Suppose they took delivery?
Ever play the futures market? I don't advise it, as it is a lot more fun to gamble at Las Vegas. I've lost more than I made, and have given it up. I don't advise it. But there are millions who regularly do futures, and some make money. Most don't. The percentages are phenomenal. It is estimated that 95% of those who do futures lose, and I believe it. Take a gold futures contract, as an example. You are betting on 100 ounces of gold, for a pittance. If you bet that it will go up by a certain month, and it does, you win. If it doesn't, you lose, and if it goes the other way, you lose big. Same with silver, which is 5,000 ounces per contract.
I write this on Monday, which is six days after the World Trade Centers ceased to exist, along with over 5,000 lives. The stock market fell out of bed today, in spite of the plunge protection team (PPT) everyone knows exists, but which all deny. Greenspan lowered the rate half point, and various corporations were frantically buying their own stock back. All in a vain effort to keep the market up on its stilts, which have mostly been eaten away by the termites of no profits, and huge P/E ratios. In spite of all the mighty effort, the market did a tailspin. Precious metals went up, and of course their prices on the futures market went up also. Just about everything went down but precious metals and Boeing, because of an imminent war. How much stock did the fed buy? No one knows that either, but the PPT goes about its work by buying, and of that you can bet.
As an aside, there is a certain entity that supposedly represents Osama Bin Ladden, who went long on gold and short on airlines before the bombing, and made $300 million in one day last week. I can only suppose that the nefarious terrorists now have an additional $300 million in their treasury. Talk about insider trading! I wonder why Uncle Sam doesn't seize those bank accounts.
But back to the subject at hand, which is futures contracts. With precious metals up ever since the cowardly act, (did you know that the terrorists got 70 virgins when they crashed the planes and went to heaven?) just suppose a lot of people had a lot of money, and rather than turning over the futures contracts, took delivery? There are hundreds of millions of ounces of silver and gold on contracts, and the metals to fulfill these contracts simply do not exist. If even a pretty small percentage of futures contract holders took delivery, how could delivery be made, when the gold and silver do not exist? Simple. The Comex and other houses would have to buy the metals on the open market to fulfill the contracts. The same situation would happen if the loaners of gold and silver demanded that the borrowers pay the metals back. It does not exist! The prices of the metals would zoom upwards as in a rocket, because there would be a mad scramble to fulfill contracts or repay loans.
A hypothetical situation, if you please: bear with me. A fellow has a contract for silver at a certain month…say it is for $4.15. Silver closed today at $4.41, so he has made 26 cents times 5,000, or $1300. He can sell the contract and cash a check for $1300…follow? Or suppose he had a few bucks, and plenty of storage space, and decided to take delivery of the 5,000 ounces. He could write a check for $20,750 and take delivery of 5,000 ounces of silver. Lots of people have $20,000 in their checking accounts. The economy, and confidence in it, are going down the tubes. Millions of people are fed up with pieces of paper with ink on them, no matter what is printed on them. Precious metals probably are going up, (all this is in dollars of course), and I believe a lot of people are going to say to themselves, "I'll just take delivery of that contract." When, and if, that happens, all you people out there who have bought from me and others will thank your lucky stars.
Want to hear a true story? A gal called me from Florida last Friday, and told me she was new at this gold and silver stuff, but had just come from her bank. She had a lot of money and wanted to invest it. Know what the banker told her? "Lady, don't give your money to me, buy gold." That is true. When the bankers tell their clients to buy gold…that's something to write home about!
If futures contracts holders decide to take delivery, and the loaners want their gold and silver back from the borrowers, the prices will go through the roof. I get a lot of e-mail from you readers, and I thank you for the compliments. The general tone of the mail is that you people are getting a bit suspicious of paper money, stocks, and the government in general. I agree totally! If the letters "CIA" stand for, "can't identify anything," does "FBI" stand for "fumbling, botched, investigations?" It's very easy to close the barn door after the horses are gone, which is what is happening now in the field of America's security. People flee to safety in times of stress, and inked papers are not safety, an increasing number of investors are discovering.
If it walks like a duck, has web feet, quacks, and looks like a duck, it must be a duck. All symptoms of the world economy point to a disgust with unbacked, intrinsically worthless paper currencies, and a massive turn to gold and silver, and tangibles of all sorts. Tangibles endure, paper doesn't, and especially in times of trouble and uncertainty. There are 455,000 tons of rubble where the World Trade Centers used to be, and over 5,000 dead. Where will they strike next? Water? Air? Power plants? Communications? Refineries? Will our "intelligence" fill out the forms after the deed has been done again? Protect yourself, because it is obvious no government can.
September 21, 2001
Don Stott has been a precious metals broker since 1977, has written five books, hundreds of columns, and his web site is www.coloradogold.com
Also by Don Stott