HSBC's Charles Tells CFTC Metals Speculative Position Limits Unnecessary

25 March 2010,11:00 a.m. EST
By Terry Wooten
Of Kitco News

 

New York--(Kitco News)--The global head of precious metals for HSBC Group said today that the U.S. Commodities Futures Trading Commission has "no practical reason" to adopt federal speculative positions for precious metals.

 Jeremy A. Charles was on a panel presenting testimony to the CFTC at a hearing in Washington, D.C.

"In light of the unique characteristics of precious metals, the global and interconnected nature of the precious metals markets, and the critical role that large commercial institutions play in maintaining liquidity, we respectfully submit that the Commission has no practical reason for considering the adoption of federal speculative position limits for precious metals," Charles said.

"Further, without evidence of excessive speculation in precious metals that may cause 'sudden or unreasonable fluctuations or unwarranted changes' in the prices of these products, we submit that the Commission lacks the statutory basis for considering the adoption of federal speculative limits with respect to these products."

Charles was one of 16 regulators, exchange officials, traders and investors testifying, He said the market surveillance activities undertaken by the futures exchanges, including the existing large trader reporting requirements and position accountability rules, "have proven to be more than adequate to govern appropriate behavior on the part of all market participants, promote market integrity and otherwise protect the public interest."

Charles said that CFTC Chairman Gary Gensler indicated that, like agricultural commodities and energy products, the supply of metals, including precious metals, may be finite.

"That may be, but it is important to distinguish between 'finite supply' and 'limited supply.'" Charles said. He said essentially all products traded on US designated contract markets have a finite supply at any given time, even foreign currencies. "However, not all products have a limited supply, such that the prices of these products may be subject to “sudden or unreasonable fluctuations or unwarranted changes,”  he said. "Gold and silver are such products. "

Charles said that unlike agricultural commodities and energy products, the vast majority of precious metals are not produced to be consumed and, once consumed, disappear from the economy.

"Further, unlike agricultural commodities and certain energy products, such as electricity, precious metals are not wasting assets which, if not consumed within a fixed period of time, lose all value." he said.  "To the contrary, the vast bulk of all the bullion that has been produced since the beginning of time is held in one form or another by central banks, industry consumers, commercial institutions, exchanges and the public."

 In the event of a shortage of gold or silver, supply can be mobilized on relatively short notice, he said. The buoyant scrap market, which has grown significantly during the current rally and is credited by many analysts with helping to moderate price appreciation, is an example of the rapid mobilization of existing supply.

Moreover, although these metals are important and necessary components in certain industrial and scientific processes, a considerable portion of the production is used for jewelry.

As for gold, Charles said jewelry accounts for approximately two-thirds of production. "In the face of high prices, the consumer can choose to reduce his or her consumption of precious metals in favor of other competing luxury items." he said. "The decline in jewelry sales in the past 24 months in reaction to high prices within and outside the United States is evidence of this. Therefore, a threatened disruption in the supply chain for these metals will not have the same economic and social consequences as shortages in food or energy supplies. "

Charles also noted that in contrast to other products, precious metals are a form of currency, as well as a commodity. He said the dual function is at the very essence of the bullion market and illustrates its unique status.

Charles said most economists agree that gold, in particular, performs a valuable economic function:

* It is a reliable store of wealth over the long term;

* It is a safe haven in times of economic, financial, or geopolitical stress;

* It is an efficient portfolio diversifier, lowering overall risk and performing best when the financial markets become dysfunctional.

--By Terry Wooten of Kitco News, twooten@kitco.com