ATLANTA (ResourceInvestor.com) -- It is perhaps the ultimate irony in this great crash market of 2008. Exactly when precious metals ought to be soaring on safe haven demand; when they should be stronger than a acre of garlic as a place for people to store wealth away from the hurricane of uncertainty that has become of the forex market (and the bizarre fluctuations of its now hugely inflated fiat currencies); the two most popular precious metals are instead being sold off on the futures markets just like all the other overly-leveraged commodities.
The ongoing deleveraging and intense flight to cash has buyers terrified worldwide. They are locked-up, deer-in-the-headlights fashion, which gives the hedgers and short sellers supernatural strength. It may sound trite, but that will continue until ends. When it ends, for gold and silver, there will very likely be a just-as-vicious rally that will:
- Seem to be as irrational as the sell-down was, if not more, and
- Very likely be a rally like the world has never seen.
It is vital to understand that the selloff on the metals is on the futures markets, where the players deal in all kinds of interrelated paper contracts. These paper contracts usually only rarely settle by actual physical metal delivery. It really isn't very much like the popular physical bullion markets where people actually take the metal home the same day they fork over the cash. But the futures markets do actually have metal that can be bought and delivered. At least they still do so far, but they very well may have a lot less of that metal after December has come and gone.
An Unprecedented Shortage of Bullion
An unprecedented shortage of physical metal currently exists in the popular gold and silver bullion markets. Premiums, the amount paid and charged by bullion dealers over the current spot or cash price, are at the highest levels since at least 1980, and possibly the highest ever seen for popular gold and silver bullion coins and bars.
That's the bad news. People want gold and silver badly. They are willing to pay much more than the spot price, but they can't find bullion to buy. They can't find it because there isn't enough physical metal available at these drastic, artificially induced, fear and fund-liquidation-caused spot prices.
How utterly ridiculous. The metal's price is falling even when it is in a physical shortage condition. Yes, that is counter to normal economic theory. Normally when shortages occur the price should rise to the level that attracts more of it into the market. Normally, when shortages occur the rising price encourages capital investment by companies that sniff it out and eventually produce more of it, answering the shortage.
These are anything but normal times, however. Perversely the extremely low prices are causing producers to shut down mines, lay off people and hunker down for better times to come. News services are crowded with reports of important mines going on care and maintenance or shuttering altogether. Think we have a shortage now for gold and silver? Just wait a few months. With all the mine closures being announced now, the shortage of physical gold and especially silver is likely about to become the stuff of legend.
How to Buy Gold and Silver Metal on the COMEX
There is, however, one source of physical metal that remains available for investors who can act swiftly and decisively. That source is the very market that has been mispricing the metals way too low. The COMEX, division of NYMEX in New York.
Long-term holders and investors in gold and silver, frustrated by the lack of available metal in the marketplace, could consider taking delivery of real gold and silver directly from the miscreant bullion banks on the COMEX that continue to show disrespect to the value of the precious metals. This report will show how to do just that for the December COMEX contract, which is the most active of the futures contracts on the COMEX.
The Slogan: Delivery in December or "DID"
Okay, fine, if the two or three big U.S. banks that have savaged the gold and silver markets on the COMEX with an since July have so little respect for gold and silver that they are willing to sell them down into oblivion - when there is a raging shortage of metal in the real bullion marketplace - then shouldn't some of us take them up on it?
In other words, if the COMEX doesn't respect the for gold and silver, shouldn't we remove the metal from them and send it into the physical market that does respect it? This report says yes, certainly we should. They are figuratively begging us to.
Apparently that exodus of metal from the COMEX is already underway. For example, just over the last five trading days 2,051,970 ounces of silver were withdrawn from COMEX warehouse stocks and delivered elsewhere. The total inventory of silver fell from 133,582,226 to 131,530,256 ounces for the period. And, that's during October, an "off month," or relatively light-contract month.
There are persistent rumors in trading circles that an unusually large number of long contract holders intend to stand for delivery in December for both gold and silver. There is good reason for that. Bullion dealers desperately need metal to fill mushrooming customer orders.
Assuming one wants over 100 ounces of gold or 5,000 ounces of silver, how does one buy gold or silver on the COMEX and take delivery of the metal? I asked Tony Klancic of Chicago based futures broker Lind Waldock for a primer on the subject. Just below is his response via email in its entirety. For those who are interested, Tony's contact information is included.
Again, if the COMEX is determined to under price its physical metal, then they ought not to mind seeing it leave their warehouse for the popular physical market.
That's it for this report.
Until next time, as always, MIND YOUR STOPS.
From Tony Klancic, Senior Account Executive
Draft October 23, 2008
Gold Futures Trading and the Delivery Process
Given the incredible volatility in the markets, there has been an increase in interest from investors interested in not only trading gold futures, but also taking delivery of the physical product. If you are new to futures trading, it's recommended you work with a professional to help determine if this approach is right for you, and help facilitate the process.
Taking delivery is not a common occurrence in the futures markets, and does involve a number of considerations. The following outlines the procedures and costs for taking delivery gold or silver futures contracts, offered on the COMEX division of the New York Mercantile Exchange. This article is meant to provide a brief overview of the gold delivery process, and it is not all-inclusive of the risks and procedures involved in futures trading.
