4 ms·

If there wasn't enough gold in London, wouldn't that mean that gold claims there would be more valuable, not less? Because in order to fulfill the delivery they

by HWR_14 2y ago

If there wasn't enough gold in London, wouldn't that mean that gold claims there would be more valuable, not less? Because in order to fulfill the delivery they will have to repurchase the gold, creating huge demand.

fuoqi 2y ago
I do not understand your logic. Imagine I have 1 gold bar and issued 100 paper claims on it. How would one claim worth more than one physical gold bar? After someone retrieves the bar, I will have zero gold bars and 99 claims. Would you buy such claim knowing that I do not have any gold in my vault? It may not be even an outright scam. Those 99 claims may be backed by claims on someone else's gold, but it's likely I will not be able to exercise those claims in a timely manner, making me insolvent. Thus we have a "bank run" situation.
- HWR_14 2y ago
  I mean, if it's oversubscribed by 100x the amount in existence it complicates things (unless the issuers have 100x the value of their gold in other assets). But if you issued 100 claims on 99 bars, clearly one person is getting something else. If I offer to sell you my paper claim for 2x what it was worth yesterday (for example) then you lose the value of 101 bars of gold after selling 100 bars of gold (net negative 1 bar) and I make a tidy profit. Just like a short squeeze sent GME to $400/share.
- weitendorf 2y ago
  OP is assuming the oversubscription is due to counterparties being on the hook for gold they are obligated to deliver at a certain time (this is commonplace with commodity derivatives, you simultaneously create contract to buy a certain amount of a commodity at a certain time in the future + a contract to sell a certain amount at the same time in the future - they cancel each other out), not that the entity holding the gold fradulently issued more claims than they could deliver on. So OP is saying that if more gold was redeemed than expected, the counterparties to those claims would be forced to buy gold at whatever the price it ultimately settles on to fulfill the contract. Of course the problem is that there is such a thing as counterparty risk. If delivering the contractually obligated gold bankrupts an individual counterparty, or is physically impossible in aggregate (eg more claims than gold exists) then the contract won't be fulfilled at least for someone. But there is a lot of complexity here because not all futures are settled physically (they can be cash-settled) and there could be mechanisms in place to manage counterparty risk at various levels, like at the exchange, eg https://www.cmegroup.com/education/articles-and-reports/counterparty-credit-risk.html https://www.cmegroup.com/education/articles-and-reports/coun... I wasn't able to read the article because of the paywall but stuff like this is why regular joes tend to think there are bigger problems with gold or finance in general than there actually is. "There is more paper gold than physical gold" - regular Joe thinks there is a problem. "Actually the paper claims' settlement are subject to various conditions, typically closed out before taking delivery, and there is a complex system in place which does its best ensure that anybody who actually wants to take delivery or settle their contract gets it settled as expected" - regular Joe lost interest and went back to doomscrolling.
  - cwalv 2y ago
    > or is physically impossible in aggregate ... then the contract won't be fulfilled at least for someone. > "There is more paper gold than physical gold" - regular Joe thinks there is a problem. Is it a bunch of regular Joe's that are making gold "worth more in New York?"
  - imtringued 2y ago
    The problem here is obviously liquidity management. You could think of the vault as a battery that charged and discharged. If you drain and charge the battery at the same time, there is no net change in the charge level. Theoretically, you wouldn't need the battery to begin with. Now add time lags. Now discharge may happen before charging. The net change is zero over the full duration of the cycle, but the battery is being drained temporarily and it is changing its state all the time. If the battery is not large enough, the system will shut down. This in itself is not necessarily a catastrophe, but you will have to pay damages over the shutdown duration for the consequences of that shutdown. This will probably ruin profitability of the counterparty.
- grandempire 2y ago
  All your customers won’t withdraw all the gold at once. So you don’t need to have 100% reserves. That’s a fact. The problem is once you go less than 100% it’s always tempting to inch that number down. Because selling new claims, or selling reserves is free money.
SJC_Hacker 2y ago
> in order to fulfill Well, there's the rub. They'll just throw their hands up and the claimants are left holding the bag. Which is what sometimes happened historically.
- HWR_14 2y ago
  Aren't most of those claims issued by giant diversified companies who have many other assets I can get in exchange? When has this happened historically (I don't know of any examples, but I don't claim that means there aren't any).
  - lmm 2y ago
    The last real corner was the Piggly Wiggly corner, and the exchange changed the rules to screw the guy who cornered it rather than the shorts. With that kind of precedent, people understandably don't really try to do a proper corner any more.
  - deleted 2y ago
    [deleted]
  - SJC_Hacker 2y ago
    Until you discover all those assets they had were also vapor, and their total debt exceeds their total assets
  - jt2190 2y ago
    You would have to have a contract that gives you claim on these other assets. I would guess that those kinds of contracts are very rare, because you’d no longer be buying gold but a derivative whose value derives in part from gold and in part from the other assets of the company selling the contract. I would bet that in practice buying gold plus a corporate bond would make a reasonable, simpler and more flexible substitute for said derivative, making demand for the derivative basically zero.
suraci 2y ago
> Because in order to fulfill the delivery they will have to repurchase the gold, creating huge demand. this is what happening now, gold price keeps rising as for the reason behind gold price is higher in NY, there're many theories and we can not know the truth untill it passed theories: 1. Most paper gold transactions take place in New York, when a short squeeze mentioned occurs, it can cause New York prices to react before London prices 2. some players are draining physical gold from london(world market de facto) by pricing gold higher
- MrMan 2y ago
  [dead]

by HWR_14 2y ago

fuoqi 2y ago

I do not understand your logic. Imagine I have 1 gold bar and issued 100 paper claims on it. How would one claim worth more than one physical gold bar? After someone retrieves the bar, I will have zero gold bars and 99 claims. Would you buy such claim knowing that I do not have any gold in my vault? It may not be even an outright scam. Those 99 claims may be backed by claims on someone else's gold, but it's likely I will not be able to exercise those claims in a timely manner, making me insolvent. Thus we have a "bank run" situation.

