Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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