Brad Zigler

Oil Market Dithers as Funds Buy

Jack -

The index represents the cumulative net long position (futures and options by delta) held by money managers reporting to the CFTC. The index is normalized at 100 as of June 13, 2006.


On Nov 12 11:22 AM Jack Walker wrote:

> Brad,
>
> Can you provide some more details of the Money Managers Index? <br/>
>
> What's included?
>
> Thanks,
>
> Jack

Incurious Gold Manipulation Theorists

Mr. Zigler fails to mention the supposition of banks holding "naked short positions" because that "fact" hasn't been established by any evidence produced by those advocating the existence of a manipulative bankers' cabal.

Investment banks (and now, with regulatory changeovers, commercial banks) in the US are the primary dealers of precious metals swaps and other OTC derivatives.

People look at the futures positions held by these banks and thinki that these represent the totality of the institutions' exposure.

But it ain't so.

The CFTC reports only the futures positions held by the banks. What you DON'T see in the reports are the cash and OTC derivatives positions that these futures offset. Those would be LONG exposures undertaken against customers.

Banks, as commercial entities, use futures to hedge residual exposures in other markets.

Money managers, on the other hand, hold only speculative positions. You see their entire exposure to precious metals in the CFTC reports.

On Nov 04 12:24 AM sweetspot wrote:

> "Money managers have adopted a historically lopsided stance in gold
> futures. Long positions held by these funds are 111 times the size
> of their short positions. Put another way, 99% of the futures positions
> held by funds are purchases."
>
> Of course there are a lot of long positions on gold now ... we're
> in a bull market for gold! And these long positions are held by many
> different money managers. What Mr. Zigler fails to mention is that
> a couple of US banks have held 25-30% naked short positions on the
> entire world's supply of silver and gold year after year! This is
> not only manipulative ... it is criminal.

Time (Again) for Crack Trades

The utilization rate for the week preceding September 19, 2008 was 66.7%.


On Oct 27 08:26 PM User 330464 wrote:

> The utilization rate in September 2008 was 74.6 percent...
>
>
> "For example, in September 2008, after the summer driving season
> ended, utilization dropped below 67 percent as refining margins thinned."

Gold: A Bubble Brewing?

In actuality, the largest net short position in the gold market is held by commercials -- producers and users of the metals. Currently, their net short position is 70% above its three-year mean.

Swap-dealing banks' net short position is roughly HALF the size of the commercial accounts.

As the article points out, money managers are the pace setters in the gold market. Collectively, CTAs and other fund runners make up the largest single trading block in the gold futures market now. Their positions, in fact, are more highly concentrated than the commercials or the swap dealers.

About 70% of the exposure held by commercial gold traders is short; for swap dealers, shorts account for 83% of futures exposure.

Money managers tip much more heavily to the long side; fully 99% of their exposure is long.


On Oct 27 07:58 AM Donald Ingram wrote:

> The record short positions held by the relatively few players of
> the bullion banks is key, in their effort to cap the price of gold
> and keep the price from breaking out. They are having a difficult
> time of it because of the Chinese position of buying any dips.<br/>Think
> of size - the US has 9 cities with a population of 1 million or more,
> China has 160 cities of this size! With the average Chinese citizen
> encouraged by their government to buy and hold gold, this has essentially
> put a solid floor under gold at these current prices. The bullion
> banks will fail in their attempts to keep the price low. When this
> happens, and it will, just a matter of time, the price of gold will
> make it's major move higher.

Gold: A Bubble Brewing?

SW Richmond --

What should, in your opinion, be gleaned from the open interest figures?

There are historically "active" delivery months in the gold futures markets -- February, April, June, October and December -- in which volume and open interest concentrate.

To discourage weak hands, the clearinghouse gooses spot month (currently October) margin requirements significantly higher than those of back-month deliveries, which drives out speculators and leaves the front month mostly to commercials.

Serial expirations (such as November) are only added when regular cycle deliveries go off the board. Open interest and volume in these months, therefore, never has the opportunity to build to the extent of regular cycle deliveries

December is traditionally the most active delivery for gold, so an experienced gold futures wouldn't be surprised to see open interest and volume in that month comparatively high.

