Millennium bug fears creeping into metals : LUSENET : TimeBomb 2000 (Y2000) : One Thread


ANALYSIS-Millennium bug fears creeping into metals

By Marius Bosch

LONDON, Sept 7 (Reuters) - Metal market players have hedged their bets over possible millennium related supply disruptions, making some year-end metal derivatives more expensive and creating growing tightness in metal forward prices.

Analysts said concern over the Y2K problem mostly affected metal markets with their tight supply mechanisms, while dealers in agricultural commodities had less to fear due to large market surpluses.

``Clearly there is some real concern about disruptions to (metal) supplies, whether it is actual physical disruption or whether there are issues in the settlement and banking system,'' said Kevin Crisp, vice president of foreign exchange and commodity research at investment bank JP Morgan.

U.S.-based commodity trading house, Cargill Inc's South African subsidiary already planned to avoid commodity trades in the country between December 15 and January 15 because of worries over Y2K.

In other financial markets, recent sharp increases in bond market credit spreads, a fresh selloff in emerging markets and the gloomy interest rate horizon implied by short-term futures markets have all been at least partly spurred by the Y2K effect, analysts said.

In base metals markets, players have taken out insurance in the form of options -- which gives the buyer the right but not the obligation to buy or sell a specified financial instrument at a fixed price before or on a fixed date -- to counter Y2K uncertainty.

Large option open positions in December on the London Metal Exchange (LME) indicated the market remained wary of Y2K disruptions while metal futures hinted that some base metals would be scarce around the end of the year through to Q1 next year.

``Effectively, production from the mine to the smelter could be affected,'' said commodity analyst Lawrence Eagles of GNI Research.

The year 2000 (Y2K) computer bug problem stems from the once common programmer practice of using only two digits for the year in dates, such as 97 for 1997.

There are fears 2000 will confuse computers and microchips embedded in machines, causing them to produce flawed data or crash. Corporations and governments across the world have been spending billions of dollars to fix their computers.

In base metals like zinc, December option volatilities -- an indicator of market thinking on future price moves -- were quoted up to three percentage points higher, dealers said.

``Option volatilities are high compared to historical levels because of the unquantifiable risk of the Year 2000,'' one options dealer said.

December zinc options open interest consisted of 5,667 lots of call options and 2,567 lots of put options - compared to 1,887 lots of calls and 1,157 lots of puts in November.

In other metals, December options open interest also showed a marked increase on November and January.

Analysts said fears that the millennium bug might disrupt metal supply or production could already be seen in most metals with a noticeable tightening in forwards.

``When we look at the forwards for all the metals for the last few months, there have been growing signs of tightness between December and the first quarter of next year,'' said Adam Rowley, metals analyst at Macquarie Equities Ltd.

Rowley said the tightness or backwardation - where the price of the future is lower than that of the spot price -- is most marked in zinc where stocks were already low.

``Clearly the most severe tightness has come in zinc and that is mainly because zinc stocks are already very low. People are obviously concerned that if there are any logistical problems or disruptions to production, zinc consumers will be affected,'' Rowley said.

The backwardation in zinc in the period December to January currently stood around $22.

In precious metals, marked options activity around the end of the year also reflected market concern over the millennium bug, with large over-the-counter (OTC) and exchange-traded options positions in December.

In addition, industry analysts have noted an increase in gold coin sales ahead of the end of the year with investors wary over possible Y2K problems buying coins to hoard.

The industry-funded World Gold Council said last month that investment demand in the second quarter of 1999 -- measured by among others sales of gold coins -- rose by 32 percent compared to the same period last year.

-- (M@rket.watching), September 07, 1999


ANALYSIS-New highs may mark start of metals rally

-- (M@rket.watching), September 07, 1999.

Thanks for those links!


-- Jerry B (, September 07, 1999.

IMHO, that's not the way I'm seeing it. Haven't got the numbers for Tuesday's commodities close, but as of last Friday's close, Gold on the NCMX for Dec99 as [only] $255.50(!) and for Feb00, $256.10. Palladium (CME) for Dec99 was $352.55, and for Mar00, $350.55. Silver (NCMX) for Dec99, $5.173, and for Jan00, $5.170(!) And platinum (CME)for Jan00, $348.10 (down from $348.60 for Oct99). Anecdotally, the owner of a local coin shop I visit, told me that "gold and silver are flyin' out the door", and that his buddies in the industry report that ordinary people all over the country are buying gold and silver coins. I believe it. But, MarketWatcher, it doesn't look to me like the market is worried.

-- Dewer Dye (qwerty@!!!!.com), September 08, 1999.

Indeed, it certainly is puzzlin why the large increase in coin buying, both gold and silver, hasn't affected the markets. If anyone has facts, not theory, concerning this I would appreciate having same. The only thing I read along these lines is that the manipulation by the major players are keeping the markets depressed while they pick up the mines, which cannot operate at a loss. Goofey Times and Wha???

-- wha??? (goldbugblues@9/99/99.hmmm), September 08, 1999.

>> Indeed, it certainly is puzzlin why the large increase >> in coin buying, both gold and silver, hasn't >> affected the markets.

Last year the US mint sold about 1,500,000 1oz gold Eagles for about 400 million dollars. That's tiny fraction of the yearly worldwide gold trades.

-- Smart Money (, September 08, 1999.

Moderation questions? read the FAQ