By: Lynette Zang
There is a rumor swirling around the web about halting trading of gold and silver on July 15th. The story goes that this is because of the Dodd-Frank Bill, Section 742 (a) Here’s the link to the full text (not that it’s easily understandable) http://www.sec.gov/about/laws/wallstreetreform-cpa.pdf .
I went to the web site to get more information. One of the things I looked at was their product offering. The only thing they trade is the XAU/Spot Gold and XAG/Spot Silver. These are derivative products, which is what the Dodd Frank bill is attempting to shift onto a clearing house platform, except for those derivatives that the treasury can decide to be exempt.
It’s probably important to explain what a derivative is. A derivative is derived from an asset that may or may not exist and once it is created from that asset, it doesn’t have to have much relationship to it. You can think of it as a side bet. For example, let’s say I’m married, so I take out a life insurance policy on my spouse. That would make sense because his daily life has a direct impact my daily life so his demise would have a direct impact on my fiscal life. But a derivative would be; a guy at a car wash, three towns away, that doesn’t even know my husband took out an insurance policy on him. He has taken out a side bet and only benefits if my husband dies. That’s basically a derivative.
Having a challenge getting good information from the Forex web site, I called them and spoke to Rachael. She confirmed that this was indeed the case and that their interpretation of Dodd-Frank was the inspiration to close down trading in those derivative products on July 15, 2011. They had no idea how other exchanges will interpret this bill, but again this only impacts XAU and XAG which are derivatives of gold and silver and not the physical metal.
Frankly, I’m wondering if the treasury will exempt the big Federal Reserve banks from this. I wish they wouldn’t, because according to the Bank of International Settlements those guys have sold a tremendous amount of derivative gold, and this gold will never exist, and yet that activity has had a tremendous impact on the spot price of gold over the years. Here’s the link – http://www.bis.org/publ/otc_hy1105.pdf . Keep in mind that they recently changed the way in which they need to report, so the market appears much smaller, $601 billion in notional value vs. $1.48 quadrillion in notional value.
And while this might impact the digital price (spot market) it does not impact the futures market where there is the assumption of the ability (true or false) to take physical possession. Nor does it impact the availability of the physical metals market, which has been shrinking over the last several years. Therefore if you want to continue to acquire gold and silver coins and bars you still can. Only the OTC (XAU & XAG) derivatives through Forex are going away on July 15th.