Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20
Does the Stock Market Really "See" the Future? - 12th Sept 20
Basel III and Gold, Silver and Platinum - 12th Sept 20
Tech Stocks FANG Index Nearing Critical Support – Could Breakout At Any Moment - 12th Sept 20
The Tech Stocks Quantum AI EXPLOSION is Coming! - 12th Sept 20
AMD Zen 3 Ryzen 4000 Questions Answered on Cores, Prices, Benchmarks and Threadripper Launch - 12th Sept 20
The Inflation Mega-trend is Going Hyper! - 11th Sep 20
Gold / Silver Ratio: Slowly I Toined… - 11th Sep 20
Stock Market Correction or Reversal? The Jury Isn't Out! - 11th Sep 20
Crude Oil – The Bearish Outlook Remains - 11th Sep 20
Crude Oil Breaks Lower – Sparking Fears Of Another Sub $30 Price Collapse - 11th Sep 20
Inflation by Fiat - 10th Sep 20
Unemployment Rate Drops. Will It Drag Gold Down? - 10th Sep 20
How Does The Global Economy Recover After This Global Pandemic? - 10th Sep 20
The Best Mobile Casino - 10th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Derivatives - The Real Dangers to Commodities!

Commodities / Gold & Silver Apr 20, 2008 - 07:20 PM GMT

By: Julian_DW_Phillips

Commodities The visible dangers of derivatives have been well documented on the internet, as the dangers of their collapse have the same potential as the sub-prime crisis is having now, but the long-term upward drive in commodity prices should limit the threat to a process of de-leveraging, as we have already seen in the large lowering of net speculative long gold positions on COMEX. But we are going to highlight a potentially more destructive facet of derivative here.

Simply put, a derivative is a 'paper' instrument founded on an asset. It can be a purchase or sale of a commodity in the future, or a share in an Exchange Traded Fund, an Option, or one of many similar instruments.

The Classic Use of a Derivative

When a silver miner or user found they had to buy or sell silver, they would usually buy ahead of the date of their need to ensure its availability on that date, but this left them exposed to the dangers of paying too much or selling for too little. How could they remove this risk? They had to "hedge" their future sale. How?

If delivery of silver sold/bought were to take place say in a year's time, they would sell/buy that position in the futures market or take out a "put/"call"" option [the right to sell/buy at a certain price at that future date]. This left them both a long position and a short position on silver [netting out at a "neutral" position on the silver].

If the price then moved substantially either way, out of expectationed price levels they culd protect themselves fairly easily. How? If the price were to go down they could then close the "short" position by buying the same quantity at the lower price to 'close out' at the same date as the 'short' [sale]. This would leave them "net" 'long' at the lower price. They would then sell that position again at the lower price, with the profit from the closed position in hand. Their customer would then get their silver at the future market price on delivery date.

But perhas the price suddenly rose on the original netted out position, what then? Then they could sell the same amount a second time to establish the higher price, which their customer would accept as the market price. After this the price may reverse in which case they would the buy the silver back at the lower price, profiting from the 'short' position, leaving the 'long' position that they originally had, again and still able to repeat the operation for profit. This could happen time and time again durng the life of the contract until delivery. This could eventually end up as 100 positions having been dealt, 'netting out' eventually at the single sale of silver, which would then be delivered to the customer as originally planned. As you can see this would be relatively low risk and allow the silver principal to 'protect' himself against moves in the metals price, for profit.

But then pure speculation came in to the market, briging volatlity to the silver price [and all other items on the futures and options markets] alongside of investment positons protecting the value of the investment funds from the depreciation of money values, as we can see in the markets at the moment. This use of these exchanges is now where market distortions are beginning to wreak havoc.

Dangerous, Speculative and Investment Positions on Comex

The dangers we now focus on in this article are the effects of the huge investment funds being 'parked' in these instruments, enjoying the price rises in commodities, etc, with no intention of taking delivery or consuming the items . We are seeing this happen in oil, wheat, rice as well as gold and silver and other precious metals plus other items demanded by a growing percentage of the globe's population, particularly in emerging and poor nations. If this feature were not present, the prices of these items would be much lower right now, at least for the near-term, while real demand continued to grow with the 'emergence' of poorer economies across the globe. For instance 37% of the COMEX positions in the oil market are investment positions riding the oil price with no intention of taking delivery. Of course poorer nations cannot afford these high prices, nor can anyone.

Investment Controls!

How can the authorities help on this front?

  1. Any move to discourage such actions would have to be employed, such as through raising margins [usually a 10% depoist asked whenever a futures contract is entered into], which we believe would be a relatively ineffective. This ploy is used occaionally to take the steam out of a price, but rarely on a permanent or even semi-permanent basis.
  2. Or the refusal by the options or futures markets to accept purchases or sales of such items unless the principals can evidence the intention and competence to take delivery of the item at the end of the cntract. This is a "Capital Control", irrespective of its name .
  3. We are seeing this control presently expressed in the form of the restrictions of exports of food items from countries where local demand is not being met locally. We see these controls in several emerging nations as price move out of their affordability range. Riots in places like Haiti against food prices are becoming more and more common. This situation can only get worse!

Are you properly structured to fend off the negative impact of these changes like Financial Controls on YOUR investments? [Subscribers contact us on this subject]

"Gold & Silver will benefit from this rising drama!"

For the entire report please visit

By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2008 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

Julian DW Phillips Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules