, generally speaking, tend to be more stringent than the ones that the CFTC might impose, were it to try and take the reins.

I think the idea of the CFTC as a federal regulator removed from the market, living in Washington and managing position limits is a bad idea. I think the idea of position limits on noncommercial positions is a good idea, but it is a good idea that is best effected by the exchanges, which are, by definition, closer to the market.

But I'm hesitant to predict the probability of the outcome of something that depends on the attitudes of politicians and political appointees in Washington. I hope we never see CFTC-managed position limits either in energy or metals, because I think it's a bad idea. I don't know what the probability is. I know that government regulators regularly crush my hopes.

HAI: Do you think the Nymex and the Comex do a good enough job regulating the metals markets already, then?

Jeffrey Christian: You can always look at it in hindsight and say no, it could be better done. And frankly, I've seen a couple slip-ups in the 30 years I've been involved in the metals markets. But I think they do a fairly decent job. They could probably do better, but the CFTC could probably do a better job of working with the exchanges on these issues.

HAI: Would adding position limits in the metals markets reduce the liquidity available, and hurt the ability of producers using these futures to hedge their risk?

Jeffrey Christian: I think there's a risk there, but it would depend on how the CFTC executes the position limits. If they were to put position limits on commercials – and the CFTC seems to have a skewed idea of what a "commercial" entity is trading in the market – then what you have is that you start skewing the futures price relative to the physical price. All of a sudden, you have asymmetrical markets. People will say that the Nymex and the Comex no longer reflect the price, and they start migrating to unregulated or under-regulated and less transparent markets.

So you have a couple of issues. First, you have "regulatory arbitrage," where people bail out of the markets because there's regulation they don't like. And the second thing is, if the regulations skew the liquidity in the futures market, you have people saying, "The futures price no longer reflects the underlying commodity market, so I'm not going to use it to hedge my positions anymore."
HAI: A lot of gold and silver manipulation theorists – the ones who believe precious metals markets are being manipulated by large banks – are calling for position limits in these markets, and they're testifying at this hearing.

Jeffrey Christian: Well, the discussion is that bona fide hedgers would not have position limits against their bona fide hedges. And that's good. But what GATA doesn't seem to realize – and even some of the people on the CFTC can get confused – is that the major banks are bona fide hedgers, too.

Most producers and consumers don't trade futures. They trade over the counter forward and dealer options with a bank, and the bank turns around and hedges its forward market position with the futures. So if you're going to allow bona fide hedgers to hedge their positions on an unlimited basis, the position limits that would be imposed would do absolutely nothing to reduce the concentration of the major banks in the market. In fact, it would actually take other people – noncommercial speculative types – and prohibit them from having too large a position.

So if anything, the position limits that are being discussed – if they're applied intelligently – would actually have the potential to increase the concentration of trades by the major banks, which is exactly what GATA wouldn't want. So insofar as they say they want position limits, they're basically saying they don't understand the nature of the market. Only speculators, trading opposite of the bona fide hedgers, would be limited.

HAI: All right, a nonposition-limit-related question for you: What precious metals do you see performing the best over the next 12-24 months, and which do you see not doing so well?

Jeffrey Christian: I think all the precious metals will do well, at least by my modest standards. I'm most bullish on the minor gems like rhodium, rhenium and iridium. I'm slightly less bullish on palladium. I'm slightly less bullish than that on platinum, and I'm slightly less bullish than that on silver. Still, I think all of those metals stand to see rising prices over the next 12-24 months.

HAI: Why do you think the minor precious metals like rhodium are going to do so much better than the others?

Jeffrey Christian: I think all the platinum group metals – and silver, for that matter – are relatively tight on a fundamental basis. I think fabrication demand will stay strong for all the platinum group metals and silver, but when I look at the individual markets, I think the fabrication demand for palladium may be stronger than the fabrication demand for platinum. The same is true for rhodium.

Also, for rhodium, rhenium and iridium, not only do you have healthy fabrication demand, but you have some supply constraints. They're much tighter, much less liquid markets, because they're not exchange-traded, and they're not commonly seen as investments. They tend to respond to tighter supply more dramatically.

HAI: So what about gold?

Jeffrey Christian: Gold may actually be reaching a cyclical peak right now, and it may have reached its cyclical peak back in December, when it touched $1227 per ounce. I think it has the potential to go a little higher over the next month or two. But if the economy continues to improve, gold actually may reach a cyclical peak in the first part of this year, and then it may trade sideways.

I don't see it falling sharply, though, because there are a lot of long-term investors who will take any decrease in the price of gold as an opportunity to add to their positions. So I don't think the Gold Price is necessarily falling. But it may not rise as rapidly as the white metals.
Why trade Gold Futures when you can Buy Gold and Silver outright, dealing at live prices 24/7 with direct access to the trading spread...? Learn more at BullionVault now... is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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