More on the topic from ZH's resident agnostic.
chindit13 wrote:
Perhaps Tyler will run a remedial class for those who are eternally confused between spot markets and futures markets, since your post, plus those who upvote you, indicates confusion.
"Naked shorting" applies only to spot markets such as equities. If I wish to short, for example, AAPL, I need to locate actual APPL stock from somewhere---usually a Prime Broker---so that there is no failure to deliver. I pay a borrowing cost for that APPL stock. Borrowing costs vary among equities, depending on how much there is available to borrow. In a heavily shorted stock, the vig can be excessive, whereas on equities with a low short ratio and a large float, the costs are minimal. If the registered owner of the stock is a large fund, it will share in the vig with the Prime Broker. That juices the yield for the long term holder, which might be a pension fund, mutual fund, insurance company, corporate treasury, etc.
Futures markets are a totally different beast. There is no need to borrow anything. One side of a trade merely creates, in essence, a bet with the other side of the trade regarding the future price movement of the underlying commodity. The exchange exists as both a marketplace and as a sort of referee between the two parties in the bet. In theory, one who holds a position to expiration assumes the responsibility to either pay the seller in full for the underlying commodity (the long pays) or else deliver the underlying good (the short delivers) to the buyer. Many futures markets have a cash settlement feature. The vast majority of contracts are liquidated well before expiration, and generally before the first notice of delivery.
The whole point of a futures market is to create a venue where speculators can unintentionally serve the purpose of providing liquidity. For example, General Mills is a natural buyer of wheat for its breakfast cereal. Archer Daniels Midland (or even a medium sized wheat farmer) is a natural seller. Those two opposing entities may come to an understanding of their production (farm side) or demand (cereal side), plus each side's respective cost structure, at widely different times in the growing cycle of the wheat. Without the specs providing liquidity, General Mills might show up understanding their own production side when the farmer as yet has no idea of the yield or even his costs. Without the specs, some side would be making an uninformed trade. As the specs liquidate into delivery and expiration schedule, contracts cancel each other out, and GMills ends up on the other side of the remaining contract with ADM.
Futures markets have existed for thousands of years. Nobody ever had a problem with them until the PM crowd decided the whole world was out to get them.
The best trick for "manipulating" markets, though it only works on a short term basis, is to either move arounds stores, or else change its classification (such as from "eligible" to "registered", or vice versa). These tricks can fool the uninformed, who apparently don't know who they are. Price suppression also could only work short term, because sellers would simply ignore spot and not sell. None of that has happened from $1921 all the way down to $1200, nor $48.50 all the way down to $20. If anything, UPSIDE manipulation is much easier, because once prices get rocking, people climb out of the woodwork hoping to catch the rocket ship to the moon.
The same lack of understanding of the nature of futures markets and the brokers who deal in them was behind the fantasy of "Crash JPMorgue" (I believe a former ZH member has relinquished all copyright claims to that, and doesn't mind letting Gilbert Gottfried, or rather Max Keiser, take credit for it). JPM hedges both miners and large scale physical holders. Those would tend to be short futures positions. JPM might also have jewelers and other end users on the long side of the market. While CTRs might give some insight into the positions (com'l vs. spec), these are not always accurate. PM Promoters have used this confusion to do a lot of business.
While I'm here, I'll add a point that is only peripherally related, but which also causes confusion and leads to foolish conspiracy-type views. Regarding silver, most large holders of silver hold it in the form of 5000 oz good delivery bars. I've had the pleasure of visiting a private vault where a massive holder has a literal underground warehouse, with stacks of pallets of 5000 oz ingots. There is a fork lift inside the vault for moving pallets. A lot of them have been moved in the last few years, especially when Ag was in the $40s. For the retail crowd to be able to get the coins they desire, the fork lift has to be gassed up, pallets moved out of the vault, shipped (maybe to another continent or country) to a smelter/stamper/whatever where the giant ingots are melted down, then cast into one ounce coins. All of that involves costs, which are included in the coin price. Add to that the rent on the local coin shop plus the dealers' staff salaries and such, and there's your spread over spot. Just as a diner cannot expect to pay Pork Belly Settlement Price for his side of bacon at IHOP, a retail coin buyer should not expect to pay spot for his Ag coin. That process---taking a pallet of 5000 oz ingots to the mint---also takes time. When retail gets excited about Ag and scoffs up the existing inventory of one ounce coins, a coin shortage develops. Buyers should not assume that means there is an Ag shortage, but rather that there is just a shortage of retail-level Ag products. Of course Promoters are not averse to taking advantage of that misunderstanding.
Gold tends to be held in smaller sizes (100 oz to 400 oz bars). Most of the costs associated with turning these bars into one ounce coins are less, so the spread at the retail level between spot and coin offer price is less than for silver. Even a mid sized Au buyer can pay about spot plus $5 if he buys, say, 400 oz Au bars on line. Go to a large Middle Eastern dealer and he can pay even less of a spread.
PMs may well re-ignite their bull market (Mohammed Aboud al Amoudi, Abdul-Aziz al-Suleiman, the al-Rajhis, etc. could try to force COMEX delivery and make up for April 1980 and what Henry Jarecki did to them), but the same sort of incredulousness people bring to MSM or Govt pronouncements should be brought to the musings of the Promoters. Otherwise, they're just somebody else's Sheeple.
. . .
Libor is a completely different animal, has fewer players involved (so it's easier to manipulate), and is infinitely more important to bank balance sheets and derivative positions than gold, which---as much as folks around here believe otherwise---is not of particular importance to many in positions of authority.
Relative to bank assets, planetary GDP, etc., gold is barely a rounding era. The likelihood of it ever being a backing for a currency again is pretty close to zero. As an asset, I suspect it will have its day again, as all assets do, and folks who champion themselves as "stackers" might one day want to consider moving to China or India where they are more likely to get the value and respect they think they deserve for owning it. As for the West, which as we are told ad nauseum is letting gold slip to the East, it is unlikely that it will care a bit if China and India suddenly announce they own all of it. India has pretty much always owned more than any other country, yet it hasn't done a heck of a lot for them. I'm there a lot, and I've yet to see the cutting edge of human civilization about which we should all be envious. I thus conclude folks can get by just fine with intellect and ambition, rather than a shiny metal.
Gold is seen as having intrinsically a high value.