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.