Gold, Silver, Massive Leverage & Super Wealthy Panicking
mrearlygold
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Gold, Silver, Massive Leverage & Super Wealthy Panicking
On the heels of continued volatility in gold and silver, today 40-year veteran, Robert Fitzwilson, wrote the following piece exclusively for King World News. Fitzwilson, who is founder of The Portola Group, discusses gold, silver, massive leverage and the race by the super wealthy to get out of fiat currencies.
Below is Fitzwilson’s exclusive piece for KWN:
Fitzwilson: “The term bucket shop is one that has been around for almost 200 years and its roots can be traced to England. Street urchins would gather kegs of beer that had been mostly tapped and discarded from pubs. The kegs would be taken to an abandoned building and the beer would be drunk.
In the financial markets, bucket shops arose at a time when exchanges dominated the majority of the transactions, certainly the larger and more profitable ones.
A bucket shop has been defined as:
“[a]n establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in.”....
“Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but there is no transaction made on any exchange. The transaction goes ‘in the bucket’ and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Alternatively, the bucket shop operator literally ‘plays the bank,’ as in a gambling house, against the customer.
Bucket shops played major roles in the two stock market crashes in the early part of the last century in the United States. The large exchanges were instrumental in having bucket shops viewed as an “evil” force in society, so that the traditional bucket shops were largely forced out of business by the early 1930s.
If any of this sounds familiar, it sure does to us. After we witnessed a flash crash in the paper metal markets, it is hard not to see that they are tantamount to the bucket shops of old. In our view, they are nothing but betting parlors. Given the massive contract dump that we saw a few Fridays ago, who are the likely visible victims? The reports indicate that it was the group known as the speculative longs.
Many of these are traditional hedge funds. Hedge funds play in these commodity markets not for taking delivery of the commodities or metals, but to simply bet on the direction against their fellow speculators. Like the betting parlor of old, the bets can be made using extreme leverage. No doubt, the perpetrators of the smash down made billions of dollars from those with long positions as the short selling ensued.
The hedge funds are funded by the very wealthy, pension funds and endowments. There is a small percentage of the hedge funds that do very well, but the majority lag far behind. When billions of losses occur, the real losers are the retirees and the schools that gave them the funds in the first place. Despite the losses, the hedge funds are recapitalized as we saw after the 2008 debacle. Consultants have been known to give even more money to the losing funds under the guise of asset allocation and rebalancing.
For the operators of the funds, there is contractual incentive is to take risk and lots of it. For the successful fund, great fortunes have been made between the annual management fee and the carried interest on profits. The investors in the funds are gambling, too. The sponsors know they cannot make the actuarial defined benefit payments required in the future with traditional investing, so they believe that ‘alternative assets’ will solve their problem. It is just desperation and hope with a fancy name.
For the exchanges, their incentive is to create more and more bets as “the house” receives a piece of each transaction. We have seen estimates of as much as 100-to-1 leverage by exchanges in relation to how much metal is in the vault versus the amount of bets outstanding. Combine that form of leverage with the leverage used by the buyers and sellers of the contracts, and it is no accident that people believe the paper metal exchanges are on the way out.
How low can the paper prices of gold and silver go? We should see shortly as Andrew Maguire has predicted. As difficult as it is to watch the death throes of these leveraged exchanges, it is likely the last days of paper metals.
For investors, next week could be another wild ride. Stay focused on value. We do not believe that all stocks are overvalued, but one has to be very selective. We remain convinced of the long-term value of energy, precious metals and key components of our increasingly strained food producing capacity. Prime farmland and residential real estate has been surging, but the prices do not represent value in the short-to-intermediate term. Art has also been in vogue, but the prices reflect near desperation by the super wealthy to unload paper currencies.”
Linky-Poo
On the heels of continued volatility in gold and silver, today 40-year veteran, Robert Fitzwilson, wrote the following piece exclusively for King World News. Fitzwilson, who is founder of The Portola Group, discusses gold, silver, massive leverage and the race by the super wealthy to get out of fiat currencies.
