Futures or Physical?
Don StottWe all gamble a bit in our lives. We gamble when we pick a mate, buy a car, home, or even groceries. Brand name or off brand, when buying food stuffs? Ford or Mercedes? Tall or short, woman or man? All sorts of gambles exist in our lives. The major gambling, which most of us think of, is the slots, blackjack, or roulette in Las Vegas or Atlantic City. However, there is another gamble, which it is said 95% lose on, and that is the futures market. I gambled and lost, and that cured me. I won some the first year, and a bit in the second, but the last, when I lost $20,000, I got out, and I won't do it again. Maybe there should be a "Futures Gamblers Anonymous." A client of mine, who was sitting with me as I wrote this, says futures is, "an idiot's game."
For many of you, it came to the bust position on Monday, June 21st, but it has happened over and over again. Time after time, year after year, decade after decade, hundreds of billions are lost playing the futures game. We all know that gold has a brilliant future. We all know that pieces of paper with ink on them, will fail. There is no question about that. When, and how many false starts and regressions will there be in the mean time? Monday, June 21st, saw gold drop a couple of bucks from its Friday close. By the end of the day, it had lost another $3. Tuesday, another $5, with silver losing a nickel an ounce. By Tuesday's end, gold had lost $10, from the previous week. Thursday, after Sir Alan's interest rate drop, another $3. The margin calls must have been, and still be…horrific.
The futures players know they are on solid ground, when betting that gold will go up in dollars. Except there is no solid ground in the futures markets, because they are famous for pulling the rug right out from under you, for no reason at all, or even for the very best of reasons. Gold's $10 plunge, created a superb buying opportunity, and an extra $3 on Thursday, an even greater one. It spelled disaster for the futures betters. They lost big. Physical holders lost value in their holdings, but so what? They're paid for, and safely tucked away at wherever their physical is stored. The physical holders don't worry about price fluctuations, because they know they are on solid ground for future security.
The futures gamblers, lost their dollars when margins were called, and had to pay. Their dollars went to the futures dealers, who legitimately made a call. They then had no dollars, and no gold either. Physical holders said, "Ho Hum," and went about their day. The gold stock-holders went the way of all flesh too, as their stocks went way down. If the mine, which is represented by stocks, goes bust, or has no good ore, you have lost. With physical, you own the production of all mines, not just one, and this is after the BS has been removed.
I go to Las Vegas about once a year. I can usually pay for my trip by playing the dollar slots, and quitting when I am ahead. Most are addicted, and can't quit, till all their dollars are gone. This is why one can get a cheap room, excellent, reasonably priced food, and get lots of excitement in Las Vegas. Those who should quit…can't, and characters like me, win. Futures gambling, seems to be on a par with those slot or other players in Las Vegas, who can't, or at least won't stop, till their wad has been extinguished.
Gold and silver stock buyers, think they are leveraged, and their stocks will go up faster than physical. My experience, before I sold all of mine a few months ago, was that they under-performed physical. With futures, dollars can get sucked up from your checking account like a vacuum cleaner, and you have nothing left but memories. With stocks, you can watch them be manipulated, ruined by poor management, diluted, and their production and reserves lied about, or exaggerated. Some stocks from producing mines, I am certain are great, and if I were going to buy mining stocks, I would try to find one. Is Newmont good? I don't know.
When the manipulators of gold have their day in the sun, the futures holders get wiped out, and no one can tell when it will happen. No one. Maybe it isn't even the manipulators, but profit taking. Maybe it is massive selling by those who have lost jobs and need to cash in. Why knows? But it does happen, and it happens all the time. I lost on Swiss franc futures, and sugar futures too. I took the advice of a Swiss guy I trusted, who told be to buy francs at 63 cents and sell them at 67 cents, and it was a sure bet. Hah! I watched Swissies go well into the 50 cent range, and I lost.
I allow for a single hundred dollar bill to be played in Las Vegas on the dollar slots. If I lose it, that's it, and I enjoy the facilities of the hotel and town. Anyone ever hear of a futures gambler getting by on a hundred smackers? I haven't. If I lose a hundred, like I did in Reno a few months ago, so what? I am not upset. The futures risk is as high, or even higher than slot machines, and a damned site more expensive. With futures, pretty waitresses don't come around and give you free drinks. You just sit there, grinding your teeth, as you wait to hear the phone ring for the margin call. The phone always rings when you bet wrongly in futures.
I have a friend in Illinois, who had to sell his entire stash of metals, to meet margin calls on bonds on which he gambled. Bonds aren't supposed to go up like they have, are they? How was anyone to know that the fed was buying its own bonds with dollars it created out of nothing? This caused them to go crazily up, which defied all expectations, and even history. But then, the government creating dollars out of thin air, and buying its own bonds it also created on its printing presses, is not a customary historical trend either, is it? Government and the fed, have their presses which can turn out dollars as well as bonds, and buy them themselves, thereby inflating the bond market, and screwing out the longs that bet in the futures market on bonds.
Everything seems to be pretty crooked in DC. Politicians, stooges, hacks, and of course the Federal Reserve and Sir Alan, live in their own little world, which affects everyone, and especially those who get in to gambling on their actions. It cost a guy in Illinois a pretty penny, and now his gold and silver are gone too. On Wednesday, Sir Alan only lowered the rate by a quarter point, instead of the half point most thought he should, and the stock market fell out of bed instantly. How many gambled on half point rather than quarter point?
Having gold and silver in one's possession, gives one a marvelous sense of security. I have done it both ways. I have owned mine stocks, and played the futures market. I have also owned an airplane and boat. I will own no more boats or airplanes, nor will I ever partake in the futures market again. I was screwed royally by the CEO's of two mine stocks, and managed to sell at a small profit anyway, but never again. Planes eat dollars and are dangerous. Boats just allow you do go round and round in some silly lake or river, while paying through the nose for trailers, docking, fuel, Cost Guard inspections, etc. No more. We learn from experience.
For you who follow my screed, Sherman is gone. I sold him for twice what I paid for him, drove him 20,000 miles, and bought another Mercedes, my 8th. This is a turbo diesel, which gets twice the fuel mileage as did Sherman, and is quieter, far sturdier, and will last forever, I am sure. Sherman was fun, and attracted a lot of attention, but the Mercedes is just sheer German engineering, which is a delight. The Mercedes, which we have named "Queen," weights but 100 pounds less than Sherman, but is a couple of feet shorter, and really, is not so ridiculous. So now we are a two Mercedes family. One gas, and the other a tribute to Rudolph Diesel, who died under very mysterious circumstances…but we won't go into that now. Protect yourself.
June 27, 2003
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
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