Recent Revelations of Massive Fraud in $5.4Trillion Gold Market

[JS80]

What are the costs associated with going short? They borrow the share from one of the longs, sell it, and wait until they are able to buy it back for less, which allows them to keep the difference. While they are holding it, do they have to make some sort of interest/dividend payment to the person they borrowed it from? Do they have to pay some up front fee to go short? I'm just trying to understand your comment about how the price per share of going short would decrease as the price per share of going long would increase.

Also, let's say you go short and the price rises. What recourse does the person you borrowed the share from have at that point? How do they know you will be able to cover the short?

Finally, how would you dynamically hedge the theoretical investment you described earlier that mirrors GLD?

I realize some of these questions probably apply to markets as a whole, but after reading your example it seemed like a good time to ask them.

You're not borrowing anything when you long or short derivatives.

The funny thing about this claim (which I wouldn't be surprised if true) is that the OP thinks they are SUPPRESSING gold prices, where in fact, all this leverage is probably inflating it. Think about the scenario where there is a run on physical gold because regulators are cracking down on leverage - the likely outcome is that, because paper holders KNOW it's impossible to get the physical gold, they will most likely dump their contracts in the open market causing gold prices to plummet.

 

[halik]

What are the costs associated with going short? They borrow the share from one of the longs, sell it, and wait until they are able to buy it back for less, which allows them to keep the difference. While they are holding it, do they have to make some sort of interest/dividend payment to the person they borrowed it from? Do they have to pay some up front fee to go short? I'm just trying to understand your comment about how the price per share of going short would decrease as the price per share of going long would increase.

Also, let's say you go short and the price rises. What recourse does the person you borrowed the share from have at that point? How do they know you will be able to cover the short?

Finally, how would you dynamically hedge the theoretical investment you described earlier that mirrors GLD?

I realize some of these questions probably apply to markets as a whole, but after reading your example it seemed like a good time to ask them.

With my theoretical long/short ETF, going short would be buying into the short fund (rather than actually shorting the long one*). So if there's more demand for the long pool and you started at $1/share each, you could end up with something like $1.5/share on the long side and $0.5/share on the short side.

As far as dynamic hedging goes, at $1.5/share long and $0.5/share short, the net fund is short gold by $100M. I'd grab some of the long end of the fund and actually buy the underlying GLD to hedge it out. More realistically you could just get away with buying out of the money puts and calls to hedge price change that would wipe one of the pools out (ie 100% at the starting point).


*IRL you can short the long leg of a fund like that, but it's usually the dumber move (if there are dividends etc you have to pay them, so it's usually better just to buy the short fund).

Mini-disclaimer: I don't work for an ETF issuer; this is just a theoretical exercise to illustrate how you can create synthetic instruments w/o having any underlying on hand.

 

[PokerGuy]

hahahaha Silly gold fools.

 

[LegendKiller]

If anything the leverage is propping up gold prices at artificially high levels. For every naked short there's a naked long. OP is just paranoid.

What I love is people claiming this is "leverage". It's not "leverage" per se, it's just people taking bets on which way gold will go or hedging different things, such as credit events or inflation.