Dave,
You said [addtional bold mine]:
"Hrunner-
So speculators on both sides (both "nekkid shorts" and longs who will never take delivery) - properly limited in the size of positions they can take - are essential for providing liquidity to the marketplace. Do you understand why this is so?
If the gold market were limited to just fundamental buyers (such as jewelry shops and mines), there would be very little trading, and that would lead to very wide spreads. Instead of buying or selling a gold future for a spread of 30 cents, perhaps you'd pay $5, or maybe $10. This raises the costs of hedging by a participant by a large amount, and it makes the market less useful for its intended purpose.
Also, liquidity is important for getting a trade done in a reasonable period of time. If a mine wanted to hedge production for some reason in the above-mentioned situation, they couldn't - not until a jewelry shop came along with an order that just happened to match the delivery date. And likely, the jewelry shop would only be able to buy some small fraction of that mine's production.
More participants = more liquidity = a better functioning market for the fundamental users. And that's what speculators do. In exchange for taking risk, they provide liquidity for the fundamental users who can then use the market to actually hedge production or buy forward. More liquidity = cheaper price for hedging, because the spreads are narrower.
As a participant in these markets, I can tell you that spreads are a big deal. Narrower spreads = a very good thing. It basically reduces the friction involved in taking a position. Narrower spreads lead to more liquidity, and more liquidity means the market functions better for its intended purpose."
Dave,
Besides the fact that you initially tried to belittle my arguments and intelligence by used words like "nekkid", you are fundamentally wrong in your thesis because you fall into the same trap and wrong-headed thinking that all statists and central planners do.
That is the utopian school of thought which is that if we just put enough smart and high-ranking people in charge of important things, such as the gold market and the money supply, and the interest rate for lending, we can get rid of all the pain, suffering and corruption in the world.
Never mind the fact that we are putting corrupt and flawed people into a position of great power to, wait for it, get rid of corruption and too much power. Seems a bit circular, doesn't.
In fairness, I don't necessarily believe your motives are wrong. And yes, all the difficulties with non-liquid markets you point out are correct. Wide spreads, slow transactions, "friction" (another funny and non-precise word like "liquidity", but I digress). All of it.
You simply miss one huge fact- markets that are relatively non-liquid are supposed to be non-liquid. They are non-liquid for a critical reason. Because there are simply fewer buyers and sellers.
Markets that are highly liquid are highly liquid because they have more buyers and sellers.
There is no such thing as too little liquidity and too high liquidity.
There is only market-correct liquidity.
Now you may not like the level of liquidity of a given market. That's a YP not an MP (Your Problem, not My Problem). I don't like the fact that I don't have a magical unicorn pooping gold nuggets in my back yard.
Doesn't change fundamental reality, does it?
Does fewer market participants that create wider spreads? Yes. Does that create slower transactions? Yes. That is the nature of markets.
Free markets have spreads and deliveries based on honest, real participants. Free markets should be free, not based on puppet-master participants setting price, spreads and volume where they believe it "should" be (or where it can most benefit their checking accounts and theories of macroeconomics,).
There are no perfect markets.
Only free or not free markets.
What you and your ilk have created are distorted, manufactured markets. Markets that hardly have any connection to an underlying "real" world.
This always ends badly.
(I will be most happy to explain supply, demand and market participant incentives sometime for you over a beer or a meal.)
I don't know what your motives and world view is. If you are like all leftists and central planners, your world view can derive from a couple of zones; good-hearted, wrong-headed motivations to "fix" things that don't need (government) fixing, or from corrupt, greedy and power hungry desires, but the net effect is the same- distorted, corrupt and broken markets.
And the fact is that real hard-working, honest people who suffer at the hands of foolish or sociopathic "leaders" who seek to manipulate these markets, most often for their own selfish gain.
Markets ruled by a few 'enlightened' individuals are set where "they" (the "enlightened ones") believe they should be set, not where the real world wants to set them.
In a free market, if a market has fewer participants and the spread is $5, then that is a "free and fair" spread. Artificially ginning up "liquidity" by fake paper gold and participants who have no interest in buying or selling the product i.e. participating in a market, is not "fair". It is not free.
Does fake paper gold it create artificial liquidity and lower spreads?
Yes.
Does it create a whole raft of corruption and market distortion, along with the glorious shrinking of spreads?
Yes.
Like all Laissez-faire economists, my world view is that you should align yourself with the real world of economics, both human/ personal economics and natural resource-driven economics.
Not with what some central planner believes is "correct".
Not with corrupt motivations of profit-driven executives nor power-hungry Fed officials and government officers.
In the former, one gets Twitter, Amazon and smartphones that cost less than months salary and have the power of earlier super computers in them.
In the later, one gets 6 million Ukrainians starving to death because the politburo believed it knew what the "right" model was for growing wheat.
Actual market buyers and sellers of gold and silver would set the natural price for precious metals (in the respective country currencies), based on supply and demand. Supply being limited by natural cost of production, ready availability of mine able ore, motivations of existing holders of physical gold to sell, and demand as a function of jewelry consumption, solar panel manufacturing, and faith and confidence that the world monetary and financial systems were being run correctly and that the chance for future growth was high and fiat currency devaluation and money-printing was low.
Not based on where central banks and governments believed the price "should" be.
To encourage false confidence in fiat money.
For what its worth, I don't believe you would see the extreme differences you list in your examples. Would spreads go up? Yes. Would they be manageable? Yes.
There would also be a good consequences to higher spreads.
Participants would be more careful and thoughtful about trades, since the cost of the trade would require more analysis and commitment on behalf of all participants. Analysis, thoughtfulness and commitment are good things in my estimation.
To be clear, I am in favor of technological and policy advances to enhance liquidity of markets in general. I am not a Luddite and would be highly supportive of advances to connect actual buyers with actual sellers. This is a public good. Allowing the buying and selling of fraudulent gold, and outrageous monopolization of markets by huge positions of mostly fraudulent gold, is bad for the rest of us.
Have a good and productive day,
H
