Paul sez: [POG] however is determined by futures contracts. Au contraire!
The following is an "old timer's" TSE option floor specialist in one of the world's LARGEST gold mining companies' personal experience/conclusion.
The price of gold is determined by derivs, allright, Paul, but not the futures derivatives contracts per se! FUTURES are is the only derivative that is actually anchored to a real, concrete physical commodity. The rest is just papered over, thin air, OTC London Bullion Marketing Association trading/promises:
[QUERY] I learned that GT global has a fund (Canadian Income Class) that uses covered calls. I was told that they used off the market options (written for the fund by large firms).
How many of Candian options are traded this way?
[ANSWER] I assume you are referring to 'over-the-counter' options. The sad fact is that for every option traded on the TSE there are probably 8 or 10 traded OTC. The big firms that engage in this take a huge third-party credit risk (remember Confed Life?), plus they carry an un-quantifiable, but huge, market risk 'off-the-books.'
If they, for example,
SELL 1000 TXO puts to a third party OTC,
they may hedge by selling 80 TXF futures.
The problem comes if there is a market 'break' like last October or 1987. If the T35 falls, say 25 points, they are no longer hedged...they must sell more TXFs or TIPs or TXO options--basically anything they can find a bid for.
Multiply this by several firms here
(and dozens in the States),
and there is an almost unbelievable amount of forced selling that would appear in a severe break.
Sure gives me pause...
[END QUOTE--5/26/98]
Hope this helps, Paul. Remember, the LDMA acc'd to their own press releases is trading an average of 38 MILLION GOLD OZS PER DAY
Now THERE's the deriv. problem!!!
O/49r |
