Section 742 of the Dodd-Frank Reform Act effectively ended the over-the-counter spot sale of gold and silver derivatives, such as the USD/XAG and USD/XAU pairs. Before the law was passed, these derivatives could be freely traded OTC with up to 200:1 leverage. That is, the investor had to put up $1 cash for each $200-worth of gold or silver. This miniscule margin requirement may have seemed attractive to unsophisticated investors until they experience the capital-destroying effects of numerous margin calls on volatile trading days. Unless they intend to actually take delivery of the metal within 28 days, retail investors can no longer participate in this OTC market. In 2011, Forex.Com closed down its large business in OTC gold trading. Exchange trading of these instruments is allowed.

Another ramification of the regulations is that capital managers and advisers who deal with a certain number of clients must now pass the Series 65 certification and receive SEC registration as a Regulated Investment Adviser (RIA) or Investment Adviser Representative (IAR) in order to serve US-based clients.

These changes are meant to protect the small investor, which they do when observed properly. However, we have seen the appearance of “rogue” leverage metals broker/dealers – unregistered and/or facilitating leveraged OTC spot metal trading. These folks usually operate offshore to escape SEC scrutiny. Well, how does an offshore OTC leveraged metals dealer get sales leads? One way is through unscrupulous sales list providers. Let us state clearly: SalesLeads.TV will never sell lead lists to these OTC leveraged metals dealers.

Of course, traders are welcome to trade spot gold and silver futures on an exchange. With this in mind, NASDAQ in February announced the trading of a spot gold futures contract (symbol NAU) on the NASDAQ OMX Futures Exchange. The contract is cash-settled, meaning there is no physical delivery of gold. A simulated cost of carry is built into the price through swap points, thus duplicating the OTC spot experience.

The NAU contracts are available in sizes as small as 10 Troy ounces. The requirements of the Dodd-Frank Act are satisfied by central counterparty clearing and client protections. Investors can take margined positions in this contract to the extent permitted by the Commodity Futures Trading Commission, the options clearinghouse and the futures-trading business that handles these transactions. Some observers see the NAU contract potential competing to the SPDR Gold Shares Trust, a popular exchange-traded fund.

–Eric Bank