How CME Futures Impact Precious Metals

by Walter Pehowich

Today I would like to share with you the other side of the Precious Metals market: the CME Future’s market and the Wall Street Gold Trader. On Friday we talked about who the retail investor is and their role in the marketplace. Now I will explain why you see a total disconnect from the price of gold and silver to the physical demand for metal.

Who is the Wall Street Gold Trader? A person who works for a bank, brokerage house, or hedge fund and most likely trades a proprietary book for his or her firm. They use technical levels, like 200- or 50-day moving average trading levels for gold and silver and have the latest electronic trading platform with the fastest news services available. He/she trades CME futures or options and also has a program that runs an algorithm book to complement their other tools and looks for momentum in the market and their trading activity creates volatility and increased open interest in the futures contracts.

Friday when the job number report came out we witnessed exactly what programming trading can do to the price of gold and silver. Let me explain. At 8:30, when the number was released, gold immediately took a bid and started to rally. The price of gold jumped 25 dollars in 15 minutes. The speed of this quick rally to the upside was initiated by some key news items. Algorithm applications look for specific wording that hits the tape and immediately executes a buy or sell order electronically. In the old days on the Comex floor, there was an open outcry pit. Brokers trading for themselves and for clients (i.e., banks, brokerage houses and hedge funds) quoted market prices back to the proprietary desks for orders to be executed. Market movement took time to react to the news. Today it’s a completely new ballgame. It is my opinion, it would be very difficult to move the price of gold that fast with open outcry. Well it’s different times now. With the speed of the electronic platforms, much larger orders can be executed with ease, where open outcry would take a lot longer.

So while trading futures or spot with an electronic platform you might feel that you have been reading the paper or getting a cup of coffee waiting for the train to arrive and next thing you know it’s at the next station up the line. And your response is how did I miss that?

This is why today there is a total disconnect between the price of gold and silver and the crazy interest in the physical market. The Wall Street trader is not too interested in the physical side of the market. He or she just wants to take advantage of news that could create instant market movement with hopes he or she can beat everyone to the punch. And the Wall Street trader will once again hope for the next opportunity to come by looking to gain an edge in the market place and taking a proprietary risk to generate quick profits in an instant with the electronic platforms and algorithms to help him along.

While the retail investor looking at stock market volatility, currency devaluations, government debt, congress out to lunch, causing them to reposition part of their portfolio is into hard assets like precious metals.

In the end, we still see long delays for delivery for all types of physical metal, but everyone is starting to catch up, and we all wait for the next bit of news that will generate interest in the precious metal markets again.

Have a wonderful Monday.

Walter Pehowich is the executive vice president of precious metals investment services for Dillon Gage with over 38 years of experience in precious metals investment services. His career began in 1977 at Bache (which evolved to Prudential-Bache Securities and then Jefferies Investment Bank). While at Jefferies, he served as senior vice president with oversight of investment grade precious metal products. Pehowich holds a National Futures Association (NFA) Series 3 license, authorizing him to advise and sell alternative investments in commodities and futures markets.