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The Bullion Report For November 9, 2011: Confidence & Precious Metals

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Nov 10, 2011 2:44 am

The collapse of MF Global this past week warrants attention. That such a large firm goes under (one that had been a significant component in the commodity industry) is hard to overlook. As the story unfolds, there are many questions and concerns that will come into the limelight. The fallout from this has the potential to lead to increased scrutiny as well as regulatory encroachment. Any confidence crisis in the brokerage industry, or in the realm of investment, will inevitably play into the markets and play out in volumes and prices. Gold and silver will not be immune to these fears.

[i]Past performance is not indicative of future results.

***chart courtesy of Gecko Software[/i][/center]

As the previous week came to a close, few eyes were focused on problems at MF Global. Instead most investors’ attention was again being directed at developments in Greece, preparing for another round of negotiation roulette. The markets were waiting to see what fresh consequences might result from the latest round of dialogues in Europe and preparing for what news might come from the FOMC meeting as well as Bernanke’s testimony scheduled for mid-week.  That changed when news about client funds and bulk transfers captured the headlines.

To begin the week, prices of the metals initially moved lower. That move down may have originally been rooted in a stronger dollar, with the macro economy staggering at the weight of the debt from many European nations. When MF Global filed for bankruptcy on Monday things got uglier. Prices plummeted and customers of MF Global became trapped.

It appears that MF Global made subsequent transfers of customer segregated funds in a manner that may have been designed to avoid detection insofar as MF Global did not disclose or report such transfers to the CFTC or CME until early morning on Monday, October 31, 2011. This was met with the harshest response, and all trading for MF Global was shut down, affecting all of its customers. MF Global filed for bankruptcy.

This led to the markets losing liquidity as floor traders, IBs, CTAs and fund accounts that regularly cleared business through MF Global could not transact. A scramble to move accounts, money and positions ensued. These efforts were thwarted when the exchanges announced that they would not allow anything other than liquidating trades. How could that be known? As a result a lot of firms chosen to execute trades were given instructions by management to cease.

There were estimates that up to 50,000 former customers of MF Global were being moved. On Saturday it was announced action was being taken to mute the impact of the transfer of accounts to other clearing members. That kind action may serve to ease the pain and allow for a more orderly shifting of accounts to other firms, and is a proper use of exchange authority. What will be the effect on the industry?

Wherever confusion and rumor are allowed to take root, confidence in the financial system gets questioned, and with it the potential for investor fear to grow. 

So what does all this have to do with precious metals?

It shakes investor confidence when the firm with whom you entrust your portfolio to administer your investments is possibly focused on their own interests above those of customers. It sets a tone and raises questions about the stability of the financial system. When you combine that with Europe’s never ending ominous debt problems, which extend well beyond Greece’s debt, you have a situation that makes an average investor wonder about safety of assets.

The entire European banking and corporate system is over-burdened with debt. They are backed by the financial institutions that stand behind them and are only as good as those firms can reliably verify. If questions arise as to the financial wherewithal of those institutions’ ability to stand behind proper reconciliation of transactions by those whose job it is to insure those transactions, then confidence becomes an issue. Precious metals are often the stop gap when confidence in traditional avenues falters.

With the mystery of the missing funds rolled into concerns over the handling of transfers, it only serves to fuel volatility and investor unease. It will be interesting to see how all of this unfolds as the real paper trail that leads to proving the facts of this tragedy. Confidence in the system is coming into question, and that in turn frightens investors.


Adding to a growing lack of confidence in the system there is also news that Freddie Mac just reported another huge loss and that means they will be seeking another bailout. Markets already are trying to digest the trouble in Greece, and now Italy is causing concern. There seems to be no end to this on going bailout in Europe. There are even reports that Germany may have been asked to pony up gold to back the loan guarantees. Printing money to loan someone is one thing, backing that loan with your own gold reserves is quite another. After all, isn’t it the financial integrity of the system that prompts ownership of gold? At this stage it seems unlikely that the stronger European economies will back off their precious metals holdings, and even if they do, that will likely only fuel price movements higher in gold and silver as it would send a message that things are really going to pot.

[b][i][u]Disclaimer:[/u][/i][/b] The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.