Weekend Feb 17 2013
Another measure or optimsim is whether Central Fund CEF is trading above or below net asset values. It rarely traades below NAV. Friday CEF closed at less than one percent premium to NAV in both Canadian and American Dollars.
Jeffrey Lewis explains the difference between paper sales of gold and silver versus real delivery.
This is a well done article. I should be doing more to explain how this process works. For example, the New York Mercantile was the old Potato Exchange. This sleep bourse came to prominence by adding crude oil futures. Interestingly the NYMEX helped create and trade conttracts for oil than there exists oil in the world. This is possible because the paper 'bets' on the price of oil can be closed out prior to expiration. At expiration one has to take physical delivery of the oil if one is long. But the majority of contracts are closed out before that happens.
The following factoid is extremely important. Big banks with their near unlimited ability to borrow from Uncle Ben at near nothing, are free to create dark pools, unkown trading groups, to short whatever they want. This is often done in gold and silver. With the Asians on holiday last week, this was a great time to do just that. And so gold was sold all the way into friday. But, and this is what Lewis is pointing out. that does not mean that anyone actually sold even one ounce of physical gold. Traders shorting gold at 1650 simply covered their bets at 1609. The physical gold stayed in the vaults. The open interest swells between expriations and then is scaled back.
Let me make an analogy that might make this easier to understand.
On big games like the super bowl, there is a betting line. I don't recall who was favored in this last one so let's just say you could bet on team X versus Y, you get X and three points. So as long as X is no less than three points under Y at the end of the game you cannot lose. Now suppose a group puts out more bets before the game. So many bets are placed that now X is favored by ten points a net change of 13 points. Now someone can take Y and get ten points. Looking at your original bet you are terrified, X cannot possibly win by ten points, and so you close out your position at a loss as no one really wants your bet where X has three points.
Those flooding the markets with bets then close out their new positions on Y, before the game even starts. Nice work if you can get it.
The point is that a drop in the futures price does not equate to a drop in the physical price until all the contracts are closed out.
Price has come right down to our 125 week MA. CCI has about reached previous oversold extremes.
Still the openning here Tuesday may be exhibit spectacular volatility.
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