@Myself, two posts, a few hours, and $30/oz ago:
Looks like I was right - still not all the way to 1525 (critical level) yet, but down to 1540 now and headed south fast.
The point was that the debt is denominated in fiat. With a gold standard, you can’t inflate away the debt by printing more money, unless you can find more gold. I stand by the statement.
As to the fact that credit can still be expanded in the banking system unless reserve ratio requirements call for at least some gold to be in the picture, you are correct about that, but I had already acknowledged that point in my post. I stand by my prior statements.
"Embry also added: “It was an interesting interview with Egon von Greyerz that you had on KWN in the last couple of days. I know him quite well and I can tell you I have the highest regard for him. He was talking about the man that went to his Swiss bank to get his allocated gold out, and they couldn’t give him the gold because the bank didn’t have it.
What he didn’t mention in his interview is that when the customer finally got his gold, it was 2011 minted bars. This made no sense because he had been holding the allocated gold for years. That’s just another example that even the allocated gold in the banking system has probably been loaned out. Many of these customers will wake up one day and realize they entrusted their gold to the wrong people.”
Victor had thought maybe this customer had been sold something that was not allocated Gold... but this more detailed accounting would suggest that this was indeed an indication that allocated Gold was not so... umm... allocated.
To Jag, why not let "the Maestro" himself explain how a Gold Std. is supposed to work, and the benefits it purports to afford;
Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
Jim,
Very prescient words from "The Maestro". I would add to that the words of Charles DeGaulle that was posted on The Burning Platform today. http://www.theburningplatform.com/?p=34937
Branden’s ‘My Years with Ayn Rand’ provides insight into her inner circle including the younger Greenspan who clearly lost his way with age … I believe these ‘banksters’ likely end up in jail Milliken-style once the dust settles on this historic moment.
Having fun figuring out how best to navigate wealth through this ‘moment’ and this thread has enhanced my thinking - thx…
@ErikT: What a gracious and informative acceptance of my (unnecessary?) apology. Thank you. I begin to understand "your agenda" better. I don’t know how familiar you are with quantum physics, chaos and complexity theory. Just in case you have not weighed these in your decision to abandon promoting the case for sound money in favour of predicting the operation of a financial system based on unsound money, I will offer up that you cannot escape.
Promoting truth, ie a sound money system, will lead to a change of outcome within the existing unsound money system: it might end sooner, for example. Predicting outcomes (whose truth cannot be established until later) within this system will similary have an effect on the system’s longevity and behaviour. If we even attempt to predict within it, we may well be extending its life. That certainly appears to be the result to date, I feel. It is time to leave the box.
It is because I understand this meta-truth that I am frustrated with those who understand the truth, yet shrink back from promoting it. I hope you will reconsider, Erik, and try to rebuild in yourself the faith required to continue to advocate sound money, perhaps in addition to attempting the impossible, ie to predict the operation of this crazy system. It perhaps seems counter-intuitive to you, but it is quite likely that it is easier to influence this system away from fiat insanity than to predict outcomes while fiat insanity reigns. Once money is stable again, predictability (in the small) will return. The mathematics of chaos and complexity theory tells us so.
Maybe you could throw a bone to your old passion, Erik, and sign off every post with "End central banking before it ends you" or suchlike. All it takes is an edit of a .signature file, and it would help others to understand where you are really coming from.
@Earthwise: I believe I may owe you an apology as well, Earthwise, and am delighted to offer it up. I very much doubt your self-effacing comments. You have the intelligence to recognize aspersions cast, and to leap to your own defense, which requires both pluck and courage. "Intelligence" can be measured many ways. Please read with a critical eye, all is not as it seems. You may find it incredible, beyond belief, but there are people who accept payment for promoting falsehoods and fomenting discord on sites such as this. I stand by my words to you that we must all weigh what we read carefully, and not blindly accept what any one mind writes. I hope you continue to read my words and that mine might be one of those minds that informs yours. Peace.
I do grow frustrated with in-the-box thinking. It is in-the-box thinking that has led us to here, and it will not get us out.
This fiat system will end, and it will end when enough people understand the truth about it.
The manner in which it will end cannot be predicted. The timing of its demise is similarly uncertain.
It will end sooner if we focus on ending it, as opposed to predicting its behaviour, which is impossible.
The act of prediction within the system changes its behaviour, and its lifecycle. We create when we predict.
To bring us back to the topic of the thread, I am delighted that organizations like GATA exist, that Harvey lives, breathes and publishes his views, and that I can read them on the 'net and choose to believe them or not, and that Eric Sprott is here in Canada promoting sound money, and that others spread the word on the monetary importance of gold and silver. I was drawn here because I saw such individuals being slagged and referred to as charlatans and such, mistruths were rampant, and the deceit of this current system and the profound negative effect it has had on us all were not getting airtime here, and it irked me.
My patience for lack of clarity on this topic wears thin, because, I believe, polarization around Bastiat’s dichotomy is occuring:
Bastiat: "All legitimate interests are in harmony". If you agree you trust freedom. If you disagree you trust a police state.
There is no middle ground. There is a battle between good and evil raging, and one is on one side or the other. Passivity currently places one on the wrong side of Bastiat’s dichotomy, and ideological activism is now required to be good.
What a strange world we have allowed them to create for us… changing it is quite possible. Effective prediction within it is not. We will eventually learn this. I want it to be sooner, not later, that my children might live in peace.
Best regards and thanks (seriously!) for your responses.
When you go back and read your words there, are you proud of them? Are there any you would change now?
Can you, on re-reading your words, and understanding my position better, understand why someone of my beliefs would become adversarial here, based on what you had written?
Just a thought. Your words are the first to appear under the article that launched this thread, Erik.
Voltaire: "How infinitessimal is the importance of anything I do. How infinitely important it is that I do it."
[quote=bbacq] @Earthwise: I believe I may owe you an apology as well, Earthwise, and am delighted to offer it up. I very much doubt your self-effacing comments. You have the intelligence to recognize aspersions cast, and to leap to your own defense, which requires both pluck and courage. "Intelligence" can be measured many ways. Please read with a critical eye, all is not as it seems. You may find it incredible, beyond belief, but there are people who accept payment for promoting falsehoods and fomenting discord on sites such as this. I stand by my words to you that we must all weigh what we read carefully, and not blindly accept what any one mind writes. I hope you continue to read my words and that mine might be one of those minds that informs yours. Peace.
[/quote]
bbacq,
I accept your apology and have now cancelled my midnight plans to put a voodoo hex on your dog. (I couldn’t do that to a person no matter how pissed off). And I do read with a critical eye, and then play one opinion against another and see what shakes out. But it all starts with good input. I will now reconsider including yours in my analysis.
Peace back atcha.