On Oct 27 08:04 AM SW Richmond wrote:

> December deliveries could prove problematic if there is no 'correction',
> so the likelihood of a correction is IMO high. Look at Dec '09 OI
> figures:
>
> www.nymex.com/gol_fut_...

Gold: A Bubble Brewing?

SW Richmond --

What should, in your opinion, be gleaned from the open interest figures?

There are historically "active" delivery months in the gold futures markets -- February, April, June, October and December -- in which volume and open interest concentrate.

To discourage weak hands, the clearinghouse gooses spot month (currently October) margin requirements significantly higher than those of back-month deliveries, which drives out speculators and leaves the front month mostly to commercials.

Serial expirations (such as November) are only added when regular cycle deliveries go off the board. Open interest and volume in these months, therefore, never has the opportunity to build to the extent of regular cycle deiveries.

December is traditionally the most active delivery for gold, so an experienced gold futures wouldn't be surprised to see open interest and volume in that month comparatively high.

On Oct 27 08:04 AM SW Richmond wrote:

> December deliveries could prove problematic if there is no 'correction',
> so the likelihood of a correction is IMO high. Look at Dec '09 OI
> figures:
>
> www.nymex.com/gol_fut_...

Clues from the Options Market

Yes; "variance" in this context was used generically and was not meant to allude to the statistical metric.


On Oct 16 03:47 PM specguy wrote:

> Brad,
> Thanks for your clear explanation on Vega and its importance to option
> pricing and strategy. In your piece you state:
>
> " Vega is a measure of volatility, representing the dollar-per-shift
> in an option's value, as expected for each 1 percent change in the
> underlying asset's variance."
>
> Did you mean 'std. deviation' (the square root of variance) instead
> of "variance" in the above statement? I say this as you use the term
> "std. dev." 3 paragraphs below the above-cited quote as the parameter
> that a market maker would look to for valuing the option under consideration.
> You also use "variance" in other places in your article where I wonder
> if another word might be more precise.
>
> Thanks again for presenting the concept so well.

Clues from the Options Market

Jimmy -

Beta can be computed against ANY benchmark. Most typically, the bogey in money management circles is the S&P 500 (SPX), but that's not necessarily the best yardstick to measure performance for ALLinvestments.

The same caveat applies to correlation. It's one thing to say that a large-cap, blue-chip fund correlates well to the SPX. The degree of fit between SPX and a small-cap portfolio expressed by correlation, however, bespeaks more of differences than similarities.


On Oct 16 10:09 AM SeekingTruth wrote:

> Brad, thanks for the added detail on Beta. Is this the same standard
> Beta used for stocks,etc , or is it a special Beta used for options?
>
> I am well familiar with "standard" Beta for stocks and that it includes
> both randomness and standard deviation although I don't remember
> the exact formula.
> Stocks have an improved metric called Correlation Coefficient which
> takes out much of the randomness and provides a truer "in - phase"
> component for comparing two fluctuating entities.
> This is what my distant memory serves up (shaky) but any expansion
> or clarifications (a refresher) by you in your future articles will
> be greatly appreciated.
> This kind of info by/from you is much more valuable than it appears
> on the surface , and I am encouraged and pleased by this line of
> investigation and discussion.
> Please continue it! Thanks again.

Clues from the Options Market

Jimmy -

Beta is actually the QUOTIENT of two values: variance and covariance and represents a RELATIVE volatility (versus a market benchmark or index); implied volatility is an independent variable.


On Oct 15 04:22 PM jimmy46 wrote:

> Interesting and well written,
> now what stocks have you screened and found changing volatility?
>
>
> I know beta is the product of 2 numbers, so it's a bit flaky,
> but to what extent is there a relationship between beta and
> implied volatility?

Oil: Three Month Roll Breaks the Buck

Better check what you "know" ...

See the history of HAI articles trailing back to mid July when gold was, in fact, BELOW $950 encapsulated in "Gold's Breakout Revisited ( www.hardassetsinvestor...).


On Oct 07 10:29 PM Albertarocks wrote:

> "Yeah, I know. Gold made a record-breaking move Tuesday morning.
> But you saw that coming, right? Not exactly a surprise, that."<br/>
>
> Easy to say after the fact, isn't it! One thing we know for sure,
> you wouldn't be puffin' your chest out like that when gold was rising
> toward $950.

