Gold and Silver Trading Prohibited?

Just recently, announced that it will stop offering over-the-counter (OTC) metals trading to its U.S.-based clients by July 15. According to them, they are simply complying with the regulations in the Dodd-Frank Act. In particular, they will be abiding by Section 742 (a) which prohibits “transactions in any commodity with a person that is not an eligible contract participant or an eligible commercial entity on a leveraged or margined basis.”

Section 742 (b) of the Dodd-Frank Act also cites an exemption for retail transactions if the actual delivery of the commodity takes place within 28 days.

In line with this regulation, is giving its customers a month to close out their gold and silver positions. All accounts that are still open at 5:00 pm on the said date would then be liquidated. Yikes!

From what I understand, non-exchange trading of metals by U.S. citizens at a leverage greater than 10:1 and with the intended delivery of the product later than 28 days when the transaction was made, will be considered illegal.

On the other hand, those who do on-exchange trading (such as with the CME Group), along with banks who are considered eligible contract participants, or those with significant amounts of gold physical for backing, don’t have to worry about anything.

Now, before you start getting rid of your bling-bling, you should know that there are those who believe that is just overreacting. The actual text of the legislation is extremely lengthy and difficult to comprehend. Because of that, it is prone to a lot of misinterpretation.

But what if’s interpretation was actually right? What would this provision mean for commodities, forex traders, and brokers?

After almost a year when it was signed into law, the Dodd-Frank Wall Street Reform and Consumer Protection Act has yet to impress market participants. Naysayers continue to have their eyebrows raised about its practical implications.

Among its other provisions, market junkies are worried about the negative effect on liquidity that Section 742 (a) would have on the commodity markets. You see, majority of the transactions made in the gold and silver markets are done over-the-counter. How many investors do you think would want to kick it old school and go through the hassle of locating a gold dealer and conducting the exchange physically?

Err, I don’t think there would be that many.

The fast-paced nature of OTC transactions is probably one of the reasons why spot gold and silver trading grew. After all, it’s so much easier to do transactions with just a few mouse clicks.

Now, if you’re saying, “Eh, I’m a currency trader; this wouldn’t affect me,” think again buddy.

We learned in the Intermarket Correlations section of the awesome School of Pipsology that trends in the commodity markets could affect currencies. With this new development in the Dodd-Frank Act seen to weigh down demand for gold, we may see the Aussie take a hit too. Pip Diddy reminds us time and again that the currency from “Down Under” tends to move in tandem with the commodity because Australia is the world’s third largest producer of the precious metal.

On top of that, we could see the U.S. forex industry lose some players. Most U.S. brokers offering over-the-counter gold or silver trading would probably lose revenue. Depending on the extent of their losses, smaller ones may be forced to exit the industry or perhaps merge with bigger brokers.

Consequently, with fewer competitors left, brokers may have one more reason to slack off in providing quality services or charge their customers higher spreads. Uh-oh…

Then again, we also have to acknowledge the fact that the move would keep a lot of novice investors from falling victim to over-leveraging which is prevalent in the spot gold and silver markets. But do you think this is enough to outweigh the disadvantages?

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  • Tulsa gold buyers

    This recent law that was enacted prohibiting over the counter gold and silver trading has gained many violent reactions especially from those in the industry. With the current state of the economy, many are against this formulated bill. Hopefully, all things will be settled since many investors and businesses are relying with the gold trading industry. 

  • Carl Leduc

    The one thing I know if Obama comes in it will be good for those who own gold the price will go up again. And if Romney gets in gold price will go down but only for a short while because America or us owe trillions and this monstrous bill is destroying the purchasing power of the dollar. When you go in the store and bread costs more you say wow bread has gone up. But that is not what is happening, what is really happening is that the purchasing power or the values of a dollar is shrinking and you need more to buy the same thing. This is happening from money printing out of thin air, the more money that is thrown out in the market waters down the money that YOU already have in your pocket. The fact is and not just my opinion that since the creation of the bank cartel called the Federal Reserve our dollar has lost over 90% of its value. Its been happening for about 90 years so why should it stop now. and the answer is it wont. Sadly unless the government and the politicians take control of the printing of money and the monstrous IRS nothing will really change.
    Carl Leduc