Fortunes change hands based on monthly numbers

It had been a relatively quiet market for some time and bullion traders at Shearson Lehman Hutton were awaiting the release by the U.S. government of the consumer price index (CPI) for April.

Earlier in the week, March trade figures released by Washington showed a drop in the U.S. deficit to below $10 billion, which set off a small rally in the U.S. dollar but which was interpreted by investors as a negative sign. Both Wall St. and the U.S. Treasury bond market were off that day. Economists said the latest trade deficit figure acted to raise fears of renewed inflation.

This morning a Northern Miner reporter was visiting the Shearson employees on the seventh floor of the American Express Tower at the World Financial Center in downtown Manhattan to observe first- hand the large, international trading and investment banking firm’s operations.

“Listen,” Bruce Gilbert, first vice-president and bullion sales manager, said as the 8.30 release time approached.

The spacious room, filled with desks and computer terminals and the people who manned them, grew quiet.

Right on time, news that the consumer index had risen 0.4% during the month (the equivalent of about a 5% annual rate), down slightly from the previous month’s increase, appeared.

The noise level in the room picked up immediately, but it was soon back to ” business as usual,” the increase, apparently driven by sharply higher clothing prices, agreeing with the forecast made by Shearson analysts. For all intents and purposes, it was a non-event. Number factor

Not a year to be remembered so far by most investors, 1988 has been marked by a stable U.S. dollar and a narrow trading range for gold, whose price at the time of the Shearson visit (mid-May) was around the $458-per-oz mark. So, as indicators of where the economy might be heading, the “numbers” take on an added importance.

“There are probably four or five significant numbers during the month traders take a look at,” Gilbert said, explaining that the numbers seem to gain in prominence during the more stable times.

Gilbert, who was born in New Jersey but who grew up in New York and who has an MBA in finance marketing, has been with Shearson since 1985. He moved over from Englehard, where he was director of marketing, to create Shearson’s commercial bullion trading department, to complement the company’s existing bullion trading.

Already big internationally and with designs on growing even larger, service-oriented Shearson promotes its bullion trading operation as one of its major businesses. The bullion trading operation purchases output from junior and major mining companies (including Canadian producers), for which Shearson provides forward hedging, options, financing (including gold loans) and refining programs.

The company also sells metals to commercial end users through a host of hedging, option and financing programs designed specifically for clients. Included among the operation’s clientele are central banks, major financial institutions, other international bullion dealers, professional traders and precious metal fabricators. Dealing centres

Shearson bullion dealing centres are maintained in three cities, New York, London and Hong Kong, with satellite offices in Geneva, Hamburg, Singapore, Sydney and Tokyo. Telephone and computer linkups give traders and their clients instantaneous access to world markets on a 24-hour-per-day basis.

In New York, Shearson, as a bullion dealer, uses Comex (New York Commodity Exchange) as a gauge for price determination as well as a hedging vehicle for its own account. The company acts as a principal in each transaction it does with its bullion clients.

Futures contracts (and options) act to serve both the “hedgers” (mainly commercial producers and users of the metal, and private investors, seeking to downplay the risk factor) and “speculators” (people hoping to profit by correctly guessing price changes).

Comex, which opened at the end of 1974 and which advertises itself as the dominant world market for gold, provides investors with an alternative to the more traditional means of investing in gold, such as bullion, coins and stocks. An assortment of commodities is traded on the Comex floor as in other exchanges around the world, with the future, or 3-month, price (a function of interest rates and supply and demand) being the focus of attention. Noise level

On the huge, paper-littered Comex floor, the first-time visitor feels compelled to comment on the noise, but when he does, Shearson’s futures representative, Carlos Perez-Santalla, claims it is really a quiet period during a rather quiet trading day.

Rings, or depressed, circular areas designated for the trading of specific commodities, are set up across the floor. Periodically, a burst of shouting emanates from one or several of the rings as traders try to make deals, while they face each other across the ring, either by shouting or through the use of hand signals.

This afternoon, platinum is drawing its share of attention; by the end of the trading day, the futures prices for the metal have jumped by more than $11 per oz (to $568.60 for the July contract price), an increase tied by analysts to a concern by investors about inflation.

(Futures contracts and options for platinum, which is listed on the New York Mercantile Exchange, trade on the Comex floor. A possible merger between the two exchanges has been under discussion for several years.) Price monitoring

Meanwhile, back on the seventh floor, traders in precious metals, options, oil, currencies and other markets continue to monitor prices and world events.

There are three shifts daily, and when the morning crowd arrives, part of the job entails talking to the overnight traders, looking at news wire copy and telephoning Shearson offices around the world, all geared to uncovering possible indicators for use in forecasting prices. Lunch, provided by the company, is ordered in the morning and brought to the seventh floor, with the traders eating at their desks.

Around 10 a.m., the London morning fix for gold is announced at $456.50.

Shearson researchers help keep the traders well informed. A mid- morning currency comment provides nuggets of analytical information, including the following:

“The dollar is marginally firmer this morning, refreshed by a better performance in U.S. bond and equity markets. This morning’s U.S. April CPI report offered no insight as to the future of the dollar given that the 0.4% increase was dead on expectations * * * The big story for today is a dramatic uptick in the Australian dollar. The Australian unit rose * * * Stability in U.S. bond prices is also beneficial to the Canadian dollar which firmed modestly. The upside potential may be limited by concern over the U.S.- Canada free trade pact * * .” Global trading

Investors know how increasingly sophisticated the gold market has become. The yellow metal is now traded around the clock and around the world on both a physical (spot) or forward basis, through a variety of means including spot sales and formula pricing, forward and futures hedging, gold loans and options programs.

And it is definitely an investor’s game. While a futures contract is defined as a firm commitment to make or accept delivery of a specified quantity and quality of a commodity during a specific future month at a price agreed upon at the time the commitment was made, statistics indicate less than 3% of futures contracts traded in a given year result in delivery of the commodity.