P.S. Nothing is beyond belief concerning what people will do for money.
[quote=Erik T.]
The fallacy of your statement is that there is "only a small, token, fiat component". The entire system is fiat, and the credit system that makes up most of the economy is denominated in fiat currency. This means that debt can be inflated away by debasing the unit of account (fiat currency).
The primary purpose of a gold standard is to limit the quantity of money. In the case of actual currency, there has to be gold to back it, so unless and until you can mine more gold, you can’t expand the money supply. In the case of credit, you still have the ability to create credit out of thin air, but to whatever extent you have a reserve ratio requirement, the need to back the system with a reserve of gold-backed money means that the growth of the credit system is proportionally limited.
Erik
[/quote]
Thanks to Erik T and bbacq for the detailed responses.
For me this raises more questions, namely it begins to come through that the goal of “sound money” does not necessarily accommodate the organic needs of the (always) growing economy. While mapping the quantity of money to the rate at which one can dig a mineral out of the ground may have the immediate effect on increasing the quality and stability on-going businesses through an enforced scarcity of capital, it will have the result of decreasing the quantity of new businesses, and may impede access to capital for existing ones as well. I suppose the theory is that this is a good thing, as it would tend to decrease abuses if there were constant competition for the best use of (artificially) limited capital.
But unless this resultant supply velocity maps in some meaningful way (highly unlikely) to the normal needs of a capitalist economy by on-going (as well as new) ventures then catastrophe will ensue. A steady supply of new business and growth of existing business is always required to accommodate the steady influx of newly minted job seekers, and others that for various reasons are entering the job market all of which require the ability, mostly through labor markets provided by existing businesses, to sell their labor power in order to survive.
Insufficient businesses equals massive unemployment and a catastrophic death spiral.
So any monetary theory, or even a simple means of modulating currency (or credit) supply, must be mindful of these basic functional requirements, which in fact supersede any “sound money” solution. If the creation of money or credit cannot keep pace with the organic needs (neither too fast nor too slow) of the economy, it is not a solution at all.
But endogenous money theory says this is a moot point, the government does not create the money supply, the demand/consumer side does. And in certain instances, this is inherently non-inflationary no matter how much credit is created- as long as the credit obtained is used for productive purposes, and not speculative or Ponzi purposes. Because of this, I don’t really think it is accurate to label this a fiat credit system, the “decree” component is not by a government, it is a self fulfilling form of a banking/borrower supply chain- even if it is settled using fiat currency.
So if you buy this frame of reference, than the key is not trying to modulate the economy with how fast a mineral is extracted from a hole in be ground, but how and to what purpose is the vast amount of credit that is being extended used.
@bbacq
I’m glad you’re still participating in this thread, and have taken a more friendly tone toward others here.
To your question, if I had it to do over again, I definitely would not have used the word "charlatan" in my first and early posts in this thread, because it seems to have caused many people to read meaning I never intended into my statements.
But I stand by my primary contention, which is that GATA, Ted Butler, Harvey Organ, and several others do the investment community an enourmous dis-service. A careful review of their viewpoints and central arguments reveals, quite simply, that they don’t know what they are talking about. While they may mean well, the simple truth is that they represent themselves to their readers as experts in these markets, when in reality they posess what strikes me as, at best, a novice level of comprehension of how the markets function.
I regret that for a while, I had fallen into Jeff Christian’s mindset, i.e. that the only possible explanation for how people who have been around these markets for 30 years could possibly say such ignorant things must be that they are being intentionally deceptive and disingenuous.
After much reflection, I am now convinced that these are good, well meaning people who sincerely want to fight the rampant corruption we all know does in fact exist in financial markets, and they are doing their own personal best in persuit of those goals. Unfortunately, their efforts are counter-productive, because they are quick to jump to errant conclusions based on their faulty understanding of the markets. The glaring errors they make (price discovery, physical to paper being a matter of leverage, etc) evidence that these people not only are not experts, but that they fail to recognize the limits of their own knowledge.
Look, I like being a hero too, and I would love to receive accolades of thousands by coming into a poor village and saving the lives of children by performing emergency, life-saving surgery on them. Problem is, I’m not a surgeon, and am not qualified to do surgery on anyone. I would be causing more risk and harm by trying, so I know better than to show up with a scalpel. The people I’ve labeled as charlatans know less about precious metals markets than I know about surgery, and that fact is obvious to anyone who does their homework.
I would definitely have chosen different WORDS to make my point in the first post, but the bottom line remains the same in my mind: These people are bad news for the investment community, and we would be far better off without them. To me it is shocking and disappointing as hell to see otherwise brilliant people like Chris Martenson and Eric Sprott falling for their misinformed, logically incoherent arguments hook, line and sinker.
I’ve answerd your question because you posed it very politely, bbacq, which was a welcome change from a few posts back. But please respect that I have no further interest in arguing this point. I’ve made my case in dozens and dozens of posts in this thread already, and really don’t have much more to say. Those people here who have read and considered my arguments throughout this thread and still feel inclined to take GATA, Harvey, and Ted seriously are people I simply cannot help. I’m sorry, but I’ve tried and have run out of energy to continue this much farther. I would certainly welcome SUBSTANTIVE discussion - like someone explaining what the paper to physical ratio has to do with leverage, for example. But in my perception, this thread has now reached the point where some people are just stuck on "I like listening to these people regardless of whether most of what they say can easily be disproven as nonsense or not". Hey man, diff’rent strokes for diff’rent folks.
It is after midnight, my dog is fine, so you must have kept your word. Trust but verify. Your karma-score would have taken a serious hit had the hex happened. My dog is a serious sweetie.
the goal of “sound money” does not necessarily accommodate the organic needs of the (always) growing economy.
I want to go bacq to basics, and start again there and we can see where we diverge. I quote myself from elsewhere:
1) Money is just an idea, not a thing itself. It is the idea that there is something in the middle of all goods' values to which everything can be compared that assists in reducing the complexity of the relative-value problem: "is A worth more than B? What about C through Z and all their relative values?".
The money-quality of a good is not a binary quality, like "alive/dead". Goods have varying degrees of money-quality. The goods that have the highest degrees of money-quality are those we refer to as currencies, and use in our transactions and savings.
The market decides on the degree of money-quality of a good, and thus its utility as currency, amongst other potential uses for the good. It can change its mind.
The market values consistency of value in transactions across time and space and scale in its determination of money-quality.
Consistency of value of a good as currency derives from other properties like supply limitation, durability, portability, universal acceptance, divisibility, broad range of utility, etc. These support the money-functions of store of value, medium for trade, unit of account.
The market picked precious metals as currency in an evolutionary process over thousands of years because they brought consistency of value, ie truth, to the markets.
