Has the US-based futures trading market suddenly gone banana republic? That's what it looks like today, because the customer accounts of bankrupt primary broker-dealer MF Global have been transferred to other brokers -- without all of the money.
As of this morning, the bulk of MF Global customer accounts were transferred to Chicago-based futures brokerage R.J. O'Brien, but, according to the Chicago Mercantile Exchange and R.J. O'Brien Websites, customers only received enough equity to cover the active trades in their accounts. The rest of the money is being held with the MF Global Trustees as part of the bankruptcy process. The company is also being investigated for what looks to be hundreds of millions of dollars missing from segregated customer accounts.
And check this out: If your account was in 100% cash, zero money was transferred. It's all stuck with the MF Global trustees, to await a feeding frenzy of lawyers, bankers, and general legal mayhem resulting from MF Global's bankruptcy.
Here's how it looked to me, an MF Global customer: Overnight, my account was transferred with one active trade (so far still profitable) -- but the account is missing approximately 75% of the cash or equity. The reason for this, as explained by the R.J. O'Brien Website, is that an "agreement" between MF Global Trustees and the CME was such that only enough cash to cover the live trades was transferred.
Not only that, but every single MF Global customer with a live trade is getting a margin call today. From the O'Brien Website:
Former MF Global customers transferred to R.J. O'Brien were delivered with approximately 75% of the maintenance margin requirement related to their accounts. As a result, every former MF Global account faces a margin call. No excess equity was transferred.
All former MF Global customers must wire R.J. O'Brien additional monies to bring their account above its initial margin requirement or liquidate their current trading positions.
If the account did not contain a trading position, former MF Global customers must wire or mail R.J. O'Brien funds to initiate trading because no excess equity was transferred.
In other words, the customers that were best off were the ones who were using maximum margin, or leverage. They would have gotten all their money. And the ones holding the most cash got very little of it. There is only a vague explanation of why so much money was held back. Again, from O'Brien:
What will happen to the remainder of my account balance at MF Global?
RJO does not have control of the remaining segregated funds.
If you have questions or need more details, please visit www.mfglobaltrustee.com.
There is no explanation of how to find the missing money, other than "Go ask the MF Global Trustees." So the former MF Global customers find themselves this morning in a situation where their positions (which had been locked up for a week) were transferred, minus a random amount of cash, with forced margin calls, and left to their own devices to find the missing money.
One former MF Global broker, who is now helping manage accounts at R.J. O'Brien, told IU, "Nobody has any idea why they did it like this or what's going on... The communication from the top is so bad, it's not even clear why it's being done like this. Is the CME trying to kill their entire futures business? They should have done it in a way that made the customers whole."
Now, I'm a relatively small customer, so I wondered what happened to other people. Andrew Abraham, of Abraham Investment Management, has written a letter to the US Congress, saying hundreds of thousands of dollars of his money is now locked up with the MF Global trustees.
Bottom line? As another one of the brokers I used at MF Global, who is now working for R.J. O'Brien put it, "It's very messy." That's the understatement of the day. The New York Fed, the Commodities Trading Futures Commission, and the Chicago Mercantile Exchange have a lot of questions to answer. The regulators didn't help the customers at all, and the sanctity of customer segregated funds has been cracked.
And the bottom line? There's still no explanation of how much of MF Global's customer money is gone -- or where it went.
>As it is said, everything can be an excellent investment at CERTAIN price range, >or a lousy investment at another price range.
Good point. Actually I think the biggest risk to gold is political. It keeps going up because Bernanke is in charge and they keep printing money. But if there were every some kind of political movement afoot to remove Bernanke, or some kind of Austrian Ron Paul-like person were elected president, gold would get crushed.
If Bernanke resigned tomorrow I bet gold would be down $400.
I fully agree that Gold is a excellent hedge against currency devaluation or hyperinflation. But I think I am too late for the game. As it is said, everything can be an excellent investment at CERTAIN price range, or a lousy investment at another price range. I am too ignorant to find the correct price range for Gold investing, but your report definely improve my understanding on how to evaluate gold price.
@Anish, Thanks for the advice to hold Gold. My principle is that I don't own anything that I can not figure out its intrinsic value, no matter it is Gold, bond, or Equity. If I step away from this principle, I know I am speculating.
There are some stocks that can hedge the fiat money as good as gold, like good consumer staples companies: KO, PG, JNJ, YUM, & MCD. Even the SPY is flat during the past decade, these stocks doubled or even tripled if you reinvest your dividend in a tax-deferred account. Of course I admit that their returns is nothing close to the Gold's superior 600% return. But they are fairly valued even at today's price.
Warren Buffett is older than most of us. If he has not gone through a fiat money Crisis, we haven't either. How can we be so sure that Warren is worse than us? I won't bet on that.
