One of the hard lessons for thousands of individual investors are the losses in net worth that the volatitility of the futures contracts can bring to investors in commodities, not only in this market
but also in the spot market because there is only a difference between both prices, depending on market conditions contango or backwardation,and of course in the price of the shares of the companies that produce commodities
For example one futures contract for gold controls 100 troy oz of gold. Being more specific when
you buy a futures contract you are entering into an agreement to buy gold in the future(usually 3months) longer deliveries have less liquidity. Right now in the Comex the margin is 25%, that
means that you buy 100 troy oz whose market value is US$ 132,990 with US$ 33,247.50. If the price of gold falls, you will have to increase your deposit,or you will be automatically liquidated if you
don't answer to a margin call.
Now the futures market is called a paper market, for one simple reason,many market participants
don´t take the delivery of their futures contracts, they liquidate them before their expiration or they renew them for a later delivery
So it is absolutely true that this market can bring high volatility in prices,and for long periods of time
the quantities involved in the futures contracts surpass the quantities that can be delivered in the
physical market of a commodity.
If you add to this the low interest rates, the quantity of money in the banking system stemmed by
QE,and the leverage that the futures contracts bring. The picture is very clear.
The trauma of the stock market crash of 2007-8 should have brought more market regulations,one of the big reasons of this long recession is the still present deleveraging of american households.
For me this means increased supervision and regulations of ALL kinds of leverage
Of course I'am not saying that the only reason e.g for the correction of the gold price and its volatility is because of the futures market, but it brings a distinguishing feature that can be easily manipulated,by big investment banks,big speculators and hedge funds. Or not?
but also in the spot market because there is only a difference between both prices, depending on market conditions contango or backwardation,and of course in the price of the shares of the companies that produce commodities
For example one futures contract for gold controls 100 troy oz of gold. Being more specific when
you buy a futures contract you are entering into an agreement to buy gold in the future(usually 3months) longer deliveries have less liquidity. Right now in the Comex the margin is 25%, that
means that you buy 100 troy oz whose market value is US$ 132,990 with US$ 33,247.50. If the price of gold falls, you will have to increase your deposit,or you will be automatically liquidated if you
don't answer to a margin call.
Now the futures market is called a paper market, for one simple reason,many market participants
don´t take the delivery of their futures contracts, they liquidate them before their expiration or they renew them for a later delivery
So it is absolutely true that this market can bring high volatility in prices,and for long periods of time
the quantities involved in the futures contracts surpass the quantities that can be delivered in the
physical market of a commodity.
If you add to this the low interest rates, the quantity of money in the banking system stemmed by
QE,and the leverage that the futures contracts bring. The picture is very clear.
The trauma of the stock market crash of 2007-8 should have brought more market regulations,one of the big reasons of this long recession is the still present deleveraging of american households.
For me this means increased supervision and regulations of ALL kinds of leverage
Of course I'am not saying that the only reason e.g for the correction of the gold price and its volatility is because of the futures market, but it brings a distinguishing feature that can be easily manipulated,by big investment banks,big speculators and hedge funds. Or not?
