The Moral Failures of the Paper Longs
Jason Hommel
Based on my readings of GATA's work
(www.lemetropolecafe.com), my readings of Ted Butler's work
(www.butlerresearch.com), and a little application of common sense, I
see clearly that the gold and silver futures markets are manipulated
and controlled by the endless creation and selling of futures
contracts. It is clear to me that the futures contract creators and
sellers are the deceivers. It logically follows then, that the paper
longs are the primary ones being deceived. I believe it is a moral
failure to be deceived. We are not to be deceived. What do people say?
"Fool me once, shame on you. Fool me twice, shame on me." Shame on the
paper longs for being deceived!
True, the manipulation affects the entire world. It
hurts miners all over the world. It continues to hurt long term holders
of the actual physical metal, while at the same time, helping buyers of
physical metal by providing the metal at artificially low prices. It
hurts those who have invested in gold for a lifetime and now wish to
sell for their retirement, but it helps those who are younger and still
working, and who are able to continue to buy gold and silver at today's
liquidation-sale prices.
But market manipulation is temporary, and when it
ends and the price is restored to a true market value, some will be
hurt, and others will benefit. When futures contracts default, it will
not hurt the miners and owners of physical metal, who will benefit from
the subsequent rise in price and shortage of the metals. But the paper
longs will be among those who suffer the most. I believe they will
either receive a cash settlement offer, or perhaps nothing. So the
paper longs are deceived into thinking that they will receive the
promises of gold and silver as written in the contracts they buy.
There is a fundamental difference between investing
in the mines and/or actual physical metal, as compared to buying the
long side of a futures contract or call option. This difference points
out another primary moral failure of the paper longs. Futures contracts
are gambling. And gambling is morally wrong.
There is a reason that Las Vegas, the city built on gambling, is called "Sin City".
There are many ways to make money in the world, and
not all of them are morally equivalent. You can take money from others
(and this is commonly called stealing), or you can produce wealth
yourself by creating something, or through trade. Obviously, taking
money from others (whether through force, deception, or gambling) is
not the morally right way to make money. Producing things, and trading,
is right and acceptable. After all, once you make something, you have
to sell it, or trade it.
But buying a futures contract is not trading, nor is
it investing. It is gambling. In a trade, you exchange; you give one
thing to someone else, and you receive something else back in exchange
from the other person. This is usually a win-win situation, as each
person involved in the exchange receives a personal benefit.
Gambling, on the other hand, involves people pooling
their money together, and then one person takes home the winnings. In
essence, one person takes from the other, and the other is left worse
off than before, not benefiting from the deal. This is unlike trade,
which is mutually beneficial to both participants. This is the moral
failure of gambling: the attempt to profit at another's loss or expense.
I'm not using the word "gambling" to denote
activities that contain an element of risk. Life contains risk, and it
is not a moral failure to attempt to live. Gambling is morally wrong
because it will necessarily cause misery and loss to at least one of
the participants.
Gambling is fundamentally different from producing
something, or investing in something. It does not logically and
necessarily follow that if you trade (or invest) dollars for gold that
the person receiving the dollars will lose. The other person might use
the dollars right away to buy more gold at a lower price at a profit,
or he might spend the dollars on what he might perceive to be a better
investment, such as silver.
But futures contracts and options are gambling:
there is a winner and a loser and the broker (who is always a winner).
The short seller must, in theory, pay any price for the metal to
deliver at the agreed upon price. It represents a loss for the short
seller if the spot price at the delivery date is higher than the
contract price. Conversely, the long would lose if the spot price at
the delivery date is lower than the contract price. Therefore, somebody
must lose. Why are people deceived into thinking that it is morally
acceptable to profit from another's loss?
The answer is greed, which is another moral failure.
(Their own greed blinds the paper longs to the wrong that they attempt
to do to others in the event that their investment "wins").
Futures and options promise greater returns than
investing in physical metal or mines. The purchaser of a futures
contract, or call option, is told that they can "control" much more
metal for their money, by using margin, which is akin to borrowing, and
therefore make a greater profit in the event the price moves up. But
does the paper long, in fact, actually control metal? No. Is the metal
in his hands? No. Therefore, the paper long does not control anything.
He who has the gold makes the rules!
The paper long buys his position on margin, he only
puts up part of the money for his position. This means the paper long
is going into debt to hold his position. That the paper longs incur a
debt is another moral failure.
When a long buys a futures contract, and the price
drops significantly, the long has to put up more money to cover the
position. This means that the long can lose all of the "down payment"
so to speak, and even be forced to put up more money, the money that
covered the rest of the position, that was considered borrowed money.
The question is raised, "What if the margin
requirements were raised to 100%, so that there is no borrowing?" Well,
that might be sufficient for the longs, but what about the shorts?
There is a limit to how low a price can go, and thus, a limit to the
loss on the downside. But there is no limit on the upside, since the
price of gold can theoretically skyrocket to infinity dollars per
ounce. Therefore, a paper short should really have to put up much more
than 100% of the paper value of the contract. Even a 200% margin
requirement for the shorts will not be enough if the price of gold
skyrockets and increases by over 100%. A 500% margin requirement would
be only half what the shorts would need if the gold price goes up by a
factor of 10. Therefore, the only truly safe margin requirement for the
shorts is that they have 100% of the actual physical metal that they
intend to deliver, and also that they are unable to borrow against that
metal or encumber it with other loans and claims.
