Discussion in 'Bullion Investing' started by Yankee, Jul 28, 2009.
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It is actually good news for gold and silver!
The limits will prevent speculators from selling short futures contracts unless they can demonstrate that they have physical metal to deliver. Right now the speculators can short silver [in particular] without limit without demonstrating that they have sold silver that they actually own.
So swine like Goldmann Sachs can't unseat commodities anymore. The gov. should never have loosened those rules after decades of stable commodity markets.
Stable markets. = stable pm prices FTW
Nobody owns anything in the futures market anyway, were never intended to. Futures are like options in the stock market - they are decaying assets that eventually will evaporate into nothing if not exercised prior to expiration.
Stocks cannot be shorted unless somebody actually owns the shares. Futures however can be shorted when somebody else actually owns future long contracts. It is the contract being shorted, not actual silver.
Of course every long future contract is backed up by actual silver or it cannot be sold to begin with. But few ever exercise the long contracts, and have no intention of ever exercising them when they buy them. Instead they sell them prior to expiration to somebody holding short future contracts so that the person holding the short can close his contracts out.
It's no different than the way the options market works in the stock market. People are trading paper and that's all. It is gambling in it's purest form - legalized gambling.
That's where the trouble starts. In the case of many commodities, a person has to demonstrate that they actually have the commodity for delivery to short it. If they don't own the commodity, the volume of contracts they are permitted to trade is limited. In the case of silver [and I think gold], a speculator can short an unlimited number of contracts without owning the commodity for delivery. This greatly distorts the price discovery process. The actual number of futures contracts is greatly in excess of the amount of silver in the Comex that is registered for delivery. If you or I wanted to short huge amounts of silver through the futures market, we obviously could not because no bank or broker would extend the credit and take the risk. But if JP Morgan Chase wants to do it, they have no limit under current law. Thankfully, this seems like it might be about to change. This should result in higher silver prices.
The CFTC can't do this. Perhaps Congress or the Treasury Dept can.
But Cloud, nobody actually owns ANY commodity in the futures markets, it's impossible. All you do in the futures market is promise to deliver if your contract is called.
I have had a concern that maybe the silver futures are selling so low in an attempt to control the price rise. Silver has gone up roughly 200% in the last 5 years from what I find, more than gold or platinum. Your thoughts???
Thanks CLOUDSWEEPER, I will have to research the CFTC as I'm not sure what that is yet!!!!
Goldman Sachs Group Inc. (NYSE: GS) representatives are yesterday (Tuesday) defended their commodities trading business on Capitol Hill, where regulators may set limits on speculators in the sector. The Commodity Futures Trading Commission (CFTC) said that the energy trading community may have played a major role in the volatility of energy prices over the last few years, and may need to expand its oversight of the practice. "The American people are tired of excessive speculation and bubble economies caused by Wall Street greed," Senator Bernard Sanders, an independent from Vermont, said at the hearing, according to The New York Times. "They are tired of hedge fund managers and firms like Goldman Sachs making a fortune betting that the subprime mortgage market will continue to get worse or that more companies will go bankrupt."
The point is that someone can go into the futures market and purchase contracts to deliver X million ounces of silver at a future date when they don't actually own silver. This has the same impact on the market price of silver as an actual sale and tends to keep the price low. If the party is a big enough player, they can roll-over the contracts or even add to their short position for years at a time without ever covering -- this has actually been going on. At the same time, this party may be profiting by purchasing silver or options on silver or selling the contracts back into the futures market at a profit on price dips. The futures exchange was set up to (1) allow legitimate hedging by buyers and sellers, and (2) to act as a price discovery mechanism. A little speculation is okay because it provides liquidity, but it has grown so large that the original legitimate purposes have been drowned out by speculative volume. If one of the large speculators is forced to default for some reason and doesn't hold physical silver to cover, there is going to be chaos, and the exchange may actually close. The regulators have recently become concerned enough about this possibility to consider placing position limits on sellers who can't demonstrate they own the silver they are offering to sell. This looks like a positive development to me.
So you believe, and I agree, because futures guru's are selling more contracts than they amount of actual silver they own it makes the market seem as if there is more silver present than actually there is? So simple supply and demand says if there "appears" to be a greater supply then the price would naturally drop. Maybe this explains why the ratio between silver and gold price is 1:68 right now when through most of history it has been 1:20. This actually makes sense to me CLOUDSWEEPER. Any further thoughts, or maybe a link explaining the futures problem?
My point is that the very same thing is true of ANY commodity. For example, I can purchase pork bellies or wheat futures for next year, or the year after - the pigs are not even born yet and the wheat has not been grown. It does not exist !
How is that any different than silver or gold ?
Yes, the specualtors are what creates the bubble. They always have, in any market. You name it, and the futures market controls the price of any product. Why ? Because people are betting on it going up - or down.
And who are the speculators if not the people ? We are own worst enemies. We are the ones who created this mess. Not Goldman Sachs or any other brokerage house. IT'S US !
Now you wanna see a real mess ? Take away the futures market. Wheat farmers will no longer have any reason to grow wheat for next year. Pig farmers will not raise the pigs. Prices will drop clean out of sight.
Now you as the consumer say - Hooray ! that's a good thing ! But is it ? What happens when the few farmers that are left go out of business because they can't get a high enough price to even justify planting next year ? What happens when all those people in the supply chain are out of jobs because there are is no wheat or pigs to ship ? What happens when your kids tell you that they are hungry and you tell them - sorry, the grocery store is closed and out of business ?
Yes, specualtion in any market is bad, in one way. But the other side of the coin is that specualtion, betting that you can make money on something in future is the driving force that literally keeps all markets alive. It has been for centuries. Take it away and see what happens.
Goverment control is not the answer. What market, where prices were regulated by the govt., have you ever seen that was successful and did not blow up in their faces ? Name just one for me.
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