The value of a currency can go up and down, based on supply and demand, just like other goods. But when currency goes up in value, say because of limited supply, or increased demand, prices as measured in currency drop. If currency is valued highly, it doesn’t take as much of it to buy something.
In a sound specie-backed competitive fractional-banking money system, there exists two goods, specie, say gold or silver, and paper representing specie, that both circulate as currency, representing as best they can the idea of money. To the extent that the banks can be trusted to perform their promised function of convertibility, notes will circulate at par to specie and for good reason. Notes are more convenient, notes can be digitized and sent for almost zero cost across oceans, digital notes can be endlessly divided to create smaller currency units, etc.
By "circulate at par" I mean that the prices of goods in specie and in issued notes are identical. A note is exchangable into and thus represents a fixed quantity of a given quality of specie in the system I descrbe.
We must ask if the supply of currency matters much, or not. We must consider carefully point 4 above. I think you have concerns about scaling effects as the economy grows. The scenario you describe is not unlike that of Canada under the Governorship of Jacques de Muelles. Unable to pay his soldiers because of a lack of currency, and facing a consequent decline in economic activity, de Meulles, Intendant of Justice, Police, and Finance in New France came up with an ingenious idea. His original (translated) words in his letter to his French masters of Sept 24, 1685:
“I have found myself this year in great straits with
regard to the subsistence of the soldiers. You did not
provide for funds, my Lord, until January last. I have,
notwithstanding, kept them in provisions until
September, which makes eight full months. I have
drawn upon my own funds and from those of my
friends, all I have been able to get, but at last finding
them without means to render me further assistance,
and not knowing to what Saint to say my vows,
money being extremely scarce, having distributed
considerable sums on every side for the pay of the
soldiers, it occurred to me to issue, instead of money,
notes on cards, which I have cut in quarters . . .
I have issued an ordinance by which I have obliged
all the inhabitants to receive this money in payments,
and to give it circulation, at the same time pledging
myself, in my own name, to redeem the said notes.”
The currency available to de Muelles was gold and silver coins. In de Muelles' case, as the supply of money stayed constant or perhaps declined, yet the demand of trade increased, it was not possible for prices to move (down, ie for the money supply/demand imbalance to be corrected through a value adjustment, money becoming more valued) to accommodate the new ratios required. He needed more supply, because he had debts he couldn't pay out of the local economy. If he were a business running at a profit out of the local economy, and his currency was divisible, no such problem would have arisen, prices just would have dropped. The reason pirates go on so about pieces of eight is that back then, they had to physically chop coins up to make change. Limited divisibility of coin-based currency helped to create the money-supply shortage de Muelles suffered. But if we make our sound specie-backed currency inifinitely divisible, a simple thing with modern digital systems, supply is not a problem, as money supply/demand variation is accomodated through price level changes. The market is a marvellously smart beast and can deal with that kind of thing. It doesn't (much) matter to the market whether money supply increases or prices drop in order to deal with economic progress. Both work. We have been taught to think that falling prices mean regress. Rather, they reflect progress.
In a productive and growing economy operating in a sound-money regime, prices fall, and this is a good thing. The reduction in the pricing of goods is a result of the improved efficiency of the more specialized evolved economy. We have been conditioned in Plato’s cave to think that economic progress induces inflation, and increased prices. Not necessarily true.
While mapping the quantity of money to the rate at which one can dig a mineral out of the ground may have the immediate effect on increasing the quality and stability on-going businesses through an enforced scarcity of capital, it will have the result of decreasing the quantity of new businesses, and may impede access to capital for existing ones as well. I suppose the theory is that this is a good thing, as it would tend to decrease abuses if there were constant competition for the best use of (artificially) limited capital.
I am not sure who suggests money-creation rates will map to mining. Long term, I suppose that would be true, and a fine thing, and it limits nothing, provided the currency is divisible and satisfies requirement 4 with respect to scale. But shorter-term, if fractional-reserve is allowed, currency-issue in excess of specie will also likely occur. If the economy demands it, and the banks feel it is prudent, and depositors have confidence in their bankers, loans will be made and the money supply will expand, and prices may even go up. There is nothing artificial about the capital limitation. The only limit imposed is how much faith depositors place in their bankers and their loans, which is the right and natural limit. Exceed it, Mr Banker, and you face a run.
But unless this resultant supply velocity maps in some meaningful way (highly unlikely) to the normal needs of a capitalist economy by on-going (as well as new) ventures then catastrophe will ensue. A steady supply of new business and growth of existing business is always required to accommodate the steady influx of newly minted job seekers, and others that for various reasons are entering the job market all of which require the ability, mostly through labor markets provided by existing businesses, to sell their labor power in order to survive.
Insufficient businesses equals massive unemployment and a catastrophic death spiral.
Can you understand, given what I write above, why I would consider this nonsense? Through lots of our history we have done just fine with price adjustments accomodating us instead of money supply variations. With bits, it is even easier. Just shift a decimal place. No spiral.
If the creation of money or credit cannot keep pace with the organic needs (neither too fast nor too slow) of the economy, it is not a solution at all.
I'm not sure I need go on. Money supply doesn't have to change, money demand can drive up money value at constant supply, and thus drive down prices instead. The market copes with this issue for us. Remember we have lived in a cave of exclusively fiat for a long time, and we might need to think carefully, outside of the current paradigm, to truly understand economics, theories of price and value, etc.
Because of this, I don’t really think it is accurate to label this a fiat credit system, the “decree” component is not by a government.
Here you are wrong, we use our failiing fiat currencies because of government decree alone. "Legal tender" means someone who gives me paper for my pig is protected by law from recourse. I can't sue him for something better than legal tender. I must pay my taxes in legal tender or I go to jail. It is certain that we tolerate fiat only because of government edict and coercion and no other reason. You conflate the effects of fractional reserve banking with fiat currency in what you write. They are separate things.
So if you buy this frame of reference, than the key is not trying to modulate the economy with how fast a mineral is extracted from a hole in be ground, but how and to what purpose is the vast amount of credit that is being extended used.
I will be candid. I don't buy the frame, no one should be trying to modulate the economy at all, other than by their own productive work, talk of holes in the ground makes me suspicious of your agenda, and credit is still extended under sound specie-backed money, and it is extended and the money supply expanded beyond the quantity of specie to the exact extent of the inverse of the fractional reserve ratio, dynamically, in response to market demand, with approproate feedback mechanisms to ensure prudence, by the banks, if fractional reserve banking is present.
What’s not to like?
I find it interesting to discuss money with people who don’t like gold or think it has much value. My sister asked me "Why gold?" to which, of course, the natural response was, giving we were sitting in the shade of a highly evolved life form, a tree, I asked back: "Why tree?"
It is the same question. The answer is the same. Um, just because?