Think about what that means. The entire process is
actually worse than gambling. When two men bet on something, and each
is not sure of the other's ability, or willingness, to pay, they both
put up their money, in advance, and pool it together, and let a third
party that they both trust hold on to the pot, and then they wait for
the outcome of the thing on which they are betting. But the game of
futures contracts, as it currently operates, is not even as honorable
as that process of gambling, since the shorts are not putting up their
obligations in advance.
The paper longs are deceived because they think they
will profit from participating in something like a bank run. The only
way to profit from a bank run is to remove your deposits before the
bank run starts. You should not assume to profit from a bank run by
leaving your funds in the bank, and standing at the end of the line,
announcing your intent to receive delivery (make a withdrawl) months
down the road, and then hope that a bank run will occur in the
meantime, before you intend to make your purchase and withdraw your
gold. Such hopeful wishing is ridiculous, and obviously counter
productive. How can you expect a bank to pay you out after it has
failed due to a bank run?
Contrary to the shorts (who may be acting with the
support or backing of the Fed), paper longs are working with limited
amounts of cash--the cash they own, and they can take no more positions
than the money they have. The Fed, and the owners of the Fed, and their
cronies, in contrast, can continue to create paper contracts forever.
They can even take huge paper losses without much sweat, because they
belong to the group who can print up the money out of thin air in the
first place.
Can the paper longs reasonably expect to win a poker
game with someone who has infinitely deep pockets and can always raise
them another round? No, they can't. Eventually, the paper longs run out
of money, and have to fold. Or, if the paper longs bet on margin, and
the positions go temporarily against them, they can be wiped out.
Let's assume the paper shorts end up defaulting, and
giving a cash settlement payout. But what good is a cash settlement
payout if the gold price in dollars is headed on it's way to infinity
dollars per ounce? What good will a cash settlement be if it takes
months to receive a settlement during a crisis when the gold price
continues to wildly escalate?
And there is the real world possibility that the
short sellers will not even pay any cash settlement at all to the
longs. I believe these companies doing the bulk of the short selling
are like the shell companies that Enron tried to create to hide debt. I
believe the insiders, the ones who control our monetary system, have
set up the bullion banks to take the fall. And who will be hurt the
most? The paper longs, and the public shareholders of the bullion banks
-- the companies that have taken on the sshort positions that will be
impossible to fulfill as the price of the precious metals skyrocket.
I simply do not believe that in the event the gold
price starts running away up and over $1000/oz., that the short sellers
will deliver actual metal. They simply cannot do so, as they don't have
the metal, and to purchase so much in the open market to cover would be
impossible. I believe they will default with a cash settlement, just as
the TOCOM shorts defaulted on Platinum or Palladium obligations back in
2000 or so. So, at best, there will be a cash settlement, and at worst,
the shorts will go bankrupt, and there will be a much reduced cash
settlement, or much delayed cash settlement, or no cash settlement at
all.
True, there will be wins along the way for a few
longs, before the eventual massive default happens, just as there are
wins in any casino. But the majority of all gamblers lose, just as the
majority of the paper longs are playing a self-defeating rigged game of
gambling.
To defend the legitimacy of the futures markets
(gambling casinos masquerading as investment opportunities) , the
argument is usually raised that a producer has a legitimate reason to
sell what would become something like a futures contract. The argument
is that if a miner borrows a certain amount of cash, the miner needs to
lock in a certain cash price in order to be able to repay his cash
debt. But it is not the case that a miner needs to borrow paper dollars
in order to raise the capital to mine gold! That is a completely false
assumption that a miner needs to borrow paper dollars in the first
place! The miner can raise capital another way, in a legitimate way,
and that is through offering shares to the public.
I believe going into debt is morally wrong. The
reason that debt is wrong is that the borrower is the servant to the
lender, and we are not to become the slaves of men, but we are to
remain free. Debt represents shackles of restraint and obligations that
might not be able to be met because life is uncertain. Additionally,
debt that is accompanied by usury, must be avoided.
The bankers have no legitimate need to loan money.
Let them invest it, and let them assume the risks of their own
investments, rather than let the borrower assume the risk.
Miners need to avoid debt and they need to avoid
creating a delivery obligation in the future for metal. The smartest
run mining companies will raise all the cash they need through
additional public offerings, and they will pledge to sell all their
gold at the spot price when the time comes that they have metal to
sell. They will avoid hedging at all costs, at all prices, no matter
how fast or how far the prices of metals may rise. What if a miner
hedges at $3000/oz for gold, and then the gold price continues to
skyrocket up to over $30,000/oz? That miner will go bankrupt! Miners
must remain debt free and hedge free, no matter how high prices rise,
and have in place a mission statement that reflects that commitment.
