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Gold/Mining/Energy : Gold and Silver Juniors, Mid-tiers and Producers

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To: aknahow who wrote (56912)	2/24/2008 4:18:38 PM
From: The Vet	Read Replies (2) of 78412

George, I'm not exactly a spring chicken either, but the undisputed fact remains that all short selling creates more trading stock than was issued and in the case of GLD this could promote a fatal collapse. Let's just take a simple example just ignoring the odd fractions and assuming gold is steady at $1000 an ounce. You place an order for 1 million shares of GLD from your margin account which is filled by an Authorised Participant (AP). GLD issues a million shares to the AP (which in turn he transfers to your broker) and GLD gets from the AP 100,000 ounces of gold which it places in the vault. You fork over the $10 million to pay for your shares. All nice and neat so far.. Your broker gets a call from my broker saying that I want to sell short a million GLD shares and does he has any to lend.. He says yes, I borrow your stock (you aren't even told about this). It's in the fine print of your margin agreement that your broker can lend your shares without any reference to you, as it is in all margin agreements. I get your borrowed million shares and sell them to Wade for $100 a share. Gold in the meantime just went up to $100.10 an ounce. I offer my million short sale at 10 cents a share lower than the AP who needs more than $100 a share to cover the gold and his expenses, so Wade takes the lot and is happy at the bargain he just got. Now Wade has a million shares in his account and so do you but GLD only issued one million shares and only has 100k ounces of gold in the vault. I have the $10 million in my account and a short position of a million shares. My broker is happy because I have enough margin to cover this position. (if only LOL). Now Wade decides because the POG wasn't moved in the last few days he wants to sell his shares so he puts them on the market for $99.00 ... The AP knows he can get $100 so he buys the lot and goes make to GLD and hands in the shares and gets all the gold in exchange. GLD now has no shares issued and no gold in the vault but.... wait for it... YOU STILL HAVE a MILLION GLD shares in your margin account which you paid $10 million dollars for!!! I have a short position of the same number but because the selling price has dropped from $100 to $99 a share, I am in profit and my broker has reduced my margin requirement! You see the drop in price and decide to cut your losses, but the AP knows that GLD has no gold in the vault and he won't buy.. So your sell order for $98 a share sits unfilled.. I am short but I have no need to cover as my profit just went up.. If you were the only seller in this position you might be able to wait me out, but if there are others in the same boat, how long do you think it would take for the price to crash.. At $1 a share I just might take pity on you and cover my short for a $99 a share profit... but then again I might wait until 50 cents or even 1 cent a share.... Do you see the problem?

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