Recently the US Congress enacted the Dodd-Frank Act, which is a new regulation aimed at increasing the protection of consumers in investing and financial related matters. One of the impacts of this regulation is that it prohibits US residents from trading over the counter precious metals, starting on July 15, 2011.
While this may look like a gold ban, it’s not that dramatic. That’s because the act only affects derivative instruments of precious metals traded on the spot. That is, financial instruments like futures contracts that are actually NOT backed up by real gold.
The reason for this change is to make the trading of precious metals actually more secure, because now when a financial institution sells a financial instrument to a consumer it needs to make sure that the value of that instrument is real and connected to a certain amount of precious metal.
Here’s a quote from the Hedge Fund Law Blog explaining the change:
The central import of new CEA Section 2(c)(2)(D) is to broaden the CFTC’s power with respect to retail commodity transactions. Essentially any spot commodities transaction (i.e. spot metals) will be subject to CFTC jurisdiction and rulemaking authority. There is an exemption for commodities which are actually delivered within 28 days. While the CFTC wanted an exemption in which commodities would need to be delivered within 2 days, various coin collectors were able to lobby congress for a longer delivery period.
In other words, you’ll still be able to buy precious metals like gold and silver, and you’ll still be able to invest in gold. But there are some points to keep in mind. Here is a quote from another article explaining the matter quite well:
As for OTC precious metals such as gold or silver, Section 742(a) of the Act prohibits any person [which again includes companies]from entering into, or offering to enter into, a transaction in any commodity with a person that is not an eligible contract participant or an eligible commercial entity, on a leveraged or margined basis. This provision intends to expand the narrow so called “Zelener fix” in the Farm Bill previously ratified by congress in 2008. The Farm Bill empowered the CFTC to pursue anti-fraud actions involving rolling spot transactions and/or other leveraged forex transactions without the need to prove that they are futures contracts. The Dodd-Frank Act now expands this authority to include virtually all retail cash commodity market products that involve leverage or margin – in other words OTC precious metals.
The prohibition of Section 742(a) does not apply, however, if such a transaction results in actual delivery within 28 days, or creates an enforceable obligation to deliver between a seller and a buyer that have the ability to deliver, and accept delivery of, the commodity in connection with their lines of business. This may be problematic as in most spot metals trading virtually all contracts fail to meet these requirements. As a result, although the courts’ interpretation of Section 742(a) is unknown, Section 742(a) is likely to have a significantly negative impact on the OTC cash precious metals industry. Here too, it is essential that those who offer to be a counterparty to OTC metals transactions seek professional help to discuss possible operational and regulatory contingency plans.
The question now becomes: what will happen to gold prices from not until July 15, and from July 15 onwards? That remains to be seen, but it might be a good opportunity for those with a sharp market understanding!
Tags: banned, gold ban, gold trading, precious metals