Entering a Position
Unlike the cash markets, with futures you have to take a long position or "buy" a contract with a specific expiration date, and wait until the contract expires and comes to delivery before you can take possession. What attracts many people to the futures industry is the tremendous leverage involved in trading commodity futures contracts. But, to address the interests of the many who are looking to use the futures markets simply to take delivery of the physical metals, we'll start by first explaining the non-leveraged approach.
If bought today, the price on the December gold contract would be between $695 - $735 per ounce, so the full value of the contract you bought would be $69,500 - $73,500 per 100-troy ounce. If bought today, the price on the December silver contract would be between $9.74 - $9.16 per ounce, or $48,700 - $45,800 per 5,000 troy-ounce contract. Please note these figures do not include any commission charges, and are only an approximation as the market prices have been highly volatile from day to day.
In order to take delivery of the gold or silver with Lind-Waldock as contract expiration nears, you would be required to have the full contract value deposited in your account with Lind-Waldock at the price it was purchased.
Then, on "First Notice Day," (November 28 for the December futures contract) COMEX will start "assigning" contracts to clients who had bought (established long positions). The last trading day of the December contract is December 29, 2008, but COMEX then would need a few days to process all of the deliveries. You would not actually be able to take physical delivery of the contracts until some time in early January.
You can enter a position without posting its full contract value, which is where leverage comes in. Upon entering the position through your account with Lind-Waldock, you would post "margin" to control the contract, which is considered a "good faith" deposit of its full value. The current margin for COMEX gold (100-troy oz) is $7,425 per contract, and for COMEX silver (5,000 troy-oz), $8,640 per contract. Margins are subject to change at any time. Note that the current leverage ratio for gold is 10:1. The leverage ratio of these and all other futures contracts can be greater or smaller than this ratio, depending on the initial margin requirement and the full contract value of the instrument being traded.
Prices can change dramatically between the time you buy the contract and expiration, so if gold prices head significantly lower, you may be called to add funds to your account to maintain your position (maintenance margin) or face having it liquidated. A margin call is generated at any time the account liquidation value falls below the Risk Maintenance at settlement, and may be issued at any time (intraday) marked to market.
To avoid this issue, you can simply deposit the full value of the contract when you establish the position, rather than just the required margin. While most futures speculators employ the use of leverage, you don't have to do so as leverage involves substantial risk of magnified losses. Please speak with a professional if you are planning to only post the initial margin requirement and not full contract value, and are unclear about how leverage works in futures.
Keep in mind that these are tradable contracts, so you don't have to take physical delivery if you don't want to. You can close out your metals position at any time before expiration, and take a profit or loss depending on where prices move.
With any futures instrument, investors also have the ability to take a short (sell) position, if a fall in prices in anticipated. If you already own the specified product and are using the futures as a hedge, you can lock in your sales price now, and would be required to deliver it to the buyer at expiration. Or, you can trade out of your position and close out the contract before then without doing so, and take your profit or loss.
Price and Delivery Costs
Once the contract is delivered to you, it is in the form of a certificate. Most of our clients will have Lind-Waldock hold the certificate for them so they can sell the contract(s) back into the market at a later date if they wish. Lind-Waldock can send you the certificate as well. In either situation, the costs for taking delivery would include a:
- Commission cost per contract, depending upon your level of brokerage service with Lind-Waldock; and
- One-time delivery fee of $100 per contract (subject to change), and a monthly insurance and storage fee, which varies by facility. If Lind-Waldock holds the certificate, we bill a customer's account for these charges.
If your intent is to actually receive the physical metal, it is held in storage at specific "delivery points." It is your responsibility to make the arrangements to do this. There are fees associated with removal from the storage facility. In addition, if the metal is taken out of storage, it cannot be sold for delivery on the exchange without being re-assayed.
The following links will give specific details on the contracts and delivery information.
To take advantage of this investment, an approved and funded account would need to be established with Lind-Waldock before the trade can be executed. Again, trading gold futures without the intention of taking delivery is a viable way to participate in these markets as well. You can potentially benefit from price changes in gold in either direction without the factors associated with the delivery and storage process.
You can register for an individual or joint account online by going to that area of our Web site. You will then scroll down and complete the questionnaire. Don't forget to check the box for "Lind Plus" (broker-assisted trading) if your intent is to work with one of our professional Market Strategists. This will then take you to the login page which will enable you to start the application. Please notify me via e-mail or phone once you've completed the application so I can expedite the processing.
If the account is to be established in some other entity such as a corporation, LLC, partnership or trust, the forms can be e-mailed to you.
Please feel free to contact me at the number below or by e-mail with any additional questions.
Tony R. Klancic
Senior Account Executive
Toll Free: 800-445-2000 X2964
141 W. Jackson Blvd
Chicago, IL 60604
Futures trading involves a substantial risk of loss and is not suitable for all investors.
Thanks to Tony Klancic and Lind-Waldock for that informative primer.
The above contains opinion and commentary of the author. Each person should study the issues carefully and, as always, make their own informed decisions. Disclosure: The author currently holds a long position in iShares Silver Trust, SPDR Gold Shares and holds various long positions in mining and exploration companies.
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