Sep 302015
 

Chris Powell of GATA took exception to my comments about the financialisation of the gold market in my post on Friday, saying that “the more that markets are ‘financialized,’ the more advantage passes to those with the greater access to financing”. I would argue that increasing financialisation increases the advantage of the average investor.

I was using the term “financialisation” in the sense of increasing use of financial instruments, like futures or ETFs. These products are another method by which investors can get exposure to gold, rather than traditional methods like buying gold over the counter and storing it at home. They are popular and have come to dominate over buy-and-hold because they reduce the cost of buying and selling and make it easier to transact. Do they introduce new risks, like exposure to promises of the parties at the other end of the contract? Yes, but then storing gold yourself is not riskless either.

Making it easier to buy, and yes, sell, gold does not give more advantage to the rich. If there were no futures markets the rich would have no problem contacting their private bankers and arranging to put $10 down and borrow the rest to control $100 worth of gold. If “only cash-on-the-barrelhead trading in gold [was] allowed” it would just limit leveraged buying (using borrowed money) and leveraged selling (using borrowed gold) to the professional players. The only advantage that would be “evaporated” would be that of the average retail investor, who would not have that ability in such a world.

Public futures markets, contracts for difference, FX platforms and so on provide easy access for retail investors to magnify their $10 into $100 of buying power. Given that retail investors have been observed to generally prefer long positions and not be comfortable shorting markets, it could be argued that increasing financialisation has been net positive for the gold market. Note also that ETFs opened up the gold market to funds who were restricted from holding physical gold by their terms.

Do such financial products make it easier to short markets? Yes, but that was always easy for the rich and professionals to do. I would also note the comment here that “numerous studies … agree that short selling is beneficial” and that “short-selling bans not only fail to achieve their intended aims, they also have adverse impacts on all market participants: reducing liquidity and increasing volatility”.

Financial gold products are just alternative tools for investing in gold. If a carpenter produces bad work, do we accept that the tools are to blame? Financial products make it easy to buy, or sell, gold. If market participants, including those with the ability to “create infinite money for futures trading purposes” as GATA claims, choose to sell gold then is that a problem with the financial tool, or the user of that tool?

I suggest the answer is to advocate, as GATA does, for transparency regarding public policy in respect of the gold market. As the BIS says, central bank autonomy requires clear objectives, balanced by transparency and accountability.

  • Shavi Tupyraz

    The facts don’t matter: it’s the narrative, Stupid…

  • Joe

    Financialisation could also be used to good effect in many other markets. For example, there are only about 100 meteors from Mars known to exist on Earth, hence they are rare and valuable. However, if the trade in Martian meteors was financialised, we could increase their liquidity. Perhaps, we could trade them in parcels of 5000? And if you were to object that only 100 exist, I would tell you, that it does not matter, so long as folks are happy to settle in cash; we can trade millions of them every day. This would be perfectly valid, by current market standards. And if for some strange reason, someone wanted to take physical possession, and for some reason, we could not deliver physical rocks, we could just settle in cash. Sounds like a great idea. But if the law said that I could NOT settle in cash, I wonder how this would affect the martian meteor trade, and comparably, how would it affect the COMEX if it was illegal to settle in cash, if someone demanded physical? Would it make any difference, or would the price be unaffected?

    • Joe

      A conceivable conversation between a Luddite (Museum Geology Curator) and an intelligent Financial Analyst:
      Luddite: These rare meteors are invaluable, they are rare and precious.
      Analyst: A specious opinion that is. The true value of these meteors will be determined on the market. That is where true price discovery takes place.
      Luddite: Oh my god. Someone has just dumped a million meteors on the market in 30 seconds, and yet there are only 100 physical rocks in existence. They have taken out all the stops, and the price has collapsed to 5 cents per meteor.
      Analyst: Nothing wrong with that my friend. That is all that the market is willing to pay for these meteors. This is the genuine market price, rather than some preconceived, inflated value that exists only in your mind.
      Luddite: But no-one has a million meteors to sell. This is a false market.
      Analyst: You are not making any sense. You are rambling, yet again. You are ignorant of how the free markets work.
      Luddite: But again, I tell you, no-one can deliver a million meteors if I wanted to take delivery.
      Analyst: Do you want to take delivery?
      Luddite: No, but I’m just saying… I’m not a trader.
      Analyst: Again I have blown your argument completely out of the water. The buyers here are happy to settle in cash. They are not interested in taking possession of stuffy little rocks. These are professional financial players.
      Luddite: But what if I wanted to take delivery?
      Analyst: Then the seller would of course to their best to accommodate you.
      Luddite: But again, there are only 100 meteors in existence.
      Analyst: Nonsense. That is a view only held by geologists. Most financial experts say that there are millions of them held in secret warehouses, and if the price is right, you can draw them out into the marketplace.
      Luddite: But what if you are wrong.
      Analyst: Not a problem my friend. We would just settle the difference in cash, at the current rate of 5 cents per meteor. Your problem, as I have said before, is you don;t understand modern financial markets, how they work, and they have achieve true price discovery.

