Page 1 of 2 On Thursday, the Commodity Futures Trading Commission (CFTC) held a daylong hearing to discuss the possibility of enacting position limits in the gold, silver and copper markets—which might sound a little strange, considering the general lack of evidence or even public outcry on the matter. Apart from some gold manipulation theorists like GATA, few have even publicly raised the question of curbs on speculation in the metals markets. But that hasn't deterred the CFTC or Commissioner Bart Chilton, who recently called out a need for "professional-grade regulatory tools" in the metals futures markets. But CFTC-managed position limits would be a very bad idea, says precious metals expert Jeffrey Christian. Christian, the managing director and founder of the CPM Group, is a well-known authority on gold, silver and base metals, and over 30 years, he has worked with such organizations as the United Nations, World Bank, International Monetary Fund, as well as dozens of miners, industrial companies, investment banks and investors. Recently HAI Associate Editor Lara Crigger caught up with Christian to get his take on the position limit question, including whether exchanges regulate effectively enough, how position limits could hurt bona fide hedgers and why gold manipulation theorists shouldn't be so quick to call for more regulation. Crigger: Even though Bart Chilton was quoted as saying we need "professional-grade regulatory tools" in the metals markets, there really hasn't been much of an outcry in favor of position limits in the metals markets. What are your thoughts on this matter? Do we need the CFTC to enact position limits in the metals markets? Christian: Well, the exchanges impose and manage them already; there are position limits in the metals markets now that the exchanges run. And the exchanges' position limits, generally speaking, tend to be more stringent than the ones that the CFTC might impose, were it to try and take the reins. I think the idea of the CFTC as a federal regulator removed from the market, living in Washington and managing position limits is a bad idea. I think the idea of position limits on noncommercial positions is a good idea, but it is a good idea that is best effected by the exchanges, which are, by definition, closer to the market. But I'm hesitant to predict the probability of the outcome of something that depends on the attitudes of politicians and political appointees in Washington. I hope we never see CFTC-managed position limits either in energy or metals, because I think it's a bad idea. But I don't know what the probability is. I know that government regulators regularly crush my hopes. Crigger: Do you think the NYMEX and the COMEX do a good enough job regulating the metals markets already, then? Christian: You can always look at it in hindsight and say no, it could be better done. And frankly, I've seen a couple slip-ups in the 30 years I've been involved in the metals markets. But I think they do a fairly decent job. They could probably do better, but the CFTC could probably do a better job of working with the exchanges on these issues. Crigger: Would adding position limits in the metals markets reduce the liquidity available, and hurt the ability of producers using these futures to hedge their risk? Christian: I think there's a risk there, but it would depend on how the CFTC executes the position limits. If they were to put position limits on commercials—and the CFTC seems to have a skewed idea of what a "commercial" entity is trading in the market—then what you have is that you start skewing the futures price relative to the physical price. All of a sudden, you have asymmetrical markets. People will say that the NYMEX and the COMEX no longer reflect the price, and they start migrating to unregulated or under-regulated and less transparent markets. So you have a couple of issues. First, you have "regulatory arbitrage," where people bail out of the markets because there's regulation they don't like. And the second thing is, if the regulations skew the liquidity in the futures market, you have people saying, "The futures price no longer reflects the underlying commodity market, so I'm not going to use it to hedge my positions anymore."
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