If you short a commodity do you have to settle your trade by the end of the day or can you hold it long term? The reason I ask is because I was looking at the escalating price of gold and a thought occurred to me.
Gold typically goes up in value during war and recession, both of which we’re experiencing to some degree now. Once favorable economic conditions return, it’s likely investors will pull their money out of gold and put it back into more lucrative markets, and the price of gold will correct down from $400+ peak it’s at right now. So far so good or have I got this all wrong?
Could a speculator or even a hedge fund sell a lot of gold right now on margin and then buy it all back at $380 or whatever figure it drops back to 6 to 24 months from now?
Probably the route that they would want to go is to sell a put option on gold or on a gold futures contract, for maximum leverage.
Note that there is a potentially unlimited upside risk to that, however. If predicting future economic swings were that easy, we all be rich (which then raises the question of what “rich” would mean, but that’s another thread, probably in GD).
From what I know, you are always on margin when buying and selling commodities because the lots you are buying and selling are large amounts and so unless you are rich, you cannot buy it outright.
As for betting against the gold price to drop, you will need to do what Akatsukami said- trade options or futures.
Margin on Comex Gold right now is $1500.
When you short the contract you need the
money in your account. You also must maintain a balance of $1500 lest you get a margin call. The trade itself will settle the next day but that doesn’t matter since you need the margin in your account at the time of the trade. You need to exit the trade by the last trading date which is the third to last business day of the trading month (as in Feb Gold, Dec Gold, etc.). A large speculator would usually trade with a bank and the trade would settle like any currency.
The time frame your talking about (i.e., “Once favorable economic conditions return”) is probably too long and vague to make futures a viable vehicle. You could easily get a $50 ($5000 a contract) price swing in the interim even if you are eventually correct in your assessment. Not to mention gold looks like it’s gonna go ballistic (and you’re talking to a died-in-the-wool contrarian)
KidCharlemagne,
I think he is asking if he can short gold.
What you provided was a very valuable info on trading futures, which I think he should look into.
I am not sure if you can short gold. I don’t even know how to buy gold without having to hold gold in my hand. I mean I don’t think I can buy a piece of paper that says I own so much amount of gold and can redeem it at a bank or store.
The only gold trading on paper I know are the futures and options market.
As for the price dropping down, yes gold prices cannot be sustained at $400. Reason is simple- there is too much gold in mines that are not in production because prices are too low. If price is sustained, these mines will resume operations and production will increase. From what I am able to tell, there is no new demand in gold. People are investing in gold as in the paper security and not the actual gold bullions or gold jewelry.
You say that you don’t even know if you can short gold and that you don’t even know how to buy gold without holding it in your hand and then you proceed to give a market analysis? That’s rich.
The only way for a small investor to outright short gold (outside of telling a friend you owe him a few ounces) is via futures. You’d need a minimum of a million dollars credit line with a currency desk at a bank to short the physical, and even that is really a future (forward).You could short the stocks of unhedged producers but it’s no longer a pure gold play.
cainxinth:
The kind of fundamentals that you mention are overshadowed by much larger issues in the gold market. The big issues currently are:
The sinking dollar and the fact that the US is happy about it.
Fear of competitive devaluations in Asia.
Gold market deregulation in India and more importantly, China. Billions of dollars of private investment in gold if these deregs go through.
Producer de-hedging. Barrick, Canada’s largest gold producer, just announced that it’s scrapping its hedging program for the next 10 years.
The lid has been kept on Gold because of massive Central Bank reserves/selling. Central Banks hold about 1/4 of all above-ground gold and it’s a highly political issue as to who gets to sell how much and when. Google" Washington Agreement on Gold" if interested. If there is one fundamental working in your favor, it’s central bank selling of gold reserves to finance deficits. The expiration of the Washington Agreement in 2004 could be a positive or a negative depending on how it’s reviewed.
Not only is it technically possible to short gold but it’s relatively easy. Same as opening an equity account but with an extra signature or two. If your looking for a broker, Lind-Waldock is a pretty standard discount house. You should do a good deal of reading about futures basics before you even open an account. If you really want to look further into it, I can help you, but as a professional trader, I advise against it. And whatever you do, don’t short gold calls.
KidCharlemange is what we call a “gold bug.” cainxinth would do good to listen to him.
As for options, we can say that these are bad for several reasons:
95% or whatever, of options expire worthless, meaning you’re losing on 95% of your trades. Not good odds.
Options that are anywhere near the strike price are so expensive that you’re better off finding areas of support (or however you place your stops) and take that risk.
