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Minyan Mailbag



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.


I would point out that not only have interest rate increases been expected for some time now, the expected rate of increase now is substantially lower than it was a few weeks ago. Further, the interest rate on the US 10yr treasury is actually down from where it was a few weeks ago, and the general consensus seems to be that the rate of GDP growth is slowing more than anticipated a few weeks ago as well.

All this makes me wonder whether it is really interest rate expectations that are driving the price of gold, because there seems to be a disconnect here. I don't know what is driving gold right now, but I don't think it is interest rate expectations.


Minyan Jim

Hi Jim,

My point about the interest rate driven currency markets is that the currency is moving in response to the anticipation of faster or slower interest rate rises. This then affects gold. Interestingly, yesterday gold fell by less than the currencies, which was opposite last week's. Interest rate expectations aren't directly affecting gold as you rightly indicate and I hope I wasn't portraying such. It's a dollar thing. My apologies for any confusion. That the currency markets go wild on something that is so well foreshadowed and obvious is the silly part of it all.

Paper gold and technical traders are driving the gold price. Sentiment is also a factor. Read today's piece from Professor Weldon on gold and also yesterday's H&S by monsieur Collins. I don't disagree at all with their analysis. I respect and appreciate technical analysis although I think there are some issues when applying to certain commodity markets. Ya gotta know what's pushing people's buttons at what levels, etc, etc.

Commodity futures contracts have a physical delivery at maturity. A vanilla futures contract (actually the spot cash price is, but let's not confuse the issue any more than I am already about to!) is the basis of any other derivative that can be dreamed up for that commodity. There is a delta to every derivative that must be transacted in the market. The delta then effects the futures market price. Derivatives are cash settled, which funds love. They don't want to be in the physical sugar or heating oil markets and they certainly don't produce or consume the stuff in the quantities they buy and sell. Therefore we have a cash settled market controlling the physical settled market. Everyone knows that buggar-all contracts are gonna be delivered at maturity and they'll be rolled to the next month or quarter or whatever. Fair enough, we all know the game rules.

Therefore, because there is no physical settlement to all derivative contracts, massive futures positions can be built in the underlying commodity that will NEVER be settled.

Technical analysis will fall apart in commodities when the market demands that the "delta player" (usually a bank or trading company) coughs up the physical commodity, NOW, rather than just "roll out" the maturity. I dunno when that will be and that's why I take note of technical people and what they are saying.

The day that futures players in commodities demand delivery on contracts that can NEVER be filled by counterparties is not a "1 in a billion" chance. That was Long Term Capital Management (LTCM). What would the price be of OJ or Cotton if such occurred? Whatever price the seller of the contract has to pay to fulfill his obligation....hhhhmmmm.

Oil over $42.50 and gold has lead shoes.... hmmmm.


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