Failure to Understand the Commodity Market

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Some people are just so hung up on this idea of selling paper gold they only try to explain the decline as false caused solely by paper shorts. Sorry – it does not matter! That is the nature of all futures markets. It is merely another twisting of facts to try to explain why a theory is not wrong. A farmer hedges a crop and sells it “forward” before he has harvested. This is to lock in a price thereby guaranteeing a profit otherwise he will gamble that the price DOES NOT collapse when it is harvest whereby he loses the farm. If the weather turns bad preventing him from harvesting, he will then have to go buy back his hedge causing a “short-cover rally”. This is the entire purpose of the futures markets. The person with the product is selling the risk to others willing to buy it and trade it in return for KNOWING he will have a profitable business for the season. This is not a conspiracy or some dark lord trying to suppress a market. If someone sells gold they do not have, they run the risk of having to buy it back if the price goes against them. It is absurd to pretend such selling suppresses gold and is criminal.

Likewise, assuming J.P. Morgan has vast naked speculative shorts for years they never trade is absurd. If they would attempt such a perpetual position they would have lost the bank if that was true when gold rallied from $250 to nearly $1900. They are hedging product. No big deal. If it were not for those “paper” positions gold would be worth much less because it is the existence of a market that brings value to whatever it is being traded. People are willing to buy a 30-year bond ONLY because they know they can sell it when needed. If there was no market, then there would be less 30 year bonds for that is a long term commitment.

The futures markets in every respect are leverage and facilitate the VELOCITY of trading creating LIQUIDITY that then makes the instrument tradable. The mortgage securities were rated AAA, which made them acceptable for the REPO market. Had the credit agencies NOT provided the AAA guarantee, the bankers would NOT have been able to sell as much as they did. They were salable ONLY because they were LIQUID!!!! .If there was no “paper” gold contracts, gold would be less liquid. There would be a greater risk in buying gold,even in coins, if there was no market accepting the product regardless of what it might be.

Marx read Aristotle who complained about the people “who made money from money.” He felt they were changing the lifestyle of Athens. Markets were emerging and then farmers began to produce more crops than what they needed for their own consumption because there was a market into which they could sell their product. This was altering the economy from a Villa Economy of a commune that was self-supporting into a Market Economy with contracts for future delivery of their product. Without such a market, there would be no gold mines for they would not risk producing anything if they were not assured they could sell it.

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Futures contracts have been around since Babylon. That is the Market Economy that enabled civilization for it provided for economic interaction making it plausible to come together to create great cultures. Futures are NOT evil as the gold promoters have twisted things for without them we would be in a dark age when there was no wages or money for the common man, Futures do not suppress the price or a commodity – they create a market that expands its supply by creating a Market Economy rather than Communism as Marx tried to do by destroying those people “who made money from money.” Creating VELOCITY adds to LIQUIDITY and that is what provides the CONFIDENCE to trade expanding the economy. You would not buy a contract if you thought you could never sell it. Sorry, there is no evidence of futures suppressing prices on some perpetual basis EVER!!! Are there attempts at short-term manipulations? Of Course. But never regarding the economy that is beyond the control of even government as Paul Volcker acknowledge in his Rediscovery of the Business Cycle.

Eliminate those “paper” gold positions and you will destroy the market. Why is it that buying “paper” contracts in gold is always “real” but selling is “false”? Indeed, at the low, the majority are bearish selling short and that set it up for the reversal. The shorts then provide the ENERGY that makes the market reverse when they become excessive.

This is all nonsense and ASSUMES gold trades in total isolation. It does not. Regardless of whatever stories are told, you cannot MANIPULATE a single market against the trend of the whole. It cannot be done. Just look at the Euro, the collapse of the gold standard, or the collapse of communism – whatever! Not even government can force a market to do something against the trend.

Why has there been no inflation despite the increase in money by the Fed? Because that was far less than the destruction of capital from the DELEVERAGING of the mortgage bubble. Even worse still, the Euro is collapsing as is Japan. The dollar is the ONLY place for big money to park.

You are looking at over $40 trillion globally that needs to park. The open interest in ALL contracts on COMEX gold is less than 400,000. Times $1500 an ounce that is $60 billion or 0.0035% of the national debt. Gold is a tiny market within the whole scheme of things. Yet to listen to the gold promoters, you would think that the entire world revolves around the gold market. Gold is a hedge against government for the INDIVIDUAL, but it is not suited for the big institutional investors who require income not capital gains.

When someone sells a commodity or even what they do not own, it does not matter because there is a buyer on the opposite side. That is different from the LEVERAGE that takes place by those buying more contracts than they have the money to pay for if they took delivery or a mine selling what it expects to get next year but is not produced now. That is entirely separate from the question of supply and demand and it is by no means only the seller that is leveraged but also the buyers willing to buy contracts far beyond what they have in fund if they took delivery. That goes BOTH ways.

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You can argue all you want. The trend is the trend. Gold is NOT ready for prime time until everything is in place. It will not go up in isolation no matter how exaggerated the gold promoters get with their wild claims. The Euro and the Yen will crack BEFORE the dollar. Only after they fall will capital then turn against the dollar as was the case in 1931. Countries are like dominoes. They fall in a sequence, not all at once. This is not OPINION, this is simply the way this stuff happens. This is not what I “think” will happen – it is how things have happened. No gold promoter can do the same to demonstrate any major economy that went into hyperinflation – they all turned against their own people and confiscated assets. They only point to a communist revolution in Germany during 1918 or Zimbabwe. It may not be to your liking, however, neither were free markets to Marx and Keynes. But sorry, that is the way it works. You can try to yell and scream and talk the markets into doing what you would like against the trend, or perhaps you want to survive and not donate your money to nonsense. It’s your choice! The market is NEVER wrong! Either understand how it functions or try to say it is wrong. I doubt you will win.