New Chinese Silver Exchange

I get you, but it seems iffy. Why would they pull their inventory and sell it in China? Wouldn't they have to move their inventory there in order to do so? The new market would have to be compelling enough to not only make up for any shipping cost but also overcome force of habit. I don't recall any silver manufacturers complaining about the NYMEX.

It would only be to their advantage if there were a long-term differential in the Chinese market's favour. That's iffy too because of arbitrage.

Good point. People love added volatility when it's upwards, but...

 

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Because they will make more money in a market without naked short selling. Also, it is likely that there will be less volitility, not more. It is easier to "sell" 100 million ounces of paper silver that never has to be delivered than it is to accumulate 100 ounces of physical. So that's not a concern. What would be interesting is if this results in a real physical price for silver for the first time in the life of just about everyone here. I don't know if this will happen. It's just something to watch for.

 

Chances are, they won't unless it's been telegraphed by a lot of complaints from those same silver manufacturers. People who deal in large sums tend to be conservative, as more money is lost if something gets bobbled. And, as Murphy's Law has it, changing procedures can lead to bobbles.

If habit wasn't a factor, every investor would be signed up with Scottrade or some other deep-discount firm. And yet, the full-service firms are still thriving.

Have you heard of Open Office? There's a perfect rationale for switching to OO from MS office: OO is free, while Office costs plenty. Despite that advantage, OO has hardly made a dent in MS Office's sales. Same with Linux vis-a-vis "Windoze," even though some "Winux" packages are as user-friendly as Windows now.

The China exchange will likely take off due to Chinese seller and buyers moving in. It has the home-field patriotic advantage, which counts for a lot in China. For all I know, they decided to forbid naked selling as a brag point for home: the new exchange is better than the 'cowboy American' NYMEX.

 

Not trying to argue, but that point also has a counterbalance. If you have to take physical delivery, then its hard for buyers to absorb extra production as well. If a miner show up with more silver than the market expected, it can easily lead to a short term price drop. In a paper market bulls would step in and buy on weakness knowing they have weeks or months to sell without danger of having to physically store it.

Kahn wrote a pretty good book on Chinese currency about the turn of the century. In it he detailed operations of London silver market pretty thoroughly as laying out how the Chinese obtained silver for coinage.

I am just saying that people who hate the CME I believe tend to have rose colored glasses on to some extent, ignoring all of the advantages of a paper market and discounting the disadvantage of a physical market. Each have strengths and weaknesses.

Someone before here lamented what happened to the Hunt's. Well, the Hunt's were trying to corner the market, and using market rules to help them do that. The Hunt's would never have been in a position in a physical market to do that, so even if we had a physical CME then it would never had been a story.

 

That was me. The point I was making was that the other side were far from wearing white hats. If you want to see the Hunts as black-hatted, then you can interpret what I said as "there were no white hats in the room."

There's a bit of a historical controversy over whether they were doing what they were widely accused of. One version said that they loaded up on silver because they thought it was a great investment, and got excited as the metal kept climbing. [You can insert a Texan joke here if you like.] Almost certainly, they were investors at the start.

Whether they were market-cornerers or mere pyramiders, it was still dumb of them. Even if the 'Crimex' board hadn't intervened, their scheme would have fallen apart anyway. They plumb forgot the first rule of parabolic rises: sell into them, don't buy them.

 

Time will tell, but I'm fairly certain that you are wrong. Money flows to the highest return. Your other examples are irrelevant since there is a service aspect that can greatly outweigh the price. As far as complaints go, many silver miners have complained for years about artificially low silver prices.

 

Time will tell, indeed.

 

Your example assumes the seller is desperate or stupid. There is no reason outside of panic to dump a large amount of silver on the market rather than sell it in an orderly fashion, lease it, or hedge it. I'm not saying that the new silver exchange regulations will be superior to the CME, but China certainly seems to have designed it to attract physical metal out of London and New York. The silver market is so small that even a relatively small quantity of metal could upset the workings of the exchanges.

 

Here's the link....
http://www.zerohedge.com/article/trading-over-counter-gold-and-silver-be-illegal-beginning-july-15

There is a 28 delivery clause which exempts a party from having to prove that they are an "eligible contract participant" such as a manufacture. The first part is hype but read the law blog. I could have it all wrong but it seems that they want to put an end to paper speculation. China looks like they are setting themselves up to avoid it from the start.

 

I believe that act was specifically for OTC "Over the counter" trading of PM , rather than commodity trading, like on the CME. There evidently were some companies/websites acting like the CME, offering paper futures, with little SEC oversight. IMO.

