I gotta admit that I’m no gold bug. I try to be an optimist with regards to where the world will be in 10 or 20 years but in the near-term it does look like gold is in. Those who are interested in gold as an asset class probably wanna read Paul Brodsky’s post.

The part I thought most interesting was this:

Less than 1% of all gold futures settle for cash. Put another way, over 99% of gold futures are rolled each month and almost no participants in the futures market take delivery of bullion. Thus, it would be accurate to say that gold futures are paper gold. Further, futures contracts are leveraged forms of unallocated gold “ownership”. For example, one futures contract on the CME, for which an investor must put up only $9,450, represents about $180,000 of gold (100 ounces per contract at $1,800/ounce). So, one need only post about 5% of notional value to ostensibly control 100 ounces of gold. (This margin requirement was actually raised twice in August to 5%).

Looks like when the party stops, many people who bought gold in financial paper form (i.e. futures, ETF) are going to feel a lot of pain.

Advertisements