St. LOUIS () -- As the freight train that is the metals market continues to mow down bears on the tracks, bullish sentiment has grow faster and farther than many seasoned gold bugs predicted - or would like.
With all the new, 'amateur' money hitting the scene, it stands to reason why some analysts are becoming more cautious in the near-term.
Peter Grandich, Editor of the Grandich Letter, sent a Special Alert to subscribers this morning predicting the long-awaited sharp correction to be hours or days away at the most.
Grandich wrote "an overbought/oversold indicator of mine that I've used since before the 1987 stock market crash, has given the most overbought reading ever for both copper and gold."
He suggested "the risk in gold, silver and copper is now equal to, or much higher, than reward in these markets for the near term."
So the questions is, when is okay to start thinking correction without getting squished by the bull train? First we must look at the warning signs.
Earlier this week, NYMEX raised margins for gold and silver futures. According to the respective press releases:
 |
"Margins for the February 2007 to December 2010 gold futures contracts increased to $2,750 from $2,250 for clearing and non-clearing members and to $3,713 from $3,038 for customers."
"Margins for the December 2006 to December 2010 contracts will increase to $5,250 from $4,500 for clearing and non-clearing members and to $7,088 from $6,075 for customers."
Although these changes are not very significant, it might be important to note how often NYMEX has increased margins for gold, silver and copper this year already.
The last time margins for gold and silver were increased was on May 3, after futures trading broke the daily volume record on April 21. Before that, gold, silver and copper were increased on April 20, silver and copper increased on April 18, April 12 and again on April 4, silver alone on March 7, gold and silver on January 27 and silver alone again on January 10.
 |
It might also be interesting to note that NYMEX last week decreased margins for the May 2006 to September 2006 contracts to $5,250 from $6,000 for clearing and non-clearing members and to $7,088 from $8,100 for customers. Could this indicate an anticipated slow down during this period?
Margins, of course, represent the amount of money that can be borrowed to invest in the market. Increases can be interpreted as means to curb the market from the little guys that might be left short if prices fall too rapidly, thus easing volatility by undoing pure speculation.
NYMEX spokesperson Anu Ahluwalia told RI that margins are reviewed every single day and the Compliance Department determines whether they need to be adjusted, looking back as far as 30 days.
She said the decision is "based on volatility," which is calculated by using four different factors.
- Future prices
- Contract size
- Confidence level
- Implied volatility
Ahluwalia could not expand on the last two factors, "confidence level" and "implied volatility," but said these are determined using a complex "mathematical formula."
Ross Norman, Director of TheBullionDesk.com, said by increasing the margin they are effectively reducing the gearing effect that speculators would gain by participating in futures.
"I would presume they are doing so because the markets are highly volatile already and raising the margins are meant to signal to market participants that caution may be required."
 |
However, CPM Group's Jeffrey Christian said that this was a normal adjustment given the rise in metal prices.
"As the prices of commodities go up, the risk of holding the contracts increases," he said. "The prices are higher, the risks are greater."
Christian said that although margin increases do have a bit of a regulatory control, they're simply meant to offset the rising prices.
Still Grandich writes, "A significant sharp correction is lurking out there ... It's highly likely to come out of left field and at its depth, should end up giving cause to question if the bull market is over."
Eventually, all-time highs will be taken out, "but we're now getting severe overbought signals that can't be discarded," concluded Grandich.
In other words, proceed with caution in the near term.
But Dale Doelling, chief market technician of Trends In Commodities, said the fact remains that neither Mr. Grandich nor myself have a crystal ball "that works worth a damn!" He said all we can do is look at the price.
"Where's the price today compared to yesterday, last week, last month or last year?" Doelling rhetorically asked.
Also, the little guys are just now waking up to the metals markets, he continued. Many of them still think that real estate is going to make them rich, he said.
"Believe me, we'll know when it's time to get out of gold, silver, platinum and copper," he said. "Now, in my most humble opinion, is not the time."
Metal Price Activity
Today, gold futures on NYMEX gained $15.80 to close at $721.50. Contracts shot as high as $728, an intraday level that hasn't been seen since September 1980! Gold is up 28% since the start of the year.
July silver touched $15.20 an ounce, the loftiest futures level since early 1981, before finishing the day up 65.5 cents at $14.935. Silver is up 40% from this year's start.
July copper set a record at $4.04 a pound before ending the session up 23.5 cents at $3.923 an ounce. In 2006, copper has gained an impressive 46%.