If nothing else you should own Gold Stocks to prepare for the eventuality of a Fiat Currency crisis.
In that event most stocks will get badly hammered(primarily because the underlying currency in which they are denominated gets hammered).
Thats why you why you want to own Gold its Money and Insurance-Plain and simple.
The thing is Warren Buffet has never been through a Fiat Money crisis so his advice on this issue is irrelevant.For that you need to read the History books/Milton Friedman.
Good response. I hold a fairly large portion of my net worth in gold mostly as a hedge against currency devaluation and general mayhem. It is the best hedge against the growing trend of wanton, mad-money printing. In that role, its performance has been stellar -- up an average of over 15% for the last 10 years -- beating every single asset class. My only regret is that I did not buy more of it.
As the report shows, the best way to monitor whether gold will "continue to go up" is by monitoring the M1 money supply, which has a 80% correlation with gold. The recent trend is that they have been accelerating the expansion of M1, rather than slowing it, which leads me to believe that the climb in gold will decelerate, not accelerate.
As for your point on the data, well, it's a bit of a paradox. The reason we did not have any data before 1971 was because the gold standard meant that CURRENCIES WERE LOCKED TO GOLD. That means they couldn't print money pell-mell, so by definition, gold was always the same as the currency -- it did not fluctuate. I think that's exactly why gold has exploded since 1971 -- once the gold standard was removed it relieved politicians of any monetary discipline or responsibility whatsoever.
So, I guess it's a philisophical thing. Do you believe that money supply and irresponsible monetary practices exist now because there is no gold standard -- or is gold just rising in some sort of manic bubble? I actually believe it's rising because the market realizes now that without any kind of gold standard, during a banking crisis, politicians will just print money to infinity...
So, in the end, to me, it is a great insurance policy especially in this environment. And unlike many stocks (or an MF Global account), I know definitively that it cannot go to zero. Therefore it's value as an "asset hedge" to me is very high.
I did read your Gold report, and I shall say it is a wonderful report. I especially like the "How to value Gold part". But I have some concerns about your valuation model:
1. As you pointed out in the report, US left Gold Standard in 1971. The data you provided in the report has less than 40 year tracking record. I am uncomfortable to reach conclusion based on data of such a short time frame. During housing bubble, real estate expert pointed out that house price will always go up in 10 years for major US metropolitan areas. The conclusion is based on the housing data of the past 60 years, but we know how accurate it is in the rear mirror.
2. Based on your data, the current gold price around $1800 is in the low to middle range, then you concluded that it will reach the high end based on historical data. You assume the bull market will reach the high end before going down, which I am not sure.
3. If you asked me whether there are sign of irrational activities, my answer is yes. I do notice the "we pay cash for gold" post on the telephone Poles, like we saw the "we pay cash for house" post during housing bubble. One Wolf Camera Store in my neighbourhood was converted to a "We Buy Gold" store.
I believe Mr. Buffet's view has been discredited by the market. Do you really think he doesn't regret not putting some gold away at $500 an ounce? ;-)
At this year Berkshire meeting Q&A session, one shareholder told Mr. Buffett, that her Gold Portfolio is performing far better than BRK stock, Mr. Buffett joked that he should hire her to manage BRK portfolio. :)
Finally, if gold is so useless, if I handed you ten Krugerrands, would you throw them in the trash?
You misunderstood my point: I said that I will toss the idea of investing in gold, not the gold itself. I will be more than glad to grab all the Krugerrands you handed to me. Similar to all alternative investments, the gems, collectible artwork, antiques, they all have certain value, but it is too hard for a layman like me to evaluate them, so I just pass the opportunity over. It does NOT mean these investments are bad choices - Just I am too chick-hearted to jump in. :)
I think it's becoming clear that the markets see gold as having intrinsic value, as it is currently becoming the ultimate form of collateral and reverting to its historic use as a global currency.
And don't you think it's an important statement on the gold market that Germany said that it would not allow its gold reserves to be used as EFSF collateral?
And did you notice that the CME recently started to accept gold is collateral? Hmm, why is that? Maybe it's even better than Treasury Bonds?
Historically, as I show in my report, you can definitely value gold in relation to the money supply. There are reasonable historical correlations.
Please read my Gold report, for which I did a lot of resources:
As a value investors, I don't care World Central Bank, Federal Reserve, or anybody else are doning with Gold, I just can NOT evaluate the intrinsic value of one ounce of this shine metal. That is enough for me to toss the Gold into my "Too hard to analyze" basket. :)
Question you should ask yourself is primarily this-Why are the institutions behind our money(Worlds Central Banks) buying so much Gold for last two years(in addition to what they already hold)???
Obviously Gold holds some value as a medium of exchange for Goods and Services -Basically as an alternative Money.
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