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Strategies & Market Trends : Booms, Busts, and Recoveries
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To: LLCF who wrote (57184)12/13/2004 3:50:19 AM
From: Taikun  Read Replies (1) of 74559
 
DAK,

<The implication is far more sinister... that I-Banks are borrowing CB gold and selling it on the market naked>

-from your earlier post.

I think I want to make sure we're talking about the same thing. Are the I-Banks selling 'naked' if they have hedged their position with a noted from, say, Barrick which guarantees to replenish the short position within 20 yrs? I thought the answer would be 'no'. If half of the CB vaults are notes and the other half physical we're fine. The sinister implications are in the physical market (futures can always settle in cash) where there is no more fabricated gold for the I-Banks to sell into the market. Until that point (and I don't think we're there yet) the I-Banks are covered. They took physical from the CBs, sold into the mkt, replaced CB's gold with a fwd contract and invested the proceeds in, say, T-Bills.

If we get to the point where there is no more CB gold to fill the shortfall between demand and current mine production then, at that point, the I-banks may be forced to do all naked shorts (when at present they can do covered shorts), and that will be the inflection point. When there is no physical to satisfy buyers who want delivery, then we'll see the true market price of gold (unless buyers will accept a note from a producer for gold in the ground to be supplied in 20 yrs-ha ha).

So, my point is, the trade does not have to be naked yet.

I note silver has bounced 10% off its lows.

D
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