Perhaps you can enlighten us. Here is how it looks to me.
If a bank has $10 million in reserves, plus $100 million in deposits, it can write $100 million in loans. It is leveraged 10 to 1 as it has created $100 million new dollars. This is the essence of fractional reserve banking.
So let’s say the COMEX has $10 million in bullion in the vaults, to back $100 million in contracts. Isn’t it leveraged 10 to 1, and hasn’t it temporarily created $100 million new dollars?
If a futures trader deposits 10% margin (in dollars or bullion) on his contract isn’t he leveraged 10 to 1?
When you have very large players with enormous amounts of money, that they can multiply 10 times, they can certainly manipulate prices. And it seems like those prices could vary significantly from what people would pay to actually buy and sell bullion. Futures markets started for agricultural products. They had to be sold due to a limited storage time, and they had to be bought so people could eat. Futures were a way to smooth out prices. But precious metals can be stored forever, so big futures market players can dominate price setting for a while to enrich themselves, while bullion owners are chased to the sidelines waiting for prices to stabilize. That would be the tail wagging the dog.
Now I don’t understand futures markets, but I know a little about banking. Why wouldn’t this analogy be valid?
[quote=Travlin]Erik
Perhaps you can enlighten us. Here is how it looks to me.
If a bank has $10 million in reserves, plus $100 million in deposits, it can write $100 million in loans. It is leveraged 10 to 1 as it has created $100 million new dollars. This is the essence of fractional reserve banking.
So let’s say the COMEX has $10 million in bullion in the vaults, to back $100 million in contracts. Isn’t it leveraged 10 to 1, and hasn’t it temporarily created $100 million new dollars?[/quote]
No, not even close. The COMEX inventory exists to provide a BUFFER for delivery FAILURES. A popular goldbug misconception is that some day all the longs will stand for delivery and there won’t be enough metal in the COMEX warehouse. This reflects a fundamental misunderstanding of how the exchange works. The metal needed to satisfy longs standing for delivery is obtained from shorts who are issued delivery notices. The COMEX inventory comes into play as a BACKUP if the short fails to deliver, but in that case the short has to settle in cash AND pay a delivery failure penalty, which is substantial. Another myth is that there might not be enough shorts to meet the needs of all the longs. This reflects another profound lack of comprehension about how the exchange works. There are always an equal number of longs and shorts.
Yes. But that has nothing to do with the exchange being leveraged, or any of the other ignorant nonsense Messr. Maguire has opined about.
In the very short run, yes. That’s why nobody disputes the reality of stop-clearing runs, which do occur. But there is no intelligent reason I am aware of to suspect or assume that central banks are behind them. I am convinced it is discount online brokers doing most of the stop-clearing manipulations. They are the ones with the critical information, i.e. visibility into their clients’ stop orders.
Wrong. So long as any formative spread can be arb’d, it will be arb’d. Law of efficient arbitrage.
Your statement lacks logical consistency. If the long-term storage compatibility of metals somehow makes them possible to manipulate while ags are not, you haven’t said why. You say "big futures market players can dominate price setting for a while to enrich themselves", but you don’t say how they could do that (they can’t).
This was all covered a hundred or so posts ago in an exchange with Bron Suchecki who explained price transmission through arbitrage.
It’s not even close; sorry. As to reasons why not, those have been explained more than once earlier in this thread. I’m willing to discuss new ideas, but not willing to rehash what’s already been discussed ad nauseum here for the sake of those who are unwilling to read the whole thread before posing the same questions again.
All the best,
Erik
I wrote elsewhere of Truth, truth, the difference betwixt, and of why I post on the internet, and why I am optimistic about our prospects now that it exists. There was a time I was more of a cynic, but I have been able to live my life in optimism gained through epiphany over two decades ago.
I again feel the need to respond as I feel we are diverging from Truth here again.
The use of a term from physics, "leverage", in the soft science of economics can lead to misunderstanding. In physics, the meaning in clear. In finance and economics it might have multiple meanings. Wittgenstein would tell us to make sure to define our terms carefully else risk being misunderstood.
Travlin I think your ideas have merit.
In a private margin-account, we think of "leverage" as the ratio of capital we have deposited to the total market exposure in the account.
In a bank’s balance-sheet, we consider leverage as the inverse of the reserve ratio. Perhaps I should speak for myself. I think that if a bank has on deposit by creditors N currency units, and is operating at a reserve ratio R, less than or equal to one, then the "leverage" the bank is operating under is 1/R. If it is a 25% reserve ratio, the bank is 4:1 leveraged.
We have considered in this thread modelling markets such as the COMEX and LBMA as banks in order to better understand the dynamics that might apply. Another way to think of the analogy is in the other direction, to consider a bank as making a market in currency. The bank has vaults, as does the COMEX. The bank has different places to store its customer’s deposits. It has demand-deposits and safety-deposit boxes. The bank can (legally) use as collateral for loans demand deposits. It cannot (legally) encroach on customers’ safety deposit boxes to satisfy demand for currency. A loan by a bank is analogous to a rolling futures contract in currency. The debtor sells short some currency (gets a loan) to start it. The bank is like the COMEX, and finds a long (some demand deposits) to mate the contract against. Every month, the contract is rolled over, and the debtor has to pay contract-roll premiums (interest). The creditor is paid contract-roll premiums. The bank takes a cut, as does the COMEX on its contracts.
The COMEX analogously maintains inventory in vaults as "customer" inventory that is "eligible" to fulfill contracts and "registered" that is ready-for-withdrawl. From the first google hit I got:
The Eligible category means that the silver meets the exchange requirements. Exchange requirements include purity, size (eligible silver bars must weigh within 10% plus or minus of 1000 ounces), and also must be from (stamped with) an exchange approved refiner.
Eligible silver essentially means that the silver is stored in COMEX warehouses, and conforms to exchange standards. It is being stored in the COMEX warehouse for a private party, but it is NOT available for delivery to contracts...
… Registered silver means that the silver is fully available for delivery to longs who stand for bullion delivery.
I am sure the situation is the same for gold. The banking analogy is that a bank's demand deposits are like Registered inventory, while safety-deposit boxes are like Eligible inventory. The bank can't use safety-deposit capital to satisfy currency demand unless its depositors choose to move their assets from safety-deposit to demand-deposit "vaults". The COMEX can't use Eligible inventory to satisfy contract delivery unless customers first move that inventory to the Registered vaults.
A bank’s customer who chooses to withdraw his currency is equivalent to a long standing for delivery from the registered inventory, and removing the delivered inventory from eligible vaults. I see the analogy as quite apt and quite valid. Maybe I miss a detail here or there, readers please advance my understanding if so.