From what I read ,the Chinese exchange requires full upfront buy of the PM for delivery. The amount required seems way beyond the average level of a general citizen, but OK for many in HK or Shanghi, and it will be delivered there. The CME or London exch. didn't have that location. So yes, for delivery purposes, it will serve the Chinese that can take delivery well, but very few contracts are for physical delivery on the CME, as to get it , you have to pay full price for it, NO MARGINS , after the deadline for decision as to whether physical or not. The only advantage is delivery in the US. Chinese who wish to play the paper PM game, will still use the CME and other marginable exchanges. I can't imagine anyone in the US paying full price, and then the high delivery, bonding , and secure deliver from Asia. So I think it will have little overall effect in the bullion game, but like many things the Chinese propose, sound good......for a while, IMO.


Jim.

 

I think it's ironic how the Hunt Bros got nailed for doing on the long side exactly what is going on today on the short side.

Also, I personally don't care if a physical market is more volatile or less so, or provides higher or lower prices. I just want to see a market with some integrity that reflects true value. Do I think we'll get this from the HKMEX? Maybe not, but it does seem like its at least making the effort to appear that way.

 

Jim,

Thanks for pointing these out. All I am saying is there are good reasons to have a paper market, as expenses of physically handling PM, with all of the security needed, is VERY expensive. In a physical exchange you will be incurring all of these expenses, which will drive costs up. These costs create a larger and larger buy/sell spread, just like we see buying and selling to dealers locally today.

I am not saying either alternative is perfect, and am not stating that a paper market is preferable to a physical market, just that each has advantages and disadvantages. The "perfect" market would be one like the CME but with some strict limits both ways to prevent overselling or overbuying, but that would limit the exchanges profitablity so not likely to occur.

In my humble opinion, I see the Chinese market probably being higher, but with the added costs it will be hard to determine what the true cost of the silver will be, and how much of the price will be the extra costs. I think it will be a resource for Chinese people to physically obtain silver at higher than average prices, but not have too much affect on world prices other than that, due to volume, kind of like APMEX today is for US investors. Not until volume is considerable will it really affect world markets, and even then you will need to strip out the added costs built into it. I do see people coming onto this board and pointing to this market, not realizing the extra costs, and claiming the CME and London exchanges are "screwing the little guy" by under pricing silver.

Just an opinion.

Chris

 

Like you, I would not personally place a lot of faith in an exchange run by China. But I can see a couple of ways it could have a major impact on bullion prices. First of all, over the next decade it is entirely possible that there will be more Asian buyers of silver than in the West. And second, if most of the physical silver trades in China, the paper traders in New York and London might be put in the position where they can no longer control the price of silver by shorting it. They will become a side show to the new physical market, and this might be what the government of China intends -- that they end up with control over the price of silver.

 

I am probably depending on Wiki too much for this comment, but if someone has better info, I would appreciate it.
http://en.wikipedia.org/wiki/Silver_mining

This indicates that of the top 6 silver production mines and the top 6 "near-production" mines , none are in China or Asia. If this is true, are we assuming that silver will be shipped to China for the physical delivery, when the mines can continue to ship to US/Canada , and Europe ( London) at less cost and security? I don't think it will affect physical delivery contracts at CME or in London, etc. , but it does give a secondary destination for the mines.

I am really wondering why many ( here and other forums) seem to be trusting of the Chinese not to engage in the same type of "manipulation" or more since they have little or no oversight. I would be so surprised if they didn't even more so.
IMO.
Suspicious Jim

 

This article is on the fringe even for my tastes (although that's never been an outright reason for me to discount information that can be fact checked independently, which I have not done at this point), but if what it's saying is true about Nathan Rothschild having a vested interest in the HKMEX that would indicate the big boys are positioning for a transition.

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I have removed this link after considering that some of the content may not be suitable for all audiences. You may search for "The Rothschilds and the Hong Kong Mercantile Exchange" if you would like to read the article from Don't Tread On Me.
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One stat that sticks out in my mind is that China used to be net yearly exporters of 200 MOz, and are now net yearly importers of that much. So they must be able to at least come up with that number internally, from where, I don't know. It's a big country.

I realize I probably came across as trusting of this initially in another thread, but I really don't trust it at all. I am just hopeful that their stated aims of position limits and no naked shorts will be a reality. That doesn't mean it can't and won't be manipulated in other ways, or that those things won't happen in the shadows, but they are obviously aware of some of the dissatisfiers on the COMEX and maybe this is just their way of swiping volume.

 

I think the Chinese expect to manipulate silver prices, only in their case they probably want the price to be higher, not lower as it is in NY since they are large owners. It seems highly improbable that they would have opened the exchange without examining the economics of silver delivery. It seems doubtful that anything could be delivered to London or New York for less than to China; and if it was, China would probably do something to make it cheaper for the silver to come in their direction such as offering below market shipping rates in otherwise empty vessels headed back to China.

We'll have to wait and see, but my guess is that China knows what they are doing.