Below is Fitzwilson’s exclusive piece for KWN:
Fitzwilson: “The term bucket shop is one that has been around for almost 200 years and its roots can be traced to England. Street urchins would gather kegs of beer that had been mostly tapped and discarded from pubs. The kegs would be taken to an abandoned building and the beer would be drunk.
In the financial markets, bucket shops arose at a time when exchanges dominated the majority of the transactions, certainly the larger and more profitable ones.
A bucket shop has been defined as:
“[a]n establishment, nominally for the transaction of a stock exchange business, or business of similar character, but really for the registration of bets, or wagers, usually for small amounts, on the rise or fall of the prices of stocks, grain, oil, etc., there being no transfer or delivery of the stock or commodities nominally dealt in.”....
“Typically the criminal law definition refers to an operation in which the customer is sold what is supposed to be a derivative interest in a security or commodity future, but there is no transaction made on any exchange. The transaction goes ‘in the bucket’ and is never executed. Without an actual underlying transaction, the customer is betting against the bucket shop operator, not participating in the market. Alternatively, the bucket shop operator literally ‘plays the bank,’ as in a gambling house, against the customer.
Bucket shops played major roles in the two stock market crashes in the early part of the last century in the United States. The large exchanges were instrumental in having bucket shops viewed as an “evil” force in society, so that the traditional bucket shops were largely forced out of business by the early 1930s.
If any of this sounds familiar, it sure does to us. After we witnessed a flash crash in the paper metal markets, it is hard not to see that they are tantamount to the bucket shops of old. In our view, they are nothing but betting parlors. Given the massive contract dump that we saw a few Fridays ago, who are the likely visible victims? The reports indicate that it was the group known as the speculative longs.
Many of these are traditional hedge funds. Hedge funds play in these commodity markets not for taking delivery of the commodities or metals, but to simply bet on the direction against their fellow speculators. Like the betting parlor of old, the bets can be made using extreme leverage. No doubt, the perpetrators of the smash down made billions of dollars from those with long positions as the short selling ensued.
The hedge funds are funded by the very wealthy, pension funds and endowments. There is a small percentage of the hedge funds that do very well, but the majority lag far behind. When billions of losses occur, the real losers are the retirees and the schools that gave them the funds in the first place. Despite the losses, the hedge funds are recapitalized as we saw after the 2008 debacle. Consultants have been known to give even more money to the losing funds under the guise of asset allocation and rebalancing.
For the operators of the funds, there is contractual incentive is to take risk and lots of it. For the successful fund, great fortunes have been made between the annual management fee and the carried interest on profits. The investors in the funds are gambling, too. The sponsors know they cannot make the actuarial defined benefit payments required in the future with traditional investing, so they believe that ‘alternative assets’ will solve their problem. It is just desperation and hope with a fancy name.
For the exchanges, their incentive is to create more and more bets as “the house” receives a piece of each transaction. We have seen estimates of as much as 100-to-1 leverage by exchanges in relation to how much metal is in the vault versus the amount of bets outstanding. Combine that form of leverage with the leverage used by the buyers and sellers of the contracts, and it is no accident that people believe the paper metal exchanges are on the way out.
How low can the paper prices of gold and silver go? We should see shortly as Andrew Maguire has predicted. As difficult as it is to watch the death throes of these leveraged exchanges, it is likely the last days of paper metals.
For investors, next week could be another wild ride. Stay focused on value. We do not believe that all stocks are overvalued, but one has to be very selective. We remain convinced of the long-term value of energy, precious metals and key components of our increasingly strained food producing capacity. Prime farmland and residential real estate has been surging, but the prices do not represent value in the short-to-intermediate term. Art has also been in vogue, but the prices reflect near desperation by the super wealthy to unload paper currencies.”
Linky-Poo
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US Rare Coin Investments
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