Travlin: So let’s say the COMEX has $10 million in bullion in the vaults, to back $100 million in contracts. Isn’t it leveraged 10 to 1, and hasn’t it temporarily created $100 million new dollars?
Yes, I think you are quite close. Just as long contract-holders may choose to stand or not, and withdraw their inventory from eligible vaults or not, bank depositors may choose to withdraw deposits, or not. The inventory available for a bank to supply currency is the sum of its demand-deposits. That is its "buffer" to deal with the case that "its longs stand for delivery". If there is insufficient inventory, the bank must begin the process of unwinding its loans, which are exactly analogous to futures contracts on currency: in exchange for N dollars now (and minor detail of periodic interest payment), I promise to deliver F dollars on future date D.
So yes, the concept of money-creation within futures markets is sound. In this strange fiat world, virtually all debt is equivalent to money.
ErikT: A popular goldbug misconception is that some day all the longs will stand for delivery and there won't be enough metal in the COMEX warehouse.
I am not sure what a "goldbug" is, nor what misconceptions they might have. But it is worth noting that if the open interest exceeds the total inventory, then the exchange itself is "leveraged", much as a bank is leveraged by the inverse of its reserve ratio. If all depositors at a bank line up and "stand for delivery", the bank must unwind its balance sheet. Doing so requires the calling of loans. It must apologetically go out to all those to whom it has loaned currency (equivalent to short futures-contract holders whose contract is not yet due) and say: "sorry, I know we said the loan (contract) wasn't due till December, but we need the currency (metal) now, else we are insolvent, and will be defaulting on currency-delivery (metal-delivery) to our demand-deposit creditors. Erik given your negated conjunction, I am not sure whether you think the misconception is that "all the longs will stand" or "there won't be enough metal". It could be either, given your wording.
ErikT: The COMEX inventory comes into play as a BACKUP if the short fails to deliver, but in that case the short has to settle in cash AND pay a delivery failure penalty, which is substantial. Another myth is that there might not be enough shorts to meet the needs of all the longs. This reflects another profound lack of comprehension about how the exchange works. There are always an equal number of longs and shorts.
Yes. Ish. I think. I think the COMEX choice of how to deal with short-failure-to-deliver is fairly opaque to customers, and it appears as luck-of-the-draw to shorts who hold put options through expiry, for example. It is true that the COMEX has an escape-clause the banks lack in terms of cash-settlement and penalty options. Banks and their debtors don't have paper to fall back on, that is where they start. Debtors who fail to pay when legally demanded to do so just go to jail, or get wages garnisheed. I think the interesting question in terms of whether COMEX prices are "true market prices" is determined by exactly the ratio of shorts who deliver to longs who demand delivery. The "effective price" in fiat dollars for the commodity is the contract value plus the penalty, not the contract price alone. There is an equal number of longs and shorts, yes, but there may not be a short who delivers for every long who stands. It is this latter ratio that is important in determining if the market is functioning properly, and if price discovery within it is working well.
ErikT: "...or any of the other ignorant nonsense Messr. Maguire has opined about."
Erik, aren't we supposed to be trying our best to stay away from condescension, pejorative, and ad-hominem?
Travlin: "And it seems like those prices could vary significantly from what people would pay to actually buy and sell bullion."
Yes, exactly. Just as I describe above. When deliveries fail and cash-settlement and penalties are invoked, the market is failing to properly discover price. Or, perhaps, better said, the real market price is closer to the sum of contract value and penalty.
ErikT: Wrong. So long as any formative spread can be arb'd, it will be arb'd. Law of efficient arbitrage.
Wrong. Erik, you gloss over the value of the penalty, which forms part of the cost to the short. Yes, arbitrage occurs, but it includes the sum of all the costs to the short, not just the contract cash-settlement cost.
Travlin: Futures markets started for agricultural products. They had to be sold due to a limited storage time, and they had to be bought so people could eat. Futures were a way to smooth out prices. But precious metals can be stored forever, so big futures market players can dominate price setting for a while to enrich themselves, while bullion owners are chased to the sidelines waiting for prices to stabilize. That would be the tail wagging the dog.
As long as cash-settlement exists within both the "true commodity" and precious metals markets, I am not sure that what you are saying is true. If physical delivery failure and cash settlement is tolerated in both markets, even common, then there is not much difference. I think the difference may lie in such minutiae as differences in position limits, margin requirements and the clever timing of margin hikes to control price etc, as well as the huge self-interest the banks have in keeping the fiat-price of metals suppressed. It is true that gold doesn't rot, but neither does aluminum or copper.
Travlin: Now I don’t understand futures markets, but I know a little about banking. Why wouldn’t this analogy be valid?
Aside from the nits I pick above, your analogy is quite valid, Travlin, and perhaps you understand futures markets better than you give yourself credit for. I'd be happy to chat more about this, if ErikT isn't. As I wrote at the link at the start of this post, it is important that we figure all this stuff out on the net and let people know as close as we can, the truth. I don't blindly assert my truth is any closer to Truth than yours, but I will argue and discuss it until I feel comfortable I understand and can communicate the difference.*
bbacq
Or I run out of time or become unaware I am involved in dialog. I can be nudged through personal messaging over at tfmetalsreport.com where I am more likely to see responses.
I think the COMEX choice of how to deal with short-failure-to-deliver is fairly opaque to customers, and it appears as luck-of-the-draw to shorts who hold put options through expiry, for example.
I should have had the short position as a sale of a call, not the purchase of a put in my example. More correctly the idea would have been expressed as:
"...as luck of the draw to shorts who fail to close a sold call before expiry..."
further:
The inventory available for a bank to supply currency is the sum of its demand-deposits.
is imprecise, as the cash inventory includes reserves as well as demand-deposits, for example. I should remind readers my preferred bank model (ie when not referring to today's wacky fiat) is specie-backed, so deposits are in specie like gold and silver, as are reserves.
There may be more little errors. I am fallible and the edit-comment time-limit feature while good as a guard against revisionism means one must pollute the board with corrigendae.
Bbacq – Thanks for your response. You spent a lot of time and effort on that. It sounds like you understand futures markets well enough to make a valid judgment. I know very little about futures. That’s why I asked if my analogy seemed valid. Here’s a technical point for your edification. Most loans cannot be “called” for early payment. When a bank needs cash they borrow from another bank, using their loan portfolio as collateral. One justification for the Federal Reserve was to act as a “lender of last resort” when commercial banks lacked the liquidity to help each other this way.
Erik - I opened my post 351 with a quote from you asking “what the paper to physical ratio has to do with leverage”.
You replied that “The COMEX inventory exists to provide a BUFFER for delivery FAILURES.” That is exactly my point. In effect they are guaranteeing all the contracts with only a small reserve. In practice, that reserve is sufficient in normal circumstances. That is analogous to a fractional reserve bank. When borrowers default on their loans the losses are absorbed from the small reserve, which is sufficient in normal circumstances to guarantee the depositors can be repaid.