    • http://goldchat.blogspot.com/ Bron Suchecki

      And when millions of people bet on a horse race, does that mean the horses aren’t real? Those gold financial products that are not backed by physical are indeed “bets” but in that sense act like prediction markets. Those people are putting money down to express a view on gold, that doesn’t mean those views are wrong just because neither long nor short wants to deal in physical.

      • Joe

        How about this possible scenario… a certain government announces that all holders of physical gold will be forced to sell their gold to the government at “fair market value”, which will be determined by the legitimate price setting mechanism of the financial markets at the end of business day 01-12-2020. The paper markets are subsequently crushed by trillions of shorts, and when the market closes at EOD 01-12-2020, the price is $1 per ounce. The government would say they are surprised, as they genuinely thought the people had a higher opinion of the true value, but alas, the market has spoken and the price set therein (by the people) must be respected. The government then buys all gold for $1 per ounce, then re-establishes a physical market only at $1,000 per ounce.
        Note: Prior to the government announcement re. the date of 01-12-2020, gold was selling for $1,500 per ounce.
        Now, according to your analogy above, what has happened is not “wrong.” It is just the inevitable result of bets that people have taken, and we must respect the outcome. It is all fair and above reproach. As the conversation between the Luddite and the financial analyst shows, when you do not have to deliver an actual physical, real-world product, the outcome can be grossly distorted.
        Would you happily hand over your gold for $1? I suspect not, and I suspect that deep down inside your heart, you would feel that all was not truly above board and honest as to how this final price was set.

        • Victor Fantastico

          Ooooh! What a terrible terrible Government! I bet they are Communists, and anyway, I am not going to vote for them! How cruel! How wicked! If this is what they are planning to do, I’m going to tell all my friends and family that we should go out right now and sell all our Gold straight away, and never ever ever ever ever buy any more, so the Wicked Witch can’t make us sell it to her in 2020! That’ll show her! (and keep the price up from now until 2020)

          We propose to invest in Unicorn Farts instead, and we’ll all live happily ever after…….

          • Joe

            Unicorn Farts leveraged at 10-1, sold in parcels of 5000. I bet you would love to buy them. yee hah, you know a good deal when you hear of it. And yes, you do get the sulphur enhancers thrown in free. Boo… hiss…. yea hah, ride ’em donkey boy. Don’t ya just love government, I know you do. Its just loads of fun watching them beat the stuffing out of good ole US citizens. Boo… hiss… oh, they are so vevil, as in Dr Evil. Here’s looking at you kid, eagerly waiting for another 2008 melt-down in the good ole US, on steriods no less, leveraged 10-1. Sleep tight, baby boy, don’t let the bed bugs bite. :-)

          • Victor Fantastico

            Have you been drinking?

          • Joe

            You’re new to this aren’t you? Don’t worry babe, you are giving off all the signs… “First they ridicule you, then…” Don’t worry babe, don’t panic

  • joey

    It’s simply the knowledge of corruption that repels me.

    “The
    two ETF’s that I follow are the GLD and SLV. You must be very careful
    in trading these vehicles as these funds do not have any beneficial gold
    or silver behind them. They probably have only paper claims and when
    the dust settles, on a collapse, there will be countless class action
    lawsuits trying to recover your lost investment.There is now evidence that the GLD and SLV are paper settling on the comex.***I
    do not think that the GLD will head to zero as we still have some GLD
    shareholders who think that gold is the right vehicle to be in even
    though they do not understand the difference between paper gold and
    physical gold. I can visualize demand coming to the buyers side:i) demand from paper gold shareholders ii) demand from the bankers who then redeem for gold to send this gold onto China” – Harvey Organ

    • Shavi Tupyraz

      how can the evil bankers redeem for gold if the ETFs supposedly have no gold?

