That is a good question. Since I am not a farmer, and have to rely on second hand information from sources like documentaries and such. How does farmer Joe do it in the real world. You have peaked my curiousity. Are there regional brokers for CME that deal with co-ops and the like? Is it the contract beween Farmer Joe and Martha White that is being bounced around the floor between now and delivery? Your first hand knowledge and insight would be greatly appreciated.
I grew up on a farm in the 70's and 80's. Here is what he did then. In the spring he went to the PCA and borrowed money to pay for seed, fertilizer, pesticides, herbicides and fuel. He then worked his fields, planted them and later on sprayed them. If he was old school he might even cultivate the weeds. At the end of the season he harvested the crop, put it in a drying bin, and dryed it properly, then sold it to the local or regional elevator.
Now, if the govt decided there was too much of something, they'd pay Mr Farmer to not plant certain items with some guidelines.
Those same things probably apply today, but there are many more loopholes and angles that I'm told about from family members that are still farming. In fact, if you do it really well, you can get the govt, typically state and fed, to build you livestock housing to clean up water systems, pay you to plant nothing and if all goes really well, rehabilitate some of your land and even buy some of that land for over market value.
FROM A WALL STREET PERSPECTIVE BY QSILVER007.
Yes it is true that many investors trade the precious metals, many more than in previous years. There are also a lot more of algos(computer driven machines) that trade very quick and have no opinion except to make money. These machines all make the same bets, and as one shi psinks so do many. Rewind to last summer Bonds 140, Gold 1900, Silver 44. All were viewed as a safe investment.
My how quickly times have changed, Gold is iffy, some days machines buy some days they sell. As for Silver, it is currently being used as the short leg in the PM space. Many machines are long gold short silver, long gold short platinum, long platinum short silver.
It is well know that if every person who owned a COMEX future tried to take delivery, it would not be available. But, in the futures world less than 2.5% of futures are actually delivered.
It is very similar to the banking sysytem as all of our major and local banks keep only a tiny part of the reserves in cash.
Another problem is with The ETF's. You have PLSV which is a true bullion fund owned by Eric Sprott of Canada, He DOES OWN the bullion. That is why his funds always trade at a premium to the silver market.
The etf problem is SLV, double long and short and triple long and short ETF'S. We as Silver and coin investors may believe it is manipulation, but it is simply trading and the way the world works. Trading and investing are about making money. Being early to a trade or investment simply means you are wrong.
Will SIlver ever go above 30.00 again in our lifetime? ABSOLUTELY.
But, it could go to 24.00 first. That is not my personal belief, but time will tell.
With Futures, you do not need to locate a short future, so the selling can be amplified as it has been recently.
At least with the ETF's one must locate the underelying, and if you choose to short it you have to pay to do so. This is telling us that there are excessive shorts in the market as the Shorts are paying more to be short SLV than the longs are to own it.
I posted a blog a week ago and said I would work on my spelling, and grammar. I hope this has made those happier. The blog was regarding Europe and the metals.
The metals are driven by emotion right now. Most traders do not know why they are long or short.
Aftert the FED announcment of no QE PM's took it on the chin. Option volatilities rose dramatically. Technically funds will bea or are short Silver as we are near the year low of 26ish.
The WS crowd is waiting for the US to announce QE. It will never happen as the funds have done the heavy lifting and put govt paper at or near all time low yields. There is not much upside left in 2s, 5s, 10s, or 30s. Metals will have there day sooner rather than later.
Gold continues to form a solid base above the 1530-1550 level.
Silver made a year low in the cash market and did close up on the day. Although it was only a few cents that is a bullish sign.
Options: Large call buyer contiue to come in to Gold adn SIlver. Gold in DEC 2012-AP 2013. SILVER there was a massive call purchase of 80,000 SLV lots of the JAN 2013 36.00 call. As long as Silver can continue to base above 26.00 it may be scary, but it sahll be very rewarding.
Disclosure: I am a Wall streeter, and I am simply sharing some info that some of you may or may not know. I hope this message is imformative for my fellow coin collectors.
Sincerely,
Qsilver007
Originally Posted by C Jay
Notwithstanding any specific commodity, how exactly is it not manipulation if the market price setting mechanism is capable of expanding the "supply" (paper contracts representing real commodities) by 4000%? If only 2.5% is delivered then the real supply would have to grow by 4000% to meet 100% delivery. This would require speculators to also increase demand by 4000% to equalize the supply/demand dynamic, and to say that leaves some wiggleroom is a gross understatement. A contract may change hands multiple times before delivery or being closed out, but that still initiates buy and sell orders that impact the price in the process. While this does provide the benefit of price stability, it is at the expense of fair value.