You said, “A popular goldbug misconception is that some day all the longs will stand for delivery and there won’t be enough metal in the COMEX warehouse. This reflects a fundamental misunderstanding of how the exchange works. The metal needed to satisfy longs standing for delivery is obtained from shorts who are issued delivery notices.” That is the same as banks where the money to honor withdrawals from deposit accounts comes from the loan payments by borrowers. Reserves are for imbalances. Of course, if the bank experiences massive defaults on loans those reserves can be exceeded in a short time. A similar effect could be produced by massive defaults on futures contracts in a financial crisis.
It is because of the small COMEX bullion reserve, and the COMEX guarantee, that traders can buy and sell paper
contracts worth many times the bullion that is backing the exchange. That still looks like leverage to me. To be more precise than my previous post, the COMEX corporation may not be leveraged, but the COMEX market they operate is. To me that’s still, “what the paper to physical ratio has to do with leverage”. You obviously see it differently. That’s fine. Let’s leave it at that.
Regarding the other issues and your responses, it seems neither one of us thinks it would be fruitful to discuss them further.
When I compared the COMEX to a bank I asked, “Why wouldn’t this analogy be valid?” You responded, “It’s not even close; sorry. As to reasons why not, those have been explained more than once earlier in this thread. I’m willing to discuss new ideas, but not willing to rehash what’s already been discussed ad nauseum here for the sake of those who are unwilling to read the whole thread before posing the same questions again.”
That’s a very nice example of typical Erik T sarcasm. I don’t remember anyone specifically raising the bank analogy in this thread. I have indeed read all 354 posts on this thread. However, over the last 35 days most have blurred together, much I can’t remember, and some were more technical than I could comprehend. However, my career put me in many situations where others knew more than me on technical issues. I’ve found that it they explain them well I can grasp the principles and evaluate the accuracy of their views. In other cases they were selling a rigid point of view and disguising it in technicalities. I reserve the right to make my own judgment.
Your demeanor in the forums reminds me of Dr. Jeckle and Mr. Hyde. Depending on your mood you can be encouraging, and helpful with your time and knowledge. Or you can be supercilious, sarcastic, and demeaning. I’m sure I’m not the only one who would appreciate less of the latter.
I get the ideas of non-call loans, lender of last resort, and the interbank overnight market. In the analogy, I don’t see the lender of last resort for the COMEX. Fed/USG, US taxpayer? Who knows these days, they bail out everything.
ErikT: The metal needed to satisfy longs standing for delivery is obtained from shorts who are issued delivery notices.”
True.
Travlin:That is the same as banks where the money to honor withdrawals from deposit accounts comes from the loan payments by borrowers
It's similar. But more like the calling of call loans than interest payments on uncallable loans.
I think you are right, the corporation isn’t leveraged, but the market they make is, because the players are. But since there is cash settlement and penalty as an option, all that happens is price discovery and delivery fail when the "reserve" is insufficent for standing longs.
Travlin: It is because of the small COMEX bullion reserve, and the COMEX guarantee, that traders can buy and sell paper
I'm not sure what reserve and guarantee you are talking about, Travlin. If a short is a member bank itself, it could choose to fail to fiat or deliver from its registered inventory, or shift eligible to registered and then deliver. It it was a customer of the bank that fails, say by holding a sold call through expiry and who doesn't have either the gold or the cash, the bank could choose to pass the fail along or cover for its client and deliver. The COMEX itself gets off scot-free and doesn't guarantee much except handling the transaction and arbitrating price in fiat in the case of failure.
Despite this, I still think the analogy is reasonable, except that the reserves are held indpendently by the members. As far as I know, any inventory actually held by the COMEX itself is in-transit between members, and they own no commodities, they just make the market. All members’ inventory is not up for grabs as reserves for delivery, just that of those who are short. I mean, why should, say, JPMorgan be responsible for, say Bear Sterns’ delivery problems? Blink. Ooops! Look now! They are!
Travlin, I think the "leverage ratio" you are seeking is some composite of the net-short-position to inventory ratio of all net-short members. I don’t think they want to tell you this info. I’d dearly love to see it broken down member-by-member. But inventory of net longs doesn’t count in the reserve pool analogy if you ask me. What matters is whether the shorts have enough to deliver. Or does it?
There are lots of weasle-words in there, by the way…
7B14. FAILURE TO DELIVER
In the event a clearing member fails to fulfill its specific delivery obligations pursuant to Exchange rules, in connection with a product listed for trading and clearing or for clearing-only by the NYMEX Division or the COMEX Division, the sole obligation of the Clearing House is to pay reasonable damages proximately caused by such delivery obligation failure, in an amount which shall not exceed the difference between the delivery price of the specific commodity and the reasonable market price of such commodity at the time delivery is required according to the rules of the Exchange. The Clearing House shall not be obligated to: (1) make or accept delivery of the actual commodity; or (2) pay any damages relating to the accuracy, genuineness, completeness, or acceptableness of certificates, instruments, warehouse receipts, shipping certificates, or other similar documents; or (3) pay any damages relating to the failure or insolvency of banks,depositories, warehouses, shipping stations, or similar organizations or entities that may be involved with a delivery.
I wonder what constitutes "Force Majeur" for these guys:
7B01. DECLARATIONS OF FORCE MAJEURE
If a determination is made by the Chief Executive Officer, President or Chief Operating Officer, or their delegate, that delivery or final settlement of any contract cannot be completed as a result of Force Majeure, he shall take such action as he deems necessary under the circumstances, and his decision shall be binding upon all parties to the contract.
For purposes of the CME Group Exchanges’ rules, Force Majeure is any circumstance which is beyond the control of the buyer or seller and precludes either party from making or taking delivery of product or precludes the Exchange from determining a final settlement as provided for in Exchange rules. The new definition provides a non-exhaustive list of such circumstances, which can include an act of God, strike, lockout, blockage, embargo, government action or terrorist activity.
Would enough longs standing together thus exhausting one or more large banks' inventory be considered an act of God? Would the government take action? I think there are enough weasle-words and the system is so broken we don't really even have rule of law operating in the financial markets, so if TSHTFan all bets are off and the best you will get is paper, not metal. IMHO.
[quote=bbacq]I again feel the need to respond as I feel we are diverging from Truth here again.[/quote]You’re entitled to whatever feelings you may have, but in reality you, sir, not I, diverge from the truth.
bbacq, you seem to share this trait with GATA: You seem to quite enjoy pontificating at length in Internet discussion forums about subjects you simply don’t understand very well yourself. I just don’t get it, bbacq. You clearly have spent considerable time and effort on your lengthy, detailed posts. Surely that time would be better spent learning some basic things about these markets yourself. But instead, you seem to prefer to lecture others on subjects that you obviously are not well informed upon yourself. WHY? I just don’t get it. By doing this, you mislead others by spreading your own lack of comprehension. I just don’t understand what motivates you to spend so much time on these pontifications when you could instead spend that time learning the material, so that you could then go on to comment more intelligently.