      • joey

        Ask the Author, Mr Organ.
        Why would the bankers redeem the gold, real or “imaginary”, they already hold ?
        On one hand they hypothicate the spot down while on the other they continue to horde.
        Like i said – soon…
        Looks like India’s record run on gold and silver is set to continue thanks to the drop in rates of 50 basis points – “tight-er”

        enjoy your evening.

        • Shavi Tupyraz

          Mr Organ is a pharmacist; as soon as I have figured out how that qualifies him to pontificate on matters he clearly doesn’t understand, I may indeed ask him.

          (But I don’t expect figuring that out any time “soon”)

          • http://kiddynamitesworld.com Kid Dynamite

            “they hypothecate the spot down”… lololol!

            Shavi, you have more patience than I do, trying to educate anyone who cites Harvey Organ… such an individual clearly has not done his research and knows nothing about the topic on which he is attempting to pontificate.

          • Shavi Tupyraz

            aha! Master Dynamite! I think that we may perhaps be related? At the risk of blowing your cover, are you not in fact my beloved cousin Rammi?

          • joey

            Hahahaha! funny racist!

          • Shavi Tupyraz

            joey, there is no shame in conceding to yourself that, whatever your gut feelings, there are perhaps some things which you may not yet fully understand; this is an anonymous forum, and nobody will know, but it does present you with a valuable opportunity to learn some of the facts (or non-facts) behind the matters under discussion. As Bron has suggested

            Rather than just make a statement that the ETFs don’t have any gold based on zero evidence, Warren at http://screwtapefiles.blogspot
            did some real work to prove whether the bar lists were fake. Suggest
            you read that if you want fact based claims rather than opinions
            disguised as fact.

            Who knows – after reading that research you may still be firmly of the opinion that Harvey Organ is a Great Man and that the World is about to end, and if so, then good on you, and I for one will respect your views even though I may continue to disagree with them.

            But to ignore Bron’s suggestion and revert instead to statements to the effect that ” I don’t trust any files or documents. I only trust the “real Deal” is not indicative of any rational thought process, but places you firmly in the “keep stackin’ ” mindset of counter-factual Faith-based fantasists. Or, put more bluntly, it marks you out as an uninformed and gullible fool, and you should expect to be treated as such.

          • joey

            No need to be derogatory Shave. Interesting how some are personally attacked for their point of view/ perhaps it’s the truth and you’re changing the subject?

            The world is waking up! don’t like it? tough!
            stack if you can.
            enjoy your day.

          • Shavi Tupyraz

            no joey, I am not changing the subject, I am responding point by point to your various challenges, and rather than attacking either you or Harvey Organ as individuals, I am simply echoing Bron’s recommendation that you should perhaps familiarise yourself with the facts before sounding off about things you don’t understand, and thereby making a fool of yourself

            It was you who, in one of our previous discussions, declared that I didn’t know who you were and implied that such knowledge was relevant to the discussion; far from attacking you, my response was that such considerations were and are irrelevant; however, facts aren’t irrelevant, much as you may prefer to ignore them

          • joey

            Really?? Attacking a man cause he’s a Pharmacist?? lol immature!
            In passing, i suggest you keep walking…Keep pledging that non existent Gold.
            Harvey Organ is a good man – Harvey Organ is a Great Man!

          • Zhanglan

            Here is “everyone’s favourite” Harvey Organ entirely objective and compassionate commentary on the latest terrorist attack in
            China (which killed 7 and maimed 50)

            Southern China rocked by 31 explosions as
            tensions increase among their citizens because of their declining
            economy

            http://harveyorganblog.com/2015/09/30/sept-30a-larger-than-expected-9-6-tonnes-standing-for-oct-delivery-and-only-5-04-tonnes-of-registered-gold-sitting-at-the-comexlbma-and-otc-options-expire-today-so-goldsilver-should-go-back-upjapa/

            I
            expect 9/11 happened because of the declining US Economy. as of course
            did the attack on Charlie Hebdo, the 2011 massacre on Utoya Island in
            Norway, the Erewan bombing in Thailand, the Saint-Quentin-Fallavier
            beheading and 30 years of sectarian violence in Northern Ireland.

            Please don’t tell me Harvey Organ is a “Great Man”; I would use a different set of adjectives.