In the case of gold and silver these contracts also usurp demand from the physical market as investors use the paper contracts instead of the real thing, which actually hurts those investors because if they all bought physical the price would have to be a lot higher.
I've heard before that every buy has a corresponding sell, so they cancel out (in a world where naked shorting does not exist), but if everything cancels out then the movement of these contracts in between initial creation and close out should have no impact on the price. Maybe this is the case and I just don't understand it well enough.
Regardless, there can still be upwards of 100 ounces of paper bought or sold for every physical ounce that exists. Using that metric, the real supply only impacts 1% of the price. Again, how is this not manipulation?
Last edited by InfleXion; 06-23-2012 at 07:00 PM.
It is obvious manipulation. But so is the funds buying up govt bonds so the yileds are zero. Unfortuantely the trading world has become so digital, the Paper silver and Gold do set the price. In March of 2011, many traders tried to put a stop to the manipulation, by taking delivery of Silver. The March future went over the July, first time in many years. Prior to that it was when SLV was invented, as they needed to buy SIlver.
The only way it stops is in a small market like silver if every indivual takes delivery. Then COMEX inventories drop.. Right now they are near historic highs at 175 million ounces. Yes you are right, SIlver is the only future, where someone or entity can hold a short position which is almost as great as 1 year of world silver production. Not sure if this helps you, btu its just the way it is. Im a metal bug at heart and it is frustrating to see people pile into govt paper and ito APPLE and PRICLEINE, and out of Silver but thats how it is now.
One thing Ive learned in trading, is when it feels so bad to be a buyer, it usally is the right idea. In my professional opinion the manipulation will end when n one expects it, the short commercials will cover near the lows as all the specs get out. For what its worth, Large govt's continue to buy gold, and are not buying US paper. Silver will eventually tag along, and if I am going to make a mistake with Gold at 1575, Id prefer to own Silver at 26.90
goode evening/morning..............QS007
I'm not sure what the problem is for the farmer. His contract is for a certain price for a delivery of corn on a certain date. Why would he be worried about who bought it, how many times it traded hands or where it ended up since his only concern is getting the money for his corn?
Of course he is free to sell his corn to his hometown mill, but without a futures contract for a guaranteed price, the farmer then takes on 100% of the risk that he might get a lot less for his corn. Likewise the local mill, who chooses to buy direct, runs the risk that no farmers might show up and the mill has to close.
Last edited by fatima; 06-24-2012 at 06:23 AM.
A problem with any producer/farmer hedging in the futures markets:
Back in the 1800's when the CBOT was started, the Farmer (as the CBOT started as grains only) could put up hi physical supply as collateral and get 100% margin.
Fast forward 100 and some years. Dodd-Frank, and many other new finacial legislation pieces havecome out to try and cubr "speculation", but they only are concerned about this in the COMMODITY MARKETS.
Why? Because if APPLE, the DOW, the SP, or some equity goes up, it is looked at a friendly to the general public.
Currently, in the grain markets, unless you have a receipt at a valid delivery point, you can look at the CBOT/CME website, it does not matter if you have 1 billion bushels of corn on your farm. If you sell futures and the market rises, the farmer ho sold will get squeezed via margin call and will end up having to buy back his hedge. Many rural banks used to do some of the hedging thru bigger brokers ie Cargill/ADM, but after 2008 they did a lot less, and many stopped alltogether. Also in Grain Markets, the futures curves are not like the metals curves, in recent years as there has been less grain around than expected, the front months (month before the farmer can deliver his crop) trade at a premium. The harvest month generally trades at the lowest future price of that calenedar year.
Now to the PM's. The futures markets as well as physical have a natural carry involved, in silver it is currently 2-3 cents per month and gold is 1.5-2.0 er month. This makes sense as 1 million or billion of PM takes up a lot of space and must be secured, insured etc.
Precious miners hedged heavily from the mid 1990's til about 2011. The parabolic rise in metals, last yer was in part due to fear, Greece, SP downgrade, etc, but it was also some of the bigger Gold and SIlver miners lifting there hedges, because emotions got the best of them and they felt 1900 and 45 were too low. They were also under seve margin pressure from there banks, as the have the physical, but unless it is in bar form, number and registered thru one of the acceptable refiners it does them no good. SO believe it or not, it was many of the largest Gold and Silver mineres that were buying back short calls and futures hedges last year.