NY markets are notoriously poor in their fills. The NY options markets are a joke. I’ve got some expensive experience in this.
Once your broker hears you say you want options, he gets visions of a trip to Cancun in his head. He’ll try to talk you into all manner of option strategies, each one of which uses more options (and therefore cash) than the rest. And they’re nearly imposisble to get out of at your preferred profit level. I got some stories there too.
It’s true that you don’t really buy options on margin, but you are out any money you put into it up front. The futures at least allow you the option (heh-heh, oh, nevermind) to move your stop to potentially lower your losses from what you had initally anticipated (but, futures being futures, you can always have your stop run and lose even more…).
Buying futures is not the only way to capitalize on gold movements. One can buy equity in gold exploration companies, which accomplishes the same thing.
Options are a zero sum market. For every winner there is a loser. Not to mmention those who use options to hedge rather than speculate.
Look at probability. you get a lot more leverage buying deep out of the money options, but on a probability basis success rate goes up on near at the money options.
Actually I’m pretty far from a gold bug.
I’ve been goading the gold bugs (and there are a lot of them) for years for wasting their time and energy on a market that displays no volatility. I’m guilty of those pessimistic Spenglerian-scale macro views myself but gold is one of the least analyzable markets out there. It’s amazing what one move can imprint in the minds of the people. If you’re looking for the Big Move (which is a waste of time anyway imo), head over to soybeans where there is decent liquidity and a quadrupling move every few years.
The popular claim that “90% of options expire worthless” isn’t true. 90% of options go unexercised. Most are closed out prior to expiration, 10% or so are exercised, and about 35% expire worthless. Even so, this says nothing about profitablity because we know nothing about the trades as part of a larger strategy, i.e., covered call writing.
As far as NY markets being a fullfillment nightmare: No arguments here. My curse per phone call ratio is thrice that to pits in NYMEX, CSCE, and Comex than any other market. Gold is fairly reasonable though.
I’m quasi-retired from trading. I used to trade for a well-known hedge fund in
NY.
A lot of people think that way, but the Plunge Protection Team and central banks have gone a long way to keep the price of gold artificially low.
Knowing that most people who would be apt to use stops on their gold positions would have them at certain levels (how would they know? Years of experience and I’m sure information from brokers and floor traders the world over), and by throwing a lot of money into the markets to short gold, they managed to knock the price down severely on the days following 9/11. Same for silver.
Remember that these guys have lots more money invested than any single investor would, so they can do ride out losses to eventually get back into profits. Your typical individual investor might only rsik $500-$1000 per contract, but a large commercial, especially one who has something major to lose should the price rise (again, we get into the issue of gold vs. the dollar and what that means as an economic indicator), would be willing to short a significant number of contracts, take any small hit that comes for a price spike as people rush in to buy gold (remember, with their distant stops, if they even use them, they can ride out larger price movements) and then run down the stops of the thousands of individual speculators who have maybe 10 contracts or less that they just bought, triggering more sell signals, running the next set of stops, and so on.
These guys who are doing this then make a significant profit when they finally close their positions, which they don’t do all at once, like they did when they entered the market, after all, they don’t want to precipitate another round of buying frenzy.
That’s the conspiracy version though, although check your charts from 9/11/03 on and you’ll see for yourself.
A lot of people think that way, but the Plunge Protection Team and central banks have gone a long way to keep the price of gold artificially low.
Knowing that most people who would be apt to use stops on their gold positions would have them at certain levels (how would they know? Years of experience and I’m sure information from brokers and floor traders the world over), and by throwing a lot of money into the markets to short gold, they managed to knock the price down severely on the days following 9/11. Same for silver.
Remember that these guys have lots more money invested than any single investor would, so they can do ride out losses to eventually get back into profits. Your typical individual investor might only rsik $500-$1000 per contract, but a large commercial, especially one who has something major to lose should the price rise (again, we get into the issue of gold vs. the dollar and what that means as an economic indicator), would be willing to short a significant number of contracts, take any small hit that comes for a price spike as people rush in to buy gold (remember, with their distant stops, if they even use them, they can ride out larger price movements) and then run down the stops of the thousands of individual speculators who have maybe 10 contracts or less that they just bought, triggering more sell signals, running the next set of stops, and so on.
These guys who are doing this then make a significant profit when they finally close their positions, which they don’t do all at once, like they did when they entered the market, after all, they don’t want to precipitate another round of buying frenzy.
That’s the conspiracy version though, although check your charts from 9/11/03 on and you’ll see for yourself.