          • joey

            I’m curious. what do you believe happened on 911?

          • Zhanglan

            I tend towards believing that the US Government – or at least parts of it – were at least aware of 9-11 before it happened, and I am confident in my own mind that there has been a major and concerted cover-up ever since.

            Whoever caused it, 9-11 was a terrorist atrocity and should be decried as such – as should terrorist acts committed elsewhere in the World, by whoever they are committed – and to write as Harvey Organ as is demeaning, offensive and indicative of a twisted and skewed perception (which is pretty much what I have come to expect from that writer).

    • http://goldchat.blogspot.com/ Bron Suchecki

      Rather than just make a statement that the ETFs don’t have any gold based on zero evidence, Warren at http://screwtapefiles.blogspot.com.au/p/bullion-bars-database.html did some real work to prove whether the bar lists were fake. Suggest you read that if you want fact based claims rather than opinions disguised as fact.

      • joey

        Sorry Bron, as i said earlier in the peace. I don’t trust any files or documents. I only trust the “real Deal” as Bill Holter states

        Those that do not take hold of “Physical” are at greater risk ! Bit of a prob these days as I’ll have to wait what 5 weeks to get my kangaroos if at all :-((

        Tell me, has Fort Knox been Audited? Not in over 50 years. There’s much more to it than deceitful technicians flashing fake paper fooling the sheep!

        Keep stacking if you can…

        • http://goldchat.blogspot.com/ Bron Suchecki

          Yes it has, see http://financialservices.house.gov/calendar/eventsingle.aspx?EventID=247243 surprised how none of your websites have mentioned this Ron Paul chaired hearing, nor the bar lists supplied, nor how Ron Paul had the opportunity to directly question the witnesses but seems to go quiet once he realised the bars are audited – I mean this was it, he had the Treasury and GAO there to interrogate.

          See also http://goldchat.blogspot.com/2014/03/us-deep-storage-gold-reserves-bar-list.html and http://goldchat.blogspot.com/2014/03/us-deep-storage-gold-weights.html for some summaries of the bar lists.

          • joey

            Bron,the “goldchat” links don’t exist. A list of bar numbers on a paper? Ok. Have you seen this vid?

            Ron Paul – Audit Fort Knox (the gold dipped tungsten bars)https://www.youtube.com/watch?v=6qTBh-jiHpU

            Is There GOLD in FORT KNOX? – Ron Paul Hearing Auditing Fort Knox’s Gold https://www.youtube.com/watch?v=7Rycqp9zfCQ
            I am the opinion that some posters here are attempting quell the belief that we are running out of physical supply? I say nice try. The world is waking up to the fiddle sticks going on, hence the 500% increase in new buyers of Physical metals.

            It all come down to trust and guess what, trust is going going gone!

            regards

          • http://goldchat.blogspot.com/ Bron Suchecki

            Those goldchat links work for me. Those video claims about tungsten are rehashes of old conspiracy memes. There is middle ground between trusting everyone and trusting no one. If you can’t trust anyone then good luck, I just hope you aren’t wasting too much of your money on coin premiums.

          • joey

            No Bron, I’m a small time investor/collector so the premiums don’t affect me as such, all i want is a tube of this and one of that, nothing more.
            Skyrocketing Coin premiums are indicative to the shortage in metals, Supply/demand and of course my suppliers are evidence to that effect.
            cheers

          • Victor Fantastico

            you could have a significantly larger tube, or get your tube far sooner, if you didn’t allow yourself to be suckered by people whose business it is to persuade you to blindly follow their advice

          • joey

            What on earth are you on about?? I’ll listen to all and follow none thanks! especially a 2012 blog that you seem to believe is gospel. weep?? lol.

          • Joe

            Victor the babe hopes that you have sufficient insight to reflect on your position, to re-evaluate it, and then weep, thus demonstrating true understanding; i.e. you are now beginning to learn.

            “There are those who weep, and then there are those who look down (from above) on those who weep, and so on…” Life is an ever ascending scale. From my throne, in the east, I look down on Victor (far below), and I can see him looking down on you (not too far beneath him). The view up here is indeed spectacular.

            But on a more serious note, 2012 blog? humph… LOL… it may as well be 500 BC. This is serious indiana jones archaeologist material, long clogged up with fossilized dust. Some folks have real nostagia for that old stuff.