Also I saw someone mention WTI Crude. Crude futures are down this year, but gasoline futures are still up slightly. The parabolic move in Crude in 2008 was again, end users and producers lifting there hedges as they did not have there Oil in Cushing, Oklahoma where the contract is elivered.
Conclusion: Futures markets and Paper markets will contunue to dominate and set prices for every major commodity. Governments will continue to craft ways to but "speculators" in Bull makrets, but as prices go down, they have achieved there goal.
The US does not have too much ammo in its so called "Money Bazooka" anymore, so all they can do is instill fear in funds, funds sell there commodities, buy bonds and voila, inflation is curbed and the funds have done QE 3, QE 4 etc for the US. These are facts, and some of my opinions I hope this helps clarify some things for those unfamiliar with the futures markets
Let's just look at this from the simple approach and even it can be somewhat confusing. As for the question of how the CME futures set the cash price for commodities the simple answer is because the futures market is where the cash buyers and sellers hedges are created.
For a farmer to lock the cash price for their crop they have to set 2 things - price and basis. A farmer sets their price for a crop using the futures market and set their basis with the entity of which they are going to make physical delivery of their crop. Price is determined from the futures market and basis is the spread (discount or premium) off price a specific buyer is offering for the crop delivered at a specific point in time. A farmer can set price with a hedge by selling futures on the CME but this only generally sets their cash price as it does not set basis. The farmer sets their basis with a different contract (basis contract) ussually with a buyer (grain elevator, mill or such) that is more locally located. At the time of delivery to the enitity which the farmer has their basis contract they close their hedge by buying futures. The point is a farmer makes delivery to the entity with which they have created the basis contract which is seperate from the CME.
Justafarmer, you have just described one of the huge reasons why gold and to a lesser extent silver, are not the same as real commodities. (as much as people like to think) With PM trades, there is essentially no basis portion.
When you ( same as the farmer) sell your silver/gold to the coin shop (the local elevator) do you receive a price equal to the current futures price? Or do they pay you a price computed as a discount/premium of current futures (basis)?
I spoke perfectly clear. It is your misunderstanding. Most contracts are offset, thereby the person making them does not need to physically deliver the product.
My description of the difference between trades and open interest were a separate matter. Your lack of being able to cognitively comprehend that is not my concern.
Member ANA, ANS, ONS, TCACC, and other random alphabetical concoctions.
We give them that "power", they were not asking for it Inflexion. Their markets are all about their customers, and their needs. They are not asking to be the price setter for physical trades at your local coin store, yet are pilloried by many saying they are trying to manipulate the price you have to pay locally. A large part of the presentation they go over is basis, and the fact they know what you pay locally will be different than their market prices.
Again, we do not pay them money, so they do not design their markets for our interests. They are a free marketplace, free to set the rules that are designed for their customers. The do not ever try to benefit buyers or sellers, but both, since all the CME is concerned about is volume. They need to please both sides in order to get volume. The CME group last year controlled 8 quadrillion dollars in trades. Its this volume of money, (and the short term interest from it), that provides the profits for the whole thing.
Member ANA, ANS, ONS, TCACC, and other random alphabetical concoctions.
People speak perfectly clear all the time, but this isn't an indication they are correct. Personal anecdotes and insults don't prove much either.
You originally stated that 1% or less of the futures contracts for corn are delivered which is what started this discussion. Clearly this is wrong. The only reason that I think that someone might make such a statement is to somehow equate gold and silver to corn and pork bellies. They are not the same. The reasoning has been posted by me and others above which you have decided to ignore.
In regards to offsetting a contract, do you understand what this means? It means you purchase exactly opposite of your current position back to the exchange. It terminates your position with the exchange but it doesn't change the total number of futures contracts. The total number of contracts stays the same and in the case of real commodities, are go to 100% delivery. i recommend that you study up on the matter.
Can you provide a source for this statement, or is it opinion?
Already discussed by me and others above. If you haven't read the preceding I recommend you do so. If you didn't understand some of it, then I will be glad to provide clarification on any specific thoughts that you have on the subject. If you don't know how the commodities markets work then I assume you can google up some info on that so I won't provide that information.
Last edited by fatima; 06-25-2012 at 05:34 PM.
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