Respectfully, in my opinion, bbacq, just like GATA, you are wasting your time and ours by posting these long diatribes, which frankly amount more to flaunting your ignorance than to teaching anyone else anything real or useful. I mean no disrespect to you personally; I just don’t get why you and so many gold bugs like you feel compelled to this behavior. I think my True Believer hypothesis is the most likely explanation, but it still baffles me to understand your motives.
No, I’m sorry but you’re wrong. Leverage as used in finance is defined just as precisely as in the hard sciences. In this case it means assets over collateral (equity).
I respectfully opine that such "considering" is counter-productive. Your time would be better spent learning how the markets actually function, rather than drawing specious analogies between things you obviously don’t understand.
Your analogy is specious because the capital reserves of a fractional reserve bank serve a completely different purpose (as reserve against total obligations of the bank to depositors) than the warehouse inventory of COMEX (which facilitates delivery of other customers’ obligations to longs and also serves as a buffer to make delivery fails opaque to longs standing for delivery).
[quote=bbacq]The COMEX analogously maintains inventory in vaults as "customer" inventory that is "eligible" to fulfill contracts and "registered" that is ready-for-withdrawl. From the first google hit I got:
The Eligible category means that the silver meets the exchange requirements. Exchange requirements include purity, size (eligible silver bars must weigh within 10% plus or minus of 1000 ounces), and also must be from (stamped with) an exchange approved refiner.
Eligible silver essentially means that the silver is stored in COMEX warehouses, and conforms to exchange standards. It is being stored in the COMEX warehouse for a private party, but it is NOT available for delivery to contracts...
... Registered silver means that the silver is fully available for delivery to longs who stand for bullion delivery.
I am sure the situation is the same for gold. The banking analogy is that a bank's demand deposits are like Registered inventory, while safety-deposit boxes are like Eligible inventory. The bank can't use safety-deposit capital to satisfy currency demand unless its depositors choose to move their assets from safety-deposit to demand-deposit "vaults". The COMEX can't use Eligible inventory to satisfy contract delivery unless customers first move that inventory to the Registered vaults.[/quote]
Your analogy is still invalid because your understanding of the flows and roles of various counterparties is fundamentally flawed. The COMEX Registered Inventory is NOT the ultimate source of metal for deliveries to longs. The source of that metal is the shorts who have been noticed for delivery. The Registered Inventory acts only as a buffer, but it does not serve as a reserve that all the longs standing for delivery must rely upon. The metal to satisfy longs ultimately comes from the shorts, not from the COMEX. It's true that longs who show up to pick up their metal will get Registered inventory, but that inventory is replaced as soon as the corresponding shorts deliver.
[quote=bbacq]A bank's customer who chooses to withdraw his currency is equivalent to a long standing for delivery from the registered inventory, and removing the delivered inventory from eligible vaults. I see the analogy as quite apt and quite valid. Maybe I miss a detail here or there, readers please advance my understanding if so.[/quote]
No, you don't miss "a detail here or there". You miss the point completely, and your comments reveal a complete and total lack of understanding on your part as to the most basic aspects of how the market functions. This brings me back to my original question, bbacq: Why are you doing this? You obviously don't know what you are talking about, yet rather than spending your time learning about the market (or even asking others here to help you learn about it), you insist on these long, involved diatribes in which you make specious, irrational analogies. Please stop. It just serves to mislead others who seek to learn how these things really work.
[quote=bbacq]
Travlin: So let’s say the COMEX has $10 million in bullion in the vaults, to back $100 million in contracts. Isn’t it leveraged 10 to 1, and hasn’t it temporarily created $100 million new dollars?
Yes, I think you are quite close. Just as long contract-holders may choose to stand or not, and withdraw their inventory from eligible vaults or not, bank depositors may choose to withdraw deposits, or not. The inventory available for a bank to supply currency is the sum of its demand-deposits. That is its "buffer" to deal with the case that "its longs stand for delivery". If there is insufficient inventory, the bank must begin the process of unwinding its loans, which are exactly analogous to futures contracts on currency: in exchange for N dollars now (and minor detail of periodic interest payment), I promise to deliver F dollars on future date D.
So yes, the concept of money-creation within futures markets is sound. In this strange fiat world, virtually all debt is equivalent to money.[/quote]
No, it's not "exactly analagous". Your analogy is completely bogus and based on a fundametal lack of understanding of how COMEX operates. Your analogies to fractional reserve banking are specious, misleading, and not useful. Your contention about "money creation" in the futures market is not "sound" - it is specious and invalid. Again, I don't understand why you and so many like you feel so compelled to behave this way. You're certainly not alone, bbacq. The goldbug forums are full of people like yourself who are prone to pontification on subjects they know nothing about. I just can't figure out what motivates you.
[quote=bbacq]
ErikT: A popular goldbug misconception is that some day all the longs will stand for delivery and there won't be enough metal in the COMEX warehouse.
I am not sure what a "goldbug" is, nor what misconceptions they might have. But it is worth noting that if the open interest exceeds the total inventory, then the exchange itself is "leveraged", much as a bank is leveraged by the inverse of its reserve ratio. [/quote]
No, your statement is blatantly false, and reveals that you simply have no idea of what you speak.
[quote=bbacq]If all depositors at a bank line up and "stand for delivery", the bank must unwind its balance sheet. Doing so requires the calling of loans. It must apologetically go out to all those to whom it has loaned currency (equivalent to short futures-contract holders whose contract is not yet due) and say: "sorry, I know we said the loan (contract) wasn't due till December, but we need the currency (metal) now, else we are insolvent, and will be defaulting on currency-delivery (metal-delivery) to our demand-deposit creditors. Erik given your negated conjunction, I am not sure whether you think the misconception is that "all the longs will stand" or "there won't be enough metal". It could be either, given your wording.[/quote]
Those are both misconceptions. All the longs will never stand for delivery because they don't have the capital to do so. If they did, there WOULD be enough metal, because the shorts would either deliver it or be forced to bid up the contract price to the point that the longs are persuaded to accept cash settlement. It is NOT analagous to a bank unwinding it's balance sheet - not in any way, shape or form, and the analogy is misleading. COMEX does not have to call any loans, because all the shorts are on the hook to deliver all the needed metal in the same month the longs can accept delivery. The COMEX inventory is ONLY drawn down in the case of delivery fails, which are very uncommon because an astute short can generally exit the position by paying whatever the ask is on the first notice date. Delivery fails have to pay that same amount plus a penalty.
