Scary stuff and more government control

Discussion in 'Bullion Investing' started by Yankee, Jul 28, 2009.


    GDJMSP Numismatist Moderator

    That's actually a tough call Darryl. But honestly, I think it would be better to leave it alone. As long as the stock and commodity markets have existed there have been claims of manipulation. And I suppose it's true in a way for any market can definitely be influenced by activity in either direction in that market.

    But the one thing that always, always comes to pass is that eventually there is a reckoning. If surpressed, the market eventually takes off like a rocket. Only to fall to back to earth sooner rather than later. And if a market is inflated, then eventually it blows up in their faces and prices drop like a hot rock. This never fails to happen - ever.

    Like water, any market will eventually seek its own level. It can't be any other way. So I'd leave it alone.
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  3. USS656

    USS656 Here to Learn Supporter

    In your previous example you used the senerio of people making negative business decissions based on the lack of a futures market. I think our recent history shows an incrediable negative impact on world businesses based on the minipulation of those markets. In this case I am speaking of oil prices last year and the wide reaching impact those prices had despite the face thateveryone said there was no shortage of oil. I don't think just sitting back and waiting for bubbles to bust makes for a stable economy. That's not to say that the government couldn't make it worse. Sorry for any spelling issues - blackberry is hard to review on.
  4. Cloudsweeper99

    Cloudsweeper99 Treasure Hunter

    I don't think anybody wants to take away the futures market. And the main issue isn't about buying commodities in the futures markets. It is about selling commodities you don't actually own or have access to. If you wanted to sell futures contracts for an enormous amount of something, the commission is proposing that your transaction be limited to a certain [fairly low] number of contracts unless you can prove you either own or will have access to the commodity to deliver when the contract comes due. This limits the ability of speculators to affect the commodity price. I think that's a good thing. Others may differ and continue to believe that speculators should be permitted to buy or sell enormous amounts of a commodity through the futures market in amounts far in excess of the physical production of that commodity. That's an accident waiting to happen. Also, nobody is talking about permitting the government to regulate prices. They are only regulating the participants.

    Your farmer example is backwards. Nobody is trying to lower prices here. They are trying to raise them to free market levels by preventing speculators from selling commodites in huge amounts to drive down the price for reasons totally unrelated to supply and demand.

    What if there was a futures market for automobiles. Under current law, a speculator could sell a futures contract to deliver 10 million autos at the end of the year. Now that is clearly impossible, causes price manipulation, and threatens the price discovery mechanism of the market. What is being proposed here is that the market participant have the ability to actually deliver the 10million autos on the delivery date before they can write the contract.

    How is that bad?
  5. bhp3rd

    bhp3rd Die varieties, Gems

    It's called gambling, in Vegas it's legal.

    It's called gambling, in Vegas it's legal.
  6. bullion dude

    bullion dude Junior Member

    So are all silver futures sold based on projected mine output in the future? Or are some futures sold on existing silver above ground with speculation on spot price rising? Just how does that work?

    GDJMSP Numismatist Moderator

    It wouldn't be bad, if it was possible. Nobody can ever actually have the ability to actually guarantee delivery on any futures contract before the contract is written. That's why they call them futures - because it is in regard to an event that may or may not take place in the future. And since we don't know what's going to happen in the future - we CANNOT guarantee it.

    If the government wants to do something to ease or stop ramapant speculation in the futures market - fine, do it. But they should at least come up with an idea that is actually possible.

    GDJMSP Numismatist Moderator

    All futures are based on predicting the future. Longs are betting that price will rice - shorts are betting that the price will drop. There is no correlation to actual physical items.

    It's like I said before - futures are decaying assets. They are based on time and since time ever marches forward then the value of any given future contract gradually declines as time advances. This is regardless of what the actual price of the given commodity is at any point in time.

    Say you want to buy longs on wheat for next year. If the value of the wheat never changes even 1 cent during that year - then as time progresses your future contract loses value until eventually at the expiration of your contract your contract becomes completely worthless.

    Now on the same contract, if the price of wheat drops during that year, then your contract loses value even faster. Eventually becoming completely worthless even before expiration.

