Wednesday, May 30, 2012

And The Currency Wars Heat Up....

I don’t know about you but to me events seem to be accelerating in pace as we hurtle along towards what feels like another crisis point.  These are historic times we are living through as the global monetary system undergoes realignment.  The last time something like this happened World Wars I and II were fought and the global banking system moved its center from London to New York.
Some of the events of the past week have piqued my spidey-sense which is reacting to the sheer number of them in such a short period of time.   And the CME Group (NYSE:CME) stands at the center of it.

The Three Signs

The CME Group was involved in three major announcements this week, individually they mean very little but in conjunction say a lot:
  1. The margin requirements for Gold and Crude Oil contracts were cut by 13% and 10% respectively.
  2. They announced a 5 for 1 stock split and extended grain trading hours.
  3. Both CME and Intercontinental Exchange (NYSE:ICE) were designated as systemic by the U.S. Dept. of the Treasury
By lowering the margin requirements for both gold and oil, this tells me, along with a few other factors that the floor has been put under the price of both commodities.  Lowering margin requirements makes it easier for speculative money to flow into the market.  With volumes and open interest in gold futures at levels not seen since late 2008, enticing more activity on the exchange makes sense. The SPDR Gold ETF (AMEX:GLD) saw inflows this week of $1.1 billion after losing $2.4 billion in redemptions for the first three weeks in May.
By opening up grain trading hours and lowering margins the CME is attempting to increase profitability and transaction volume on the exchange.  Now that they are no longer in the running to purchase the London Metals Exchange, which is down to ICE and the Hong Kong Exchange Company, CME has to react to the very negative past year with MFGlobal and the relentless Silver and Gold manipulation stories emanating from the trading community.
But, the timing of this announced split is odd.  CME’s chart is uninspiring.  The stock has been stuck in a decaying consolidation pattern for the past 3 years.  It looks to be trading near fair value, so why split it unless there was some other motive to entice retail investors to come on board at a lower price in conjunction with the recently announced dividend?

The Iranian Connection

The last portent is the most important, however, for its potential implications given the timing and the rest of the global macro situation.  Last week I went over in detail the devaluations of the currencies of those who have publicly stood by Iran since their expulsion from the SWIFT international bank transfer system.  Recently the Tehran Times reported that Iran had developed an alternative to SWIFT that was now operational; allowing Iranian banks and the Central Bank of Iran to do business with the outside world, bypassing the effects of the SWIFT dis-invitation.
As well, China announced that they would now be accepting Japanese Yen as well as U.S. Dollars in exchange for Yuan. Now the Yen can be used for the settlement of trade with China and not just the U.S. Dollar.  This is very bullish for the CurrencyShares Japanese Yen ETF (AMEX:FXJ) especially considering how quickly the Japanese are moving in their investments around Southeast Asia in countries like Vietnam, Cambodia, Myanmar and Indonesia.  This is also another direct blow to the U.S. petrodollar system.  The Yen was chosen not because of its strong fundamentals but because it is the most liquid of the currencies of Southeast Asia at this point.  I would expect to hear of other such conversions into the Hong Kong and Singapore Dollars in the coming months.
So, when we add those things to the announcement that both major U.S. commodity exchanges have been given an explicit bailout guarantee by the Federal Reserve to go into effect around the same time as sanctions against all friends of Iran go into effect we get a very worrisome thought.

Golden Signals

When you operate under the assumption that there are no coincidences then you have to wonder why this announcement now going into effect when it does?  The CME and ICE have been given these resources because those resources need to be in place.  If there was to be a failure of the COMEX or ICE due to an inability to deliver product to those longs who stand for delivery then the following course of action would take place:
  1. The COMEX would declare force majeure and settle all contracts in Dollars.  Stiffing the longs who stood for delivery.
  2. Those dollars would have to come from the Federal Reserve
Current Open interest in gold is 435,000+ contracts.  June open interest is currently 93,790 or 9.379 million ounces.  The COMEX states they have 11+ million on hand of which 8.5 million is eligible for delivery.  While under normal circumstances the number of contracts that settle physically are very small, in a panic situation that could change rapidly.  And if there was something that caused a run on the COMEX gold reserves, that would necessitate a bailout from the Federal Reserve.  
This is the vaunted commercial signal failure scenario that many gold commentators have been predicting would or could happen as the end-game for the Federal Reserve’s current policy of managing the rising gold price.  And if that were to occur, the CME group would need a bailout from the Federal Reserve.
On Friday, May 25th, 24,887 June contracts were settled and re-applied further out in time, with the lion’s share moving out to August, 17,437 of them. 
The failed talks between the U.S. and Iran over Iran’s nuclear program in which there were no negotiations only a hard line stance from the U.S. who refused to back off on sanctions.  The headlines this weekend were filled with stories of Iran building two reactors; it was front page on the Drudge Report along with a report from Reuters that Iran has enriched nuclear fuel to 27%.
The rhetorical war is heating up again.  Gold and oil have been given the green light for accumulation.  At this point it would not surprise me if there was some form of attack on Iran in the next 30-60 days.  If an attack on Iran or a failure of the Eurozone to work out their problems on the periphery were to occur, the gold and/or oil markets would go ballistic and the exchanges would have to be protected.  The groundwork is being laid for major events and I would recommend protecting yourself accordingly.

No comments: