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Reversal Night 3/24/20


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Futures markets are built with expectations/capacity foe delivery of the underlying. 
which is to say, their original purpose was to support/finance/hedge real economic activity. 
Like the corn or hog farmer, who sells production into the future at a price today that assures profitability. 
Or the sausage maker or breakfast cereal maker who buys those same futures. 
Typically, futures are settled for cash: then parties use resulting cash to purchase in spot markets. 
But there are strict rules providing for physical delivery of the underlying.
Given the financial panic & resulting scarcity reported in physical gold markets, longs may be looking to take delivery upon expiration... a delivery that parties never presupposed when those contracts were first created. 
This will require some normalization - to bring spot/scarcity into connection with futures pricing. 
It’s an aggravating problem if sources for gold - refiners - aren’t working. 
 

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1 minute ago, Jimi said:

Futures markets are built with expectations/capacity foe delivery of the underlying. 
which is to say, their original purpose was to support/finance/hedge real economic activity. 
Like the corn or hog farmer, who sells production into the future at a price today that assures profitability. 
Or the sausage maker or breakfast cereal maker who buys those same futures. 
Typically, futures are settled for cash: then parties use resulting cash to purchase in spot markets. 
But there are strict rules providing for physical delivery of the underlying.
Given the financial panic & resulting scarcity reported in physical gold markets, longs may be looking to take delivery upon expiration... a delivery that parties never presupposed when those contracts were first created. 
This will require some normalization - to bring spot/scarcity into connection with futures pricing. 
It’s an aggravating problem if sources for gold - refiners - aren’t working. 
 

Thanks Jimi! This is why I don't trade gold. I didn't even know refiners were shutting down. 

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Delivery is interesting stuff. 
https://www.cmegroup.com/education/courses/introduction-to-precious-metals/what-is-the-precious-metals-delivery-process.html
 

There’s been a long-standing coeur de cri among gold bugs: “Take delivery!”
The idea is that the paper markets are so much greater than the available resource, that demand for delivery would break what some think is an unreliable & manipulated spot price of the underlying. Some go as far as to insist that parties sell large futures contracts to manipulate the spot price - I’ve never been convinced  

IIRC, Potatohead started a fund years ago that does take delivery and assigns specific lots of ownership to underlying bullion - specific marked bars. He provides vaulted underlying ownership to bullion, not paper exposure of the sort available in futures markets that may not provide for delivery in a crisis. Storage comes with a fee - which is why delivery is usually eschewed in futures markets, because you just trade out of the position with the gain/loss and buy in the spot market  

But if the spot markets go illiquid, and you really want the underlying, the storage costs for PH’s fund is cost-competitive insurance against one’s own private bunker.

 

 

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