    Now what happens if the price of wheat increase during your 1 year contract ? Well, it depends on how much it increases as well as when it increases. If it increases a lot, tomorrow, then your contract becomes more valueable and you can sell it to someone else for a profit. But if the price does not increase (the same amount as above) until 6 months into the term of your contract then the increase in the value of your contract is much less because of the time element. So again your asset has decayed. And the closer you get to expiration date the faster it decays. Eventually, say the day before expiration, the price of wheat is up from when you bought the contract, but not a whole lot. Again your contract is worthless. The only possible advantage you have left is to call the contract and take delivery of the actual wheat. But of course you will have lost anyway even by taking delivery. Because the premium you paid for the future contract was well in excess of the increase in price. And of course you now have to do something with the wheat you own. So you have to sell it. That also incurs costs, and so you have lost even more.

    The only possible way you can make any money on futures contracts is if the price of the commodity goes up greatly, and very soon after you buy the contract. Then you can sell that contract to somebody else for a profit. If it doesn't - you are going to lose money, it is inevitable.

    You see, with futures you are paying for time. Not the commodity. And as time goes on - it becomes cheaper and cheaper because there is less chance that the commodity will increase in the time left.

    As I said, it is gambling in its purest sense. Many think Las Vegas, Monte Carlo - where ever is the gambling capital of the world. It isn't - Wall Street puts all of them combined to shame.
  9. Cloudsweeper99

    Cloudsweeper99 Treasure Hunter

    Bullion dude,

    You got it right. Google Ted Butler. He writes some of the best analysis on the silver market and the problem with the futures.
  10. Cloudsweeper99

    Cloudsweeper99 Treasure Hunter

    This isn't correct. If an oil exploration and production company decides to hedge a percentage of next year's production, they aren't gambling or speculating. They are hegding to lock in a cash flow so they can budget for next year. These companies are concerned with locking in a return on capital, not speculating on the price of oil. And they can demonstrate to the CFTC that they have every expectation of being able to meet delivery of their futures contract. Is it a guarantee? No, that isn't possible in this world. Is it evidence of legitimate commodity hedging? Yes, and that is what the discussion is about.

    It is very easy for the government to stop speculation with position limits. The legitimate hedgers will be exempt from the limits by demonstrating that their business has the normal expectation to produce more wheat, corn, soybeans, oil, hogs, silver, etc... than the futures contracts requires for delivery. This locks out the market manipulators who currently sell more contracts than could be delivered by any entity on the planet, particularly in silver.

    Interestingly, if someone [like the Hunt brothers] decided to purchase massive amounts of silver for future delivery, the regulators would jump all over them for being market manipulators. But if someone [like JP Morgan Chase] decided to sell massive amounts of silver that they don't actually own and promise future delivery, the regulators don't even blink. This is the issue. Leveling the playing field.
  11. bullion dude

    bullion dude Junior Member

    Thanks GDJMSP and Cloudsweeper. The good thing here is I am seeing both sides of the coin in your replies to each other. I am going to google Ted Butler. What I am getting out of this thread is that it is possible for speculators to sell more paper contracts that the amount of silver they would be able to deliver (however unlikely the contract being called to deliver would be). Because of silver's dramatic price rise in the last few years (200% roughly) there is alot of hype about buying silver, I have been pushed, and pushed into silver being the save all investment. I feel this hype is what is pushing the short futures so hard and anything that is growing that fast can become easily corrupt. I feel like any investment a big rise is followed by some sort of correction so I didnt fall into the push and continue to "average" in a way by buying a little here and there.
  12. GDJMSP

    GDJMSP Numismatist Moderator

    Silver up 200% ? Since 2002 it increased 300% at one point. Gold increased 400%. But if what you are after is stuff with really big increases - then forget all about precious metals. What you want is plain ordinary scrap iron. In a much shorter time period scrap iron increased well over 1000%.

    Adds a little different meaning to the saying - all that glitters is not gold.
  13. Yankee

    Yankee Senior Member

    I agree! but what do you think your neighbors would think about all those big piles of scrap iron in your back yard? LOL
  14. bullion dude

    bullion dude Junior Member

    scrap iron?? cool!! But YANKEE is right, I already have too much negative attention from my neighbors now, 40 tons of iron in the back yard would degrade the neighborly relations further.

    Huge returns would be great and gladly accepted but I buy bullion for the intrinsic value and it seems to be the best inflation hedge.
  15. GDJMSP

    GDJMSP Numismatist Moderator

    With returns like that, you could afford the storage space.

    Point is, any material has intrinsic value - even just plain dirt. When looking for the best return on your money - never overlook what is right in front of your face.
  16. Drusus

    Drusus Pecunia non olet

    This is the difference...a legitimate company who has delivered in the past and who can be expected to deliver in the future...and people selling something they will never deliver, have never delivered, and arent in the business of delivering. Speculation using real possible future estimates based on past trends.

