The Crude Oil Futures Crash Is a Warning to Gold Speculators / Commodities / Gold & Silver 2020
The metals complex showed relative stability this week asthe oil market suffered a historic meltdown. West Texas Intermediate Crudecrashed 70% at one point this week on the continuous contract, bringing pricesbriefly below $7 per barrel. By Thursday, prices were trading between $14 and$18 per barrel.
The volatility on the May futures contract was even moreextreme. On Monday, May futures for crude oil crashed to one dollar, then tozero, then to a few pennies below zero, then to an unbelievable negative $37per barrel.
With the world literally running out of places to storeoil, oil contracts for immediate physical offtake represented a liabilityrather than an asset. Nobody wanted to take delivery of oil.
That left speculators, hedge funds, and exchange-tradedfunds that hold oil futures as financial instruments only needing to unloadtheir contracts at any price. They ultimately would rather pay buyers to takeunwanted barrels of oil than assume the obligation and hassle of owning them.
Some traders cried foul over the apparent forced sellingand filed complaints with the CME Group, which runs the world’s largestcommodity exchange, and the U.S. Commodity Futures Trading Commission. Billionaireoil executive Harold Hamm of Continental Resources wrote a letter to the CFTCcalling for the agency to investigate possible market manipulation.
CME Group Chairman Terry Duffy responded on CNBC byinsisting the futures market was functioning just fine and had not mispricedoil contracts when they began trading below zero.
CNBC Anchor: There was one that commenthe put in his letter to the CFTC. He asked them to investigate whether therehad been market manipulation or failed systems or computer programs that playeda part in our going negative. If they carried out that investigation, can youanswer what they'd find for us now?
Terry Duffy: You know, the CME, we area neutral facilitator of risk management, and we're happy if people want tolook into the markets. Futures contracts have been around for hundreds of yearsand I will tell you since day one, everybody knows that it's unlimited lossesin futures. So, nobody should be under the perception that it can't go belowzero.
Regardless of whether the market was manipulated, thedeeply negative futures price was disconnected from physical reality.
Nobody could call up an oil producer and expect to beable to buy barrels of oil for less than nothing because of a negativelytrading futures contract. No oil company announced to investors that its oilassets had suddenly become liabilities because of a negative futures quote. Infact, energy stocks traded higher this week.
Although many oil producers are losing money at the moment, it’s not because they are literally selling oil at a negativeprice. It’s because their production and storage costs are exceeding thereal-world prices they can fetch for their product.
And that real-world price is now in the teens per barrel.The absurd negative $37 figure on a particular futures contract was never seenas a credible gauge of the global value of physical oil.
The credibility of the gold and silver futures markets is also being called into question. Earlier this month the spread between COMEXgold futures and the London so-called spot price grew to a record high of morethan $80.
Something strange is going on. The COMEX and Londonmarkets curiously changed their rules to allow 400-ounce gold bars located inLondon to be substituted for delivery of 100-ounce bars in satisfaction of U.S.contracts, actions which have drawn the attention of Congressman Alex Mooney ofWest Virginia.
Rep. Mooney is now demanding the CFTC explain why U.S.markets are permitted to carry so little deliverable physical gold and silverto back the exchanges. If there are widespread defaults, it could throw theentire financial system into chaos, Mooney warned.
At the same time, an enormous divergence between spotprices and the prices on bullion coin, bars, and rounds have developed.
So what is the real price of gold? Whatis the real price of silver?
The answer is that it depends on the form in which it istraded. Paper contract settlements carry one price. Bullion bars carry another.And American Eagles carry yet another.
For example, while the silver spot price closed at $15.36on Thursday, Silver Eagles were selling for $27 or more at Money Metals’higher-priced competitors.
Certainly a few of these dealers are getting greedy orstruggling with insufficient capital, but the elevated premiums in general DOreflect extraordinarily strong retail demand on the one hand – and on theother, higher sourcing costs and U.S. Mint closures that threaten to crimpsupply.
Coin values cannot be manipulated arbitrarily on afutures exchange. No physical bullion product will suddenly acquire a negativeprice because a handful of traders desperately need to unload contracts at aparticular time and can’t find buyers.
As long as you aren’t using leverage, your downside riskin bullion is limited. That’s certainly not the case if you choose to play goldand silver futures. There, as you heard the head of the CME/COMEX admit, youcould potentially lose more than 100% of the capital you deploy.
The upshot for holders of physical is that in the eventthe highly leveraged precious metals futures markets lose credibility, andespecially if they melt down and default on obligations to deliver, a squeezeon available inventories of physical metal could push bullion pricesexplosively higher – regardless of what the paper quotes for gold and silverhappen to be.
By Mike Gleason
Mike Gleason is President of Money Metals Exchange, the national precious metals company named 2015 "Dealer of the Year" in the United States by an independent global ratings group. A graduate of the University of Florida, Gleason is a seasoned business leader, investor, political strategist, and grassroots activist. Gleason has frequently appeared on national television networks such as CNN, FoxNews, and CNBC, and his writings have appeared in hundreds of publications such as the Wall Street Journal, Detroit News, Washington Times, and National Review.
© 2020 Mike Gleason - All Rights Reserved
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