[quote=bbacq]
ErikT: The COMEX inventory comes into play as a BACKUP if the short fails to deliver, but in that case the short has to settle in cash AND pay a delivery failure penalty, which is substantial. Another myth is that there might not be enough shorts to meet the needs of all the longs. This reflects another profound lack of comprehension about how the exchange works. There are always an equal number of longs and shorts.
Yes. Ish. I think. [/quote]
Please notice how I already gave you the information (in this quote) you needed to avoid making the incorrect analogies you insisted on making anyway. At this point, my interest in this conversation is limited to studying the psychology of what makes people like you behave this way when you have already been given the information you need to understand how it really works.
[quote=bbacq]I think the COMEX choice of how to deal with short-failure-to-deliver is fairly opaque to customers, and it appears as luck-of-the-draw to shorts who hold put options through expiry, for example. It is true that the COMEX has an escape-clause the banks lack in terms of cash-settlement and penalty options. Banks and their debtors don't have paper to fall back on, that is where they start. Debtors who fail to pay when legally demanded to do so just go to jail, or get wages garnisheed. I think the interesting question in terms of whether COMEX prices are "true market prices" is determined by exactly the ratio of shorts who deliver to longs who demand delivery. The "effective price" in fiat dollars for the commodity is the contract value plus the penalty, not the contract price alone. There is an equal number of longs and shorts, yes, but there may not be a short who delivers for every long who stands. It is this latter ratio that is important in determining if the market is functioning properly, and if price discovery within it is working well.[/quote]
No, your analysis is wrong and I didn't forget to consider the penalty. The "effective price" is the ask, not the ask plus the penalty. Someone (including the exchange replenishing its inventory from the spot market to compensate for delivery fails) pays the ask, not the ask plus the penalty. Your contention that the "effective price" is the ask plus the penalty is ridiculous and further reveals your failure to understand the basics.
[quote=bbacq]
Travlin: "And it seems like those prices could vary significantly from what people would pay to actually buy and sell bullion."
Yes, exactly. Just as I describe above. When deliveries fail and cash-settlement and penalties are invoked, the market is failing to properly discover price. Or, perhaps, better said, the real market price is closer to the sum of contract value and penalty.[/quote]
No, completely wrong. The market continues to properly discover price so long as the arbitrage trade to other markets is possible, as was already discussed at length much earlier in this thread. Or perhaps better said, your insistence on making these assertions of fact when you obviously don't understand the basic functioning of the market serves only to mislead others, add confusion, and to thwart your own learning process. You would do better to ask questions and allow people who actually know the answers to educate you.
[quote=bbacq]
ErikT: Wrong. So long as any formative spread can be arb'd, it will be arb'd. Law of efficient arbitrage.
Wrong. Erik, you gloss over the value of the penalty, which forms part of the cost to the short. Yes, arbitrage occurs, but it includes the sum of all the costs to the short, not just the contract cash-settlement cost.[/quote]
Dead wrong, bbacq. I didn't "gloss over" anything. I simply recognize the fallacy of your assertion that the penalty is part of the transaction cost of arbitrage. It isn't. The penalty is ONLY a cost to shorts who fail to cover before being obligated by a delivery notice. It is not levied on arbs who profit from price discrepancies between markets.
[quote=bbacq]
Travlin: Futures markets started for agricultural products. They had to be sold due to a limited storage time, and they had to be bought so people could eat. Futures were a way to smooth out prices. But precious metals can be stored forever, so big futures market players can dominate price setting for a while to enrich themselves, while bullion owners are chased to the sidelines waiting for prices to stabilize. That would be the tail wagging the dog.
As long as cash-settlement exists within both the "true commodity" and precious metals markets, I am not sure that what you are saying is true. If physical delivery failure and cash settlement is tolerated in both markets, even common, then there is not much difference. I think the difference may lie in such minutiae as differences in position limits, margin requirements and the clever timing of margin hikes to control price etc, as well as the huge self-interest the banks have in keeping the fiat-price of metals suppressed. It is true that gold doesn't rot, but neither does aluminum or copper.[/quote]
Your comments here simply don't make sense. See my prior reply to Travlin for an accurate explanation.
[quote=bbacq]
Travlin: Now I don’t understand futures markets, but I know a little about banking. Why wouldn’t this analogy be valid?
Aside from the nits I pick above, your analogy is quite valid, Travlin, and perhaps you understand futures markets better than you give yourself credit for. I'd be happy to chat more about this, if ErikT isn't. As I wrote at the link at the start of this post, it is important that we figure all this stuff out on the net and let people know as close as we can, the truth. I don't blindly assert my truth is any closer to Truth than yours, but I will argue and discuss it until I feel comfortable I understand and can communicate the difference.*[/quote]
Now we're at the real heart of the matter. Is is you, bbacq, who simply don't understand the first thing about futures markets and how they function, and the shortcomings of your knowledge are revealed by your astonishingly ignorant post, which contains far more misinformation than fact.
The part of this that fascinates me is your motivation. Why are you doing this, bbacq? What makes you feel inclined to spend so much time and effort writing a post that ends by authoritatively reassuring Travlin that "his analogy is quite valid" and that he "understands futures markets better than [he] gives himself credit for", when you yourself rather obviously don't know the first thing about the subject at hand, and aren't qualified to offer such opinions?
You have obviously spent hours composing your posts to this thread. Surely your time would be better spent reading up on futures markets and learning how they function, so that some day you can offer accurateinformation in online discussion groups. It almost seems is if your learning technique is to pontificate at length about subjects you know little or nothing about, so that others will correct you. I submit there are more effective and efficient ways to learn about new things.
[quote=Travlin]
Bbacq – Thanks for your response. You spent a lot of time and effort on that. It sounds like you understand futures markets well enough to make a valid judgment. I know very little about futures. That’s why I asked if my analogy seemed valid. [/quote]
This is the part that drives me nuts, bbacq. You come across confidently enough to persuade people who know the limits of their knowledge that you have the knowledge they don't. But that's simply not true. I, too, apprecaite that you have put considerable effort into these posts, but honestly I think the net value is negative. You've caused Travlin to incorrectly conclude that his analogy was valid, when in fact it was not.
bbacq, I've spent considerable time responding to you here only because I'd hate to see others misled by making the errant assumption that you actually know of which you speak, which you clearly don't. Please, stop doing this, and go learn the subject matter instead.
All the best,
Erik
[Moderator's note: The author of this post (while clearly aroused) has taken pains to avoid gratuitous personal insults and irrelevant character attack. It is this restraint which puts this post the correct side of the forum rules, while the later post by bbacq falls on the wrong side.]