The Dodd-Frank Act has changed a number of laws in all of the securities acts including the Commodity Exchange Act. One of the impacts of this regulation is that it prohibits United States residents from trading over the counter (OTC) precious metals, including gold and silver, starting Friday, July 15, 2011.
More specifically, as Dodd-Frank will come into effect on July 15 it will bring to live Section 742—Retail Commodity Transactions. Part of this section amends the Commodities Exchange Act by placing spot commodity transaction (in this case, OTC precious metal spots) under the jurisdiction of the U.S. Commodity Futures Trading Commission (CFTC).
As the proposal for this change entered public scrutiny last August, legal and financial experts assumed that the CFTC would rescue these retail products by creating a regulatory structure. However, with only few days until the July deadline, it is almost impossible that that CFTC will rescue OTC precious metal spots.
The new amendment offers several exemptions. Eligible contract participants (ECPs) and eligible commercial entities (ECEs) are free to trade as they like. Retail transactions are also exempt from CFTC oversight if they either result in a physical delivery within 28 days or create an enforceable obligation. However, as the OTC market currently stands, very few precious metal spots would qualify for these exemptions. The result, as the amendment will go into effect on July 15, off-exchange spot transactions will become illegal in the United States.
With the magic wand of the Dodd- Frank, the CFTC has used its authority to shut down the OTC spot precious metals domestic market down entirely, however you will still have the opportunity to trade these products on the regulated US exchanges.
Clearly, the new amendment represents a series of escalating restrictive measures placed on the once-unregulated precious metal spots market. However, the question now becomes: what will happen to gold prices from now 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!