HWR_14 2y ago
I mean, if it's oversubscribed by 100x the amount in existence it complicates things (unless the issuers have 100x the value of their gold in other assets). But if you issued 100 claims on 99 bars, clearly one person is getting something else. If I offer to sell you my paper claim for 2x what it was worth yesterday (for example) then you lose the value of 101 bars of gold after selling 100 bars of gold (net negative 1 bar) and I make a tidy profit. Just like a short squeeze sent GME to $400/share.
weitendorf 2y ago
OP is assuming the oversubscription is due to counterparties being on the hook for gold they are obligated to deliver at a certain time (this is commonplace with commodity derivatives, you simultaneously create contract to buy a certain amount of a commodity at a certain time in the future + a contract to sell a certain amount at the same time in the future - they cancel each other out), not that the entity holding the gold fradulently issued more claims than they could deliver on. So OP is saying that if more gold was redeemed than expected, the counterparties to those claims would be forced to buy gold at whatever the price it ultimately settles on to fulfill the contract. Of course the problem is that there is such a thing as counterparty risk. If delivering the contractually obligated gold bankrupts an individual counterparty, or is physically impossible in aggregate (eg more claims than gold exists) then the contract won't be fulfilled at least for someone. But there is a lot of complexity here because not all futures are settled physically (they can be cash-settled) and there could be mechanisms in place to manage counterparty risk at various levels, like at the exchange, eg https://www.cmegroup.com/education/articles-and-reports/counterparty-credit-risk.html https://www.cmegroup.com/education/articles-and-reports/coun... I wasn't able to read the article because of the paywall but stuff like this is why regular joes tend to think there are bigger problems with gold or finance in general than there actually is. "There is more paper gold than physical gold" - regular Joe thinks there is a problem. "Actually the paper claims' settlement are subject to various conditions, typically closed out before taking delivery, and there is a complex system in place which does its best ensure that anybody who actually wants to take delivery or settle their contract gets it settled as expected" - regular Joe lost interest and went back to doomscrolling.
- cwalv 2y ago
  > or is physically impossible in aggregate ... then the contract won't be fulfilled at least for someone. > "There is more paper gold than physical gold" - regular Joe thinks there is a problem. Is it a bunch of regular Joe's that are making gold "worth more in New York?"
- imtringued 2y ago
  The problem here is obviously liquidity management. You could think of the vault as a battery that charged and discharged. If you drain and charge the battery at the same time, there is no net change in the charge level. Theoretically, you wouldn't need the battery to begin with. Now add time lags. Now discharge may happen before charging. The net change is zero over the full duration of the cycle, but the battery is being drained temporarily and it is changing its state all the time. If the battery is not large enough, the system will shut down. This in itself is not necessarily a catastrophe, but you will have to pay damages over the shutdown duration for the consequences of that shutdown. This will probably ruin profitability of the counterparty.
grandempire 2y ago
All your customers won’t withdraw all the gold at once. So you don’t need to have 100% reserves. That’s a fact. The problem is once you go less than 100% it’s always tempting to inch that number down. Because selling new claims, or selling reserves is free money.

SJC_Hacker 2y ago

> in order to fulfill Well, there's the rub. They'll just throw their hands up and the claimants are left holding the bag. Which is what sometimes happened historically.

HWR_14 2y ago
Aren't most of those claims issued by giant diversified companies who have many other assets I can get in exchange? When has this happened historically (I don't know of any examples, but I don't claim that means there aren't any).
- lmm 2y ago
  The last real corner was the Piggly Wiggly corner, and the exchange changed the rules to screw the guy who cornered it rather than the shorts. With that kind of precedent, people understandably don't really try to do a proper corner any more.
- deleted 2y ago
  [deleted]
- SJC_Hacker 2y ago
  Until you discover all those assets they had were also vapor, and their total debt exceeds their total assets
- jt2190 2y ago
  You would have to have a contract that gives you claim on these other assets. I would guess that those kinds of contracts are very rare, because you’d no longer be buying gold but a derivative whose value derives in part from gold and in part from the other assets of the company selling the contract. I would bet that in practice buying gold plus a corporate bond would make a reasonable, simpler and more flexible substitute for said derivative, making demand for the derivative basically zero.

suraci 2y ago

> Because in order to fulfill the delivery they will have to repurchase the gold, creating huge demand. this is what happening now, gold price keeps rising as for the reason behind gold price is higher in NY, there're many theories and we can not know the truth untill it passed theories: 1. Most paper gold transactions take place in New York, when a short squeeze mentioned occurs, it can cause New York prices to react before London prices 2. some players are draining physical gold from london(world market de facto) by pricing gold higher

MrMan 2y ago
[dead]