    An oil company who drills and pumps and has so for many years is the actual producer and they can assess from past what the future might look like...One reason for high oil prices are the speculators who buy up and sit on the oil until they can make a profit...and those are the good ones who actually buy and dont just sell what they never had or never plan to have. I am not a fan. People will do a lot of thing to make sure things work out right and prices go up and they make the money they expect to make. JP Morgan sits on huge amounts of oil (actual not projected) which will not enter our gas tanks until they can somehow assure they make a nice profit and what might they do to make sure this happens?

    Speculation must be realistic...
  17. bullion dude

    bullion dude Junior Member


    Point taken! I just use bullion because silver and gold have seemed to hold their value best and are proven by a long history as a storage device for money. Aluminum, copper, iron, wood chips or coffee beans, although all have an intrinsic value, dont offer the same stability I feel gold and silver do. Could make a fortune or wind up with a pile of scrap you cant wait to give away.
  18. Cloudsweeper99

    Cloudsweeper99 Treasure Hunter

    I don't worry about oil. For one thing, data on the oil market is so bad that I don't think anybody knows what is going on, even if they pretend they do. Since most of the production and consumption data outside of the US is a state secret, none of the numbers seem trustworthy. Another issue is that the oil market is so huge that even a large speculator can't really move the price. Also, if JP Morgan buys oil and sits on it, it doesn't necessarily drive up prices. It might actually drive down prices because whatever they hold becomes "inventory overhang."

    Most of the commodity markets are pretty honest. The one glaring exception is silver [and gold, but less so], where futures can be used to manipulate the price downward and the regulators look the other way. The silver market is tiny compared to, say, oil or wheat, and a billion dollars in silver is a big deal, so prices are easily moved. This can be corrected with position limits for sellers of futures contracts who can't demonstrate that they or their clients hold silver or have the ability to deliver future when the contract expires.

    Free markets don't mean lawless markets without rules. And government regulations aren't necessarily bad. The government regulated the commodities markets for decades with no bad side effects. I believe it was in the 90s that the commodity exchanges were permitted to self-regulate in the name of free trade, and now there are problems. Markets tend to work when they are large and have many players. But when a market can be dominated by a few huge speculators, the normal supply/demand price discovery process for physical goods is overwhelmed by the paper-hangers.

    Anyway, that's my view :loud: and it also seems to mirror what is happening.
  19. TomCorona

    TomCorona New Member

    I agree with the cloud. Good stuff!. You should write for a mainstream political news source!! (oh that's right...we don't have any).:cool:
  20. Yankee

    Yankee Senior Member

  21. Drusus

    Drusus Pecunia non olet

    In fact the data for oil production is quite reliable although accurate speculation is difficult for other reasons, not because it is a secret. The nature of oil drilling and production means they cannot keep such secrets. The nature of the business oddly requires even competitors to be willing to share info and work together in many cases.

    I only work for an oil service and tool manufacturing company (a bigger one) and we track every well on earth, each wells production, actual new wells, projected new wells (we need to know these things as we provide tools and service for these things) the industry goes in cycles so we track when we are in a drilling or production phase. At any given time my company knows how many well are operating world wide and how much they are producing each year, how many new projects the big guys have in the works, and how much those new wells will likely produce, what tool requirements each well will need, whether deep water, shallow, etc...and who is in the running to provide service and tools for those wells. We can tell you who provide the wellhead for a platform off the coast of Nigeria as easily as who provided the liner hanger each well operating in the north sea.

    There is only a handful of companies that can do certain things. It doesn't matter if its Brazil and Petrobras, or Singapore, or Gazprom. They will still need to contract someone like Shell, and Shell will still have to buy a wellhead, they will still need to contract every little aspect of a floater, a jack-up, etc...Shell doesn't drill, shell hires drillers, shell doesn't make oil tools, they hire us to make oil tools, they dont make platforms, they hire someone.

    The state oil most cases, are just contractors...those who do the work and whose existence counts on being the provider for these wells knows exactly how many wells are out there...its not exact of course...but its not quite the secret you make it out to be as these state companies must release most data to the many companies they must contract to do the work.

    I also think the major speculators (and they are big...just like oil) have a huge effect on oil prices...they are in fact one of the several major reasons why oil prices spike...creating artificial panic so oil prices will spike and they will make a nice profit per barrel. But this is not about oil.
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