Mr Vet > In fact most gold is traded as "paper gold" including the majority traded by Mr Kaplan. There is simply no need to move gold sold for investment purposes and the actual gold (if it even exists) can be transferred by a book entry often without the physical metal moving within a bank vault or other depository.
Yes, I accept what you say. What concerns me, however, is that most/many of the contracts traded on the Comex are not purchased with the intention of taking delivery, at all, but are merely time-related speculations. In other words, considering a call option as an example, either it expires should the target price not be achieved in time or, if it is, then the gold covered by the option is sold to make an immediate profit. There is no intention to buy and hold the gold which is covered by the option.
Likewise, with futures, the intention is to purchase the gold at a future date and if, at that time, the gold price is higher than it was at the time of purchase, the holder will immediately sell the gold. Thus, the object behind the purchase of this "paper gold" is not to avoid transport of the metal but to avoid payment for the gold itself and, at the same time, to make a profit at the smallest financial outlay. In other words, to use the leverage implicit in the derivative as a speculative instrument.
Thus the situation is quite different from what would pertain if the metal (or its equivalent paper certificate) was bought directly, for the simple reason that the gold covered by the option or future contract has not yet been purchased and, in fact, the only time it will be is after the amount of gold covered by the contract has first been sold by the holder of the derivative.
Hence a market which is driven by the purchase of such instruments is exceedingly brittle and speculative. Not only is a price rise subject to forced selling as mentioned above but should it become clear that the price is not going up as anticipated, eg if the USD strengthens and speculative fervour cools, there will be a "rush for the exits" as many futures holders will try to sell at any price in order to make whatever they can on their contracts.
It is also clear that should the future or option expire before the gold covered by it has been purchased, that gold still "overhangs" the market as a potential sale. In other words, the original seller used the derivative as a means to facilitate the sale of the gold and not the gold just as a means to facilitate the sale of the derivative which, of course, it did. |
