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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory
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To: UncleBigs who wrote (58538)4/18/2006 3:48:19 PM
From: Tommaso  Read Replies (2) of 110194
 
But what about the effect of these ETFs in gold and oil? The money that goes into them HAS to be put into futures contracts, and the number of futures contracts, as I understand it, always greatly exceeds the physical supply. That means that buyers who actually want to take delivery of the physical supply will be bidding against an enornously larger amount of cash that has gone into these ETFs. The futures markets could go absolutely insane with this kind of demand.

Or so it seems to me. Usually you have longs and shorts engaged in a zero-sum game, but the injection of ever-larger amounts of cash via the ETFs will quickly bankrupt all the shorts and there won't be any additional contracts for sale. The markets may have to close down. There will be a huge surplus of long contracts oustanding as claims against real gold and real oil that exists in much smaller amounts.

Gold could go to $2,000 an ounce and oil could go to $250 a barrel in a matter of weeks. The stocks of the producers could rise astronomically. There would have to be some kind of government intervention to put an end to the insanity. The owners of futures contracts would be forced to settle for a partial share of the actual commodity.

The thing to do would be to scale out, taking profits and getting into short-term T-Bills, if such a chain of events should occur.
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