The second major reason that miners should publicly
renounce and rebuke hedging is that the availability of paper futures
contracts creates a directly competing investment alternative that
takes money away from the mining sector. Money that would otherwise be
invested in mining companies directly is siphoned away into the long
positions in the futures contracts. Mining companies ought to tell
their prospective investors that it is a moral failure to go long and
buy a paper futures contract, and that instead, it is morally right to
choose to become a shareholder of a company that is debt free and has a
commitment to avoid hedging.
The third major reason that miners should publicly
renounce and rebuke the futures markets is that the futures markets are
the primary method being used to harm the price of the products they
produce. The sooner the fraud of the futures markets is exposed, the
sooner the price manipulation will end, and the sooner the miners will
be able to reap the rewards of their labors.
The moral failure of the paper longs can be summarized as follows.
1. They are deceived into thinking
that the shorts can deliver. They are deceived into thinking that the
endless creation of futures contracts doesn't affect the price, but it
does, it even harms the value of their own paper positions.
2. The paper longs are gambling,
and hoping to make money off of another's loss. They are deceived into
thinking that buying a futures contract is a legitimate investment
opportunity, when it is actually less honest and less reliable than
many forms of gambling.
3. The paper longs assume the risk
of debt, and worse, they may lose all of their money, and have to put
up additional monies in the event of a margin call. They are deceived
into thinking that they "control" metal, when, in fact, they do not
control (own) anything. They own a promise, not a thing.
4. The paper longs are motivated
by greed, thinking that through taking on debt, and owning a vain paper
promise, that they will profit more than those people who choose to own
actual physical metal. They forget and ignore the fundamental inherent
quality of owning precious metal is that it represents payment in full,
and gold does not default on it's owner, it is the only thing that
truly protects one from default by another. Gold is the antidote to
paper promises. A paper promise is no substitute for gold.
5. The paper longs think they are
participating in a bank run, but they are not. They are the ones on the
sidelines, or at the end of the line, hoping that a default will occur
before they reach the window!
It is no wonder that Warren Buffet called
derivatives "sewage". They are garbage. Options on futures are even
worse, garbage on top of garbage, or perhaps the slime that lies
beneath the garbage pile.
I believe it is inevitable that the shorts in the
futures markets for gold and silver will default. And I believe that
when they do, the price of precious metals will skyrocket.
I strongly recommend that people take advantage of
what they know about the extent of the fraud and deception that exists
in the world, and that they protect themselves from that fraud and
deception through precious metals ownership.
Disclaimer: I am not a licensed investment advisor.
I am not a broker. I hold positions in precious metals and mining
stocks, which are subject to change without notice. I am biased against
what I consider to be the fraud of fiat money, which are false weights
and measures, and an abomination. I am biased against the fraudulent
practice of creating money out of nothing. I am biased against debt:
particularly when money is lent at any interest rate whatsoever, a
practice called usury.
For a list of many other reasons why I believe now
is a very good time to buy gold and silver, see my web site at
www.goldismoney.com
Jason Hommel
jasonhommel@yahoo.com
22 January 2003
Other essays by Jason Hommel:
25 Reasons To Support The Sound Money Bill - 08 July 2004
I'm Insanely Bullish On Silver - 19 June 2004
Silver Stock Evaluations - 22 May 2004
The Silver Bull Is Back - 04 May 2004
Late April Silver Update - 22 April 2004
Silver Juniors With Cash Flow - 04 March 2004
Major Frauds of the U.S. Monetary System - 26 February 2004
Market Perspective & Cabo Mining - 12 February 2004
Usury Enslaves - 19 January 2004
Sterling Mining - 29 December 2003
The U.S. Trade Advantage With China - 17 December 2003
Rising Gold Prices Will Help The Economy - 02 December 2003
Miners to Use Silver as Cash - 27 November 2003
Private Placements in Silver Companies - 20 November 2003
Is the Silver Market Too Small to Buy? - 13 November 2003
Inflation & Deflation During Hyperinflation - 06 November 2003
Silver Price Expectations of Silver Stock Investors - 30 October 2003
Buying & Tracking Canadian Silver Stocks - 29 October 2003
Canadian Zinc--Silver Potential - 23 October 2003
Silver Stocks--Comparative Valuations - 4 - 13 October 2003
Silver Stocks--Comparative Valuations - 3 - 06 October 2003
Silver Stocks--Comparative Valuations - 2 - 29 September 2003
Silver Stocks--Comparative Valuations - 1 - 22 September 2003
Silver and Cardero Resource - 08 February 2003
The Moral Failures of the Paper Longs - 22 January 2003
CFTC Response to Silver Problem - 14 January 2003
People Talking About $32,567/oz - 10 January 2003
Letter To Authorities of Silver Markets - 06 January 2003
Why no talk of $32,567/oz ? - 02 January 2003
Refuting Myths about Gold - 28 October 2002
Controlling Gold with Paper - 10 June 2002
Impending Gold Futures Default - 29 May 2002
Certain gold stocks are still cheap - 07 May 2002
A Few Supply and Demand Fundamentals of the Dollar and Gold - 06 May 2002
New DROOY Institutional Holdings - 21 February 2002
Hommels View of Gold - 23 March 2001
Gold Price Under Differing Scenarios - 24 June 2000
Goldismoney.com
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