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Gold futures trader's withdrawal spooks market
Small Trader Makes Big Waves
By Carolyn Cui and Gregory Zuckerman
The Wall Street Journal
Friday, January 28, 2011
A huge trade by a tiny hedge fund has sent shudders through the gold market.
Thanks to the nature of futures trading, Daniel Shak's $10 million hedge fund held gold contracts valued at more than $850 million, more than 10% of the main U.S. futures market, and the equivalent of South Africa's annual gold production.
But as gold prices started falling this year, the trade, which was a combination of being long and short gold contracts -- bets that prices will both rise and fall -- started going bad. Monday, he liquidated his position and is returning money to clients.
As a result, the number of gold contracts on CME Group Inc.'s Comex division plunged more than 81,000, to about 500,000, the biggest single reduction ever. While his trade didn't account for all of the contracts, an average daily move is about 3,000 to 5,000 contracts.
That Mr. Shak and his firm, SHK Asset Management, could control one of the largest positions in the gold market underscores how leverage can enable investors to control huge positions in many commodity markets.
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Sona Drills 85.4g Gold/Ton Over 4 Metres at Elizabeth Gold Deposit, Extending the Mineralization of the Southwest Vein on the Property
Company Press Release, October 27, 2010
VANCOUVER, British Columbia -- Sona Resources Corp. reports on five drillling holes in the third round of assay results from the recently completed drill program at its 100 percent-owned Elizabeth Gold Deposit Property in the Lillooet Mining District of southern British Columbia. Highlights from the diamond drilling include:
-- Hole E10-66 intersected 17.4g gold/ton over 1.54 metres.
-- Hole E10-67 intersected 96.4g gold/ton over 2.5 metres, including one assay interval of 383g of gold/ton over 0.5 metres.
-- Hole E10-69 intersected 85.4g gold/ton over 4.03 metres, including one assay interval of 230g gold/ton over 1 metre.
Four drill holes, E10-66 to E10-69, targeted the southwestern end of the Southwest Vein, and three of the holes have expanded the mineralized zone in that direction. The Southwest Vein gold mineralization has now been intersected over a strike length of 325 metres, with the deepest hole drilled less than 200 metres from surface.
"The assay results from the Southwest Zone quartz vein continue to be extremely positive," says John P. Thompson, Sona's president and CEO. "We are expanding the Southwest Vein, and this high-grade gold mineralization remains wide open down dip and along strike to the southwest."
For the company's full press release, please visit:
"Yeah, that was just me liquidating my spread position," Mr. Shak, 51, said in an interview. "I had a significant, fully margined position. The dollar amount of the gold liquidation was very small, it was just a lot of contracts."
Mr. Shak said he quit the trade when he was 70% down. People close to the firm confirmed the loss was about $7 million.
Just over a week ago, he put his apartment on Manhattan's Fifth Avenue up for sale with a price tag of $7.5 million. He said the sale wasn't related to his losses.
While the drop in contracts didn't appear to hurt gold prices, it caused some panic in the market. Brokers said they fielded calls from clients worried that a big trader may be dumping holdings. Monday, gold futures rose slightly to $1,344.50 a troy ounce and settled at $1,318.40 Thursday. The front-month contract is down 7.3% from its record close on Jan. 3.
Gold has been one of the hottest trades of the past few years, attracting big hedge-fund managers such as John Paulson and George Soros. Since the metal shot up 30% last year to records, some investors have become concerned that some large holders could sell, triggering an exodus.
Many are buying gold futures, which trade on the exchange and enable investors to buy the metal at a fixed price before a fixed date, and others are plowing money into exchange-traded funds, which are backed by the physical bullion.
What Mr. Shak took on was a "spread trade," in which he was long and short gold contracts of various maturities.
It isn't an outright bet on gold prices, but rather on the degree of movement among different contracts. The fact that the sale came from a spread trader, rather than a gold holder, could put some investors' minds at ease.
Spread trading often flies under the radar of regulators and exchanges, as it is regarded as involving little risk. Therefore, traders are able to use high leverage to command a big number of contracts with only little capital.
For example, with as little as $135, a trader can control a spread trade, which is nominally valued at more than $260,000 at today's price.
In comparison, traders need to put up $6,751 to invest in one futures contract. Mr. Shak's positions were extended as far as December 2015, according to exchange data.
"He just had too much position on," said a person who is familiar with his trades. "He didn't think he was flying naked the whole way."
A CME spokesman said he couldn't comment on specific trades.
Mr. Shak said the trade had been profitable for him for years, but it stopped working and the exchange kept raising his margin requirements, forcing him to put up more money. Mr. Shak said that when the exchange raised it by 25% Monday, he decided to cut his losses and end the trade.
Some Wall Street banks and gold producers were on the other side of the trade, according to people close to the matter.
"It was David against Goliath," Mr. Shak said, referring to his position in the market in relation to banks and the commodity exchange. "I just decided to get out; down 70% is better than down 100%."
He had worked as a floor trader at Comex for years before he set up his own fund in 2002. The firm suffered losses of about 12% in 2008, before rising 20% in 2009 and 100% last year, Mr. Shak said.
Mr. Shak, who lives in Las Vegas and also owns a home in the Hamptons on New York's Long Island, also is a competitive poker player and says he has won more than $2 million, including a $1 million win at the Aussie Millions in Melbourne, Australia, last year.
Discussing his business before the poker tournament, he told an Australian newspaper that he trades with the biggest gold and metal producers.
"I am one of the very few people willing to sit down and make a market in any spread transaction. It's a niche market, but it's my niche," he said.
Mr. Shak said his decision to close his position wasn't related to the faulty trade, but rather was a "lifestyle decision."
"I just chose to close, I didn't like my positions so I chose to liquidate, I wasn't forced," he said. "I was in the process of closing anyway."
Mr. Shak said he will return to trading in a few weeks, though perhaps not manage money for others.
"This is not career ending," he said. "I'm not stopping trading."
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Prophecy Resource Spins Off Platinum/Palladium Venture:
World-Class PGM Deposit in Yukon
Company Press Release, January 18, 2011
VANCOUVER, British Columbia -- Prophecy Resource Corp. (TSX-V:PCY)and Pacific Coast Nickel Corp. announce that they have agreed that PCNC will acquire Prophecy's Nickel PGM projects by issuing common shares to Prophecy.
PCNC will acquire the Wellgreen PGM Ni-Cu and Lynn Lake nickel projects in the Yukon Territory and Manitoba respectively by issuing up to 550 million common shares of PCNC to Prophecy. PCNC has 55.7 million shares outstanding.
Following the transaction:
-- Prophecy will own approximately 90 percent of PCNC.
-- PCNC will consolidate its share capital on a 10 old for one new basis.
-- Prophecy will change its name to Prophecy Coal Corp. and PCNC will be renamed Prophecy Platinum Corp.
-- Prophecy intends to distribute half of its PCNC shares to shareholders pro-rata in accordance with their holdings.
Based on the closing price of the common shares of PCNC on January 17, $0.195 per share, the gross value of the transaction is $107,250,000.
For the complete announcement, please visit: