Download PDF, Issue 26 - Swiss Futures and Options Association

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The Metals Markets Are Still Roaring Along Special Metals trading volume on the New York Mercantile Exchange, Inc., appears to be heading towards its second consecutive record year, reminiscent of the bull markets of the early 1980s, writes James E. Newsome, President of the Exchange. 20 COMEX merger anniversary Coincidentally, the Exchange this year marked the 10 th anniversary of its merger with the Commodity Exchange, Inc. (COMEX), a union that created the largest physical commodity futures exchange, a trading forum exclusively for strategic commodities – precious and base metals and energy. The 2004 metals markets are among the strongest that have been seen since the venerable COMEX gold, silver, and copper futures and options contracts joined the Exchange energy, platinum, and palladium contracts under the auspices of a single exchange on August 3, 1994. Aluminum futures and options were added to the COMEX Division slate in 1999. Trading activity is up in nearly every category. Metals futures volume through the third quarter of 2004 was running 20% ahead of the first three quarters of 2003, a year that shattered long-standing records, and options volume was up 25% for the same period. During 2003, for example, total COMEX Division volume broke the record that had stood since 1987. Gold futures volume, running 22% above last year through the third quarter, set a volume record in 2003 that surpassed the mark set in 1982. Through the third quarter of 2004, nearly every other contract in the metals complex also showed strong performance over the year-ago period. Welcome to the bull market Prices are strong this year, too, and bullish prices tend to attract investors. During the first quarter, prices had increased to levels that had not been seen since the 1980s for platinum and silver, and reached seven and eight year highs for copper and gold. There are a number of fundamental factors that have led to the resurgence in metals market activity, but the most significant reason metals industry market participants and customers turn to our exchange as the premier source of risk management, market efficiency, and price transparency is the unique liquidity offered through open outcry trading. This trading activity accounts for approximately 95% of overall Exchange volume, providing the base to expand electronically and internationally. The Exchange is committed to maintaining the strength of this forum, as well as continuing to expand its efficiency through the on-going development of technology that reinforces and strengthens the level of service to its customers. New technology At the beginning of October, for example, the Exchange introduced the New York Mercantile Exchange Electronic “Metals markets tend to be less correlated to the financial markets.” Order Network (NEON) in the gold and silver futures rings. NEON was developed internally to provide a gateway for firms and traders to electronically route orders right to the trading rings. The network uses an open application program interface that conforms to financial industry standard message formats which enables market participants to communicate on-line with the Exchange no matter what applications they use. NEON also allows firms to view order data including status and fill details through an internet-based program. The introduction of these services could not be more timely, with increased metals market strength stemming from expanding worldwide demand for metal, particularly from China which has been a voracious consumer of a broad variety of commodities. Investors also want a hedge against the U.S. dollar which has been relatively weak against the Euro – the hedging role is traditionally played by gold. The weaker dollar also added strength to prices by boosting those dollardenominated commodities, which fed into the trends that attracted investors. Hedge funds have poured billions of dollars into the commodities markets this year. Low correlations It was not just the strong commodity prices that attracted investors. Commodity markets, as a general rule, and the metals markets in particular, tend to be less correlated to the financial markets. The low (less than 0.5) or negative correlations shown on the accompanying table implies that metals prices are counter cyclical to the prices for equities and bonds, and often energy, although energy prices have recently experienced a bullish trend that has seen new market highs nearly day-by-day. The data indicate that the metals, particularly gold, perform well during periods of financial stress. Investor interest in gold was rekindled after September 11, 2001, and in the more than three years since that atrocity, prices have not revisited the $271.60 settlement price of September 10, 2001. There was no settlement price for September 11 because trading on the Exchange, which was across the street from the World Trade Center, was abruptly halted after only about an hour, and the next spot price settlement was $290.20 per ounce on September 14, 2001. The immediate run up of gold prices was not solely due to the attacks of September 11. Most bull markets are SWISS DERIVATIVES REVIEW 26 – NOVEMBER 2004
“Investor interest in gold was rekindled after September 11.” Correlation of monthly average prices, October 1999 to September 2004 S&P Treasury Bonds Crude Oil Natural Gas Gasoline Gold –0.195 0.189 0.223 0.177 0.05 Silver –0.057 –0.091 0.107 –0.049 0.106 Platinum 0.059 –0.051 0.35 0.207 0.295 Copper –0.009 –0.197 0.112 0.117 0.13 driven by a confluence of circumstances, and the foundations of a return of investors to gold had been present for some time, such as the steep declines in the equity markets. The attacks were the catalyst that tied all of the various market factors together, which have also sustained the market’s strength. International investors The metals futures and options contracts are used by a wide range of industry and commercial market participants, and their renewed emphasis in diversified investment portfolios represent a variety of strategies and opinions on the market outlook which still has a significant untapped potential for the metals futures and options markets. Asia is a potentially fruitful area for the Exchange to expand its business. This year, the Exchange concluded agreements with other exchanges and market regulators in the region that have brought Asian market participants directly into the Exchange and COMEX Division markets through the NYMEX ACCESS ® electronic trading system. The internet-based system is the afterhours electronic extension of the trading floor that permits trading in the metals and energy futures markets for an additional 17 hours after the open outcry session ends in the afternoon in New York, allowing trading during the business day in Asia. Through an alliance with the Tokyo Commodity Exchange, the Exchange metals and energy futures contracts have been available since July for direct trading during the business hours in Tokyo. Regulatory authorities in Hong Kong and Singapore also this year approved direct internet-based trading in the Exchange’s metals and energy markets from those cities. Market participants in Asia wasted little time in taking advantage of their new opportunities. In July, approximately 2,300 energy and metals “This could include a future listing of Exchange contracts in China.” contracts traded on NYMEX ACCESS ® from the region, and for August, the monthly volume increased to almost 8,000 contracts. Asian volume nearly tripled during September; in addition, market participants began trading from Switzerland this year, as well. There has also been significant after-hours trading from London via NYMEX ACCESS ® for a decade. In June, the Exchange signed a memorandum of understanding with the Shanghai Futures Exchange to explore areas of mutual interest and cooperation. In the future, this could include a possible listing of Exchange contracts in China and the ability of market participants to trade the Shanghai Futures Exchange products from New York. Market confidence The vitality of the Exchange’s metals markets and its ability to conclude agreements in market centers far from the United States is due in no small part to the confidence that market participants have in the trading forum. The matter of counterparty credit risk is no longer regarded as casually as it once was. The Exchange’s financial controls and market surveillance functions are designed to assure that market participants do not become overextended to the point that they could endanger the broader market. During 2003, the well-regarded clearing organization of the Exchange was strengthened further by combining the Exchange Division and COMEX Division guarantee funds into a single pool totaling approximately $150 million. The fund is also backstopped by a $100 million default insurance policy that could be drawn on in the unlikely event that the guarantee fund is depleted by the failure of a clearing member. The Exchange metals futures and options markets are the keys to vital dynamic market activity that provides a wide universe of commercial hedgers and investors with a safe, liquid, and transparent market forum, serving as market benchmarks for market participants worldwide. James E. Newsome at the 25 th Bürgenstock Meeting in Switzerland, September 10, 2004. James E. Newsome, Ph.D., President, New York Mercantile Exchange, Inc., www. nymex.com. Former Chairman and Commissioner of the CFTC. Special 21 SWISS DERIVATIVES REVIEW 26 – NOVEMBER 2004
Page 1 and 2: SWISS DERIVATIVES ISSUE 26 - NOVEMB
Page 3 and 4: Contents Contents SWISS FUTURES AND
Page 5 and 6: Dear Members and Friends of SFOA Ed
Page 7 and 8: Focus Treasury. Then came Ginnie Ma
Page 9 and 10: “This approach moves us in the di
Page 11 and 12: WHEN YOUR FIRST NAME IS “NEW,”
Page 13 and 14: Focus Union’s regulators in terms
Page 15 and 16: “There’s no rule saying banks c
Page 17 and 18: The rush of endless opportunity. Li
Page 19: Further your future: team up with a
Page 23 and 24: A new standard in the derivatives i
Page 25 and 26: “The Stone Age didn’t end becau
Page 27 and 28: A blazing sponsor for Friday night
Page 29 and 30: CNBC Europe reporting live from Bü
Page 31 and 32: A fascinating presentation by ballo
Page 33 and 34: “Swiss taxation is very advantage
Page 35 and 36: “These results seriously question
Page 37 and 38: D O W J O N E S I N D E X E S THE D
Page 39 and 40: “ ‘Carry’ strategies and even
Page 41 and 42: Education Chart 2 Overbought zone (
Page 43 and 44: Bollinger Bands Let’s briefly rev
Page 46 and 47: Emerging Markets A Perspective on E
Page 48 and 49: Profile IFRI - The International Fi
Page 50 and 51: Profile 50 Official Publication of

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