          • joey

            Some folks perhaps. As for weep? nup! below or above.
            I was simply quoting Mr Organ. He believes what Jim Sinclair believes, what Jim Rickards believes, what Peter schiff believes and so on and so on.
            I have used this knowledge to successfully invest in Gold stocks.
            Many of you here would be weeping if you knew my returns lol.
            have a pleasant evening.

          • Victor Fantastico

            Hi joey

            I wasn’t going to reply, but in order to sustain continuity, here is what I mean: if you buy coins at expensive premiums over spot (because you fall for the idle notion that this reflects “scarcity”), or if you believe every False Dawn and buy your coins whilst the market is still falling, then for any given sum invested, you will end up with less Silver than if you waited and were more discerning in what you purchased, when. The way to fill up your tube quickly is to buy more of it at a lower price, and over the past 4 years, pretty much every day the price has been slipping further down.

            Many of the people who peddle these myths about the imminent failure of COMEX, scarcity and manipulation have a vested interest in either encouraging or scaring you into a rushed and ill-considered investment decision. This may be because they either sell bullion themselves, or run advertisements which require a steady click-stream in order to generate a return. You would be naive to believe that your best interests are their primary concern in writing these articles – and there is of course no accountability when their Myths & Legends don’t come true

            The article I referred you to was intended to illustrate how people with ambiguous moral principles were promoting precisely these same scare stories several years ago – and what the consequences were

            I wish you well with your investments, but I am confident we share a common desire to get the biggest bang for our buck, and to avoid feeling foolish if we dive in too soon on the basis of ambiguous information

          • joey

            Thanks for the explanation Victor. I suppose that’s why i work the market and hold no gold. I do collect some silver just for a hobby.

            I stay neutral then act on what my eyes see and what do i see. Lies, deceit errors in judgment, powerful entities manipulating each and everything for profit. Wars for continuum power etc. Do you still believe 911 was an act of terror” I bet you did at conception ???

            There’s so much more than meets the eye. You cannot say there’s an abundance of Silver especially when you cannot buy the stuff or have to wait months if you’re lucky enough to get your hands on it?

            I’ve also read Bix’s stories on the so called “million” tons of gold protected by the military in the grand canyon?

            Will China, Russia etc with all the gold they’ve been hoarding(Alasdair McLeod 30,000tons) bring in a “gold standard? look at all the billboards in China depicting that gold coin? Why are the Indian’s maniacs when it comes to precious metals?

            Every piece of the puzzle is crucial. I suggest you do not believe everything you see or hear but have an open mind. Yes there most probably is a shortage, If you’re willing to bet there’s not then don’t buy!

            This thing about coin premiums have “skyrocketed” needs to be further investigated. those that have a history of knowledge in prices know what i mean.

            In the end we all have a point of view, right or wrong and for that i say Harvey Organ is a great man.

          • JanNieuwenhuijs
          • joey

            Yeah and i recall the Fed saying it’s not in America’s if not the worlds interest that it be Audited??
            Yellen’s choking on her own vomit – reap what you sow…

  • Shavi Tupyraz

    do you know what a Ponzi scheme actually involves?

    my apologies. please let me rephrase that

    do you even care what a Ponzi scheme actually involves, or are you merely using that phrase because you think it sounds as if you know what you are talking about?

    • dolph9

      Apparently, Shavi, you do not need gold, because you believe that growth can continue forever. I bet you also believed that there were weapons of mass destruction in Iraq. Surely you believed Bernanke in 2007 that the economic problems were contained, and housing was not in a bubble.

      Everything is just fine, nothing to see here, move along folks.

      As such, put your money where your mouth is. Put it all in indexed stock and bond funds and surely your wealth will grow to infinity.

      • Shavi Tupyraz

        “Apparently, Shavi…”

        Gosh! Did you work all that out by yourself, or did someone help you?

        Thankyou for the kind invitation to step down into the gutter, but you are at an unfair advantage down there on your home turf, and I’ll stay on to the topic of precious metals and economics rather than WMD if that’s ok with you.

  • http://goldchat.blogspot.com/ Bron Suchecki

    As I discussed in this podcast http://research.perthmint.com.au/2015/09/29/interview-on-precious-metals/ if money created is only used to buy assets with the expectation of reselling them later at higher prices, rather than the debt being paid back with productivity/wealth creation, then yes that is Ponzi-like in nature.

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