Gold, silver markets seen as much harder target for CFTC


By Frank Tang
Thursday, January 14, 2010

NEW YORK -- U.S. futures regulators set their sights on precious metals markets on Thursday after unveiling plans to limit positions in energy contracts, but gold and silver trading will be harder to control.

Commodity Futures Trading Commission Chairman Gary Gensler said the CFTC will discuss possible position limits on gold and silver contracts at a March meeting. The CFTC, the top U.S. futures market regulator, on Thursday unveiled proposals to limit trading of energy contracts.

But unlike U.S. crude oil and gas futures -- which are in effect benchmarks for global prices -- COMEX precious metals contracts are a small part of gold and silver trade. The CFTC is powerless to control the large physical market overseas that dominates overall trade.

Traders expressed surprise at the CFTC's move to look at gold and silver trading given the relative lack of public outcry compared to energy markets. Still, most agreed precious metals markets had little to fret about.

"Precious metals are huge international markets because there are a lot more trading outside of the U.S., particularly in the physical market," said Bill O'Neill, partner of New Jersey-based LOGIC Advisors. "I really don't think it will have that much of an impact."

Trading volume of the U.S. futures market was relatively small compared to volume of over-the-counter physical bullion in Europe and Asia, analysts said.

However, COMEX futures turnover recently surpassed the volume of the London bullion market. In November, COMEX daily volume averaged 21.7 million ounces, slightly above the 21.5 million ounces cleared by London OTC bullion dealers.

The impact, if any, would simply be to erode COMEX's role in a market already facing increased competition from Chinese and Indian exchanges, plus easy-to-access exchange traded funds (ETFs) that buy and store physical bullion or silver to reflect investment into the listed security.

"These moves may ultimately lessen participation (in futures), lower liquidity, and could push particularly more metals volume out of the U.S.," he said.

Far from fearing a cap on holdings that could force speculators to sell out of positions, gold traders bid prices slightly higher on Thursday, a move some analysts blamed on a knee-jerk response to buy and store more of the physical asset.

U.S. February futures ended up $6.20 at $1,143 an ounce on Thursday.

"The initial impact would be for investors to add to positions because they would be concerned that they might not be able to add positions later on," said George Gero, vice president at RBC Capital Markets Global Futures in New York.

But Gero said the long-term price effect would be minimal.

"The metals are internationally priced and they are highly liquid, and certainly the supply of metals is very large," Gero said.

Martin Murenbeeld, chief economist at DundeeWealth in Vancouver, said public scrutiny of gold and silver trading was minor compared to oil and energy markets, which can have an oversized impact on the global economy.

"My guess is that the CFTC is reviewing every commodity that is traded, much like screening on the airplane. It wants to be politically correct," said Murenbeeld, who is also an adjunct professor at the University of Victoria.

Murenbeeld said wealthy investors who want to circumvent gold and silver position limits could use other products like the exchange-traded funds, which back each security issued with physical stocks of a given commodity.

"Position limits will not be meaningful because you won't have the limits in London, Zurich, Singapore, and other major physical gold markets," Gero said.

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