The Three C's of Commodity ETF Returns

Contango is NOT linear, but varies, especially with the petroleum complex, on supply. Contango, in its strictest sense, is actually the spread between deliveries in EXCESS of full carry. There was, earlier this year, an active carry trade in crude oil reflecting the depressed price of spot oil. As inventory was worked off, contango shrank. There's now no carry trade obtainable, though there's still a back month premium.


On Sep 29 12:56 PM searcher wrote:

> "Contango reflects the carrying charges, or the costs of financing,
> insuring and storing a cargo until the delivery date specified by
> a futures contract." True enough, but these factors would obtain
> for any commodity and would be reasonably linear as a function of
> the forward terms. Expectations for future demand and of current
> liquidity are more at play for some commodities than others. These
> factors are not linear.

Why Pros Spread Oil and Gas

Historic figures arise from spot prices. To avoid the roll effect, though, retail traders ought to employ the January contracts in a "spread-and-hold" position. Forward contracts, too, qualify for a lower margin tier.

Why Pros Spread Oil and Gas

January contracts for both commodities.


On Sep 28 08:06 PM Ron2008 wrote:

> Brad, in your article "What (Or When) Is Up With Natural Gas?" you
> never said what contracts (month) you were using to play the long
> NG and short CL spread. Which ones did you use?

Why Pros Spread Oil and Gas

Perhaps you failed to note the embedded link to the foundation article, "What (or When) is Up with Natural Gas?" (www.hardassetsinvestor...) which laid out the historical basis for the natural gas/crude oil spread.

That article, published on JULY 8 while natural gas was still cycling lower, cautioned investors that buoyancy shouldn't be expected in gas prices until Labor Day. As it turned out, the market nadir was Friday, September 4 (Labor Day was Monday September 7).

You state: "That rebound in NG had nothing to do with the stupid oil/gas ratio ..."

The oil/gas ratio is a manifestation of the underlying markets' fundamentals; It's an EFFECT, not a cause. No one, in the above article, the linked foundation piece, or in the articles published last year about the spread (starting with "Spreading Oil and Gas," www.hardassetsinvestor..., from August 2008) claimed the ratio was driving market fundamentals.

It's perfectly appropriate to trade seasonal spreads to capture market tendencies. It's been done for years in the agricultural markets and now it's done in the energy complex as well. Spread traders simply note marketthese tendencies and attempt to trade WITH them; ratio plays aren't a causative force themselves.

Even NYMEX recognizes the connection between natural gas and crude oil. That's why the clearinghouse grants margin credits for the NG/CL spread.

Aricool wrote:

> this is a lame article because you waited until Nat Gas got a technical
> rebound after Labor Day to publish it. If you would have published
> this article any time this year before Labor Day you would have looked
> like an idiot within two weeks. That rebound in NG had nothing to
> do with the stupid oil/gas ratio, but was just a matter of OFO's
> getting annually lifted on Labor Day, which kept the Henry Hub spot
> price from heading towards $1. Same thing with oil, it is going down
> b/c distillates have been piling up all year and are maxing out storage-
> crack spread going towards zero. So speculators and oil market manipulators
> cannot overcome such blatant evidence of collapsed demand so they
> bug out, maybe quicker because its a soft time of the year, but nothing
> special about the oil/gas ratio none-the-less. This article is completely
> hog wash and opportunistic to look smart about a stupid oil/gas ratio
> that the traders always love for some reason!
>
> Ari-

Oil Supply and Contango: Drawn Down

The quarterly contango implied by NYMEX futures at Friday's settlement was $1.39/bbl. That represents the roll from nearby October to January, or three months.

After paying paying finance and storage costs, there is indeed a negative carry now. Using nominal fee assumptions, you'd be in the hole by 67 cents/bb, for an annualized loss of 3.7%.

Historically, the reversal of the carry trade precedes a flip into backwardation. The question now is whether we'll see history repeat itself.

On Sep 13 12:44 AM JeffDB wrote:

> On Sep 11 01:51 PM Ron2008 wrote: