Alex Ramos

Alex Ramos
Contributor since: 2013
SVXY seems to be broken this week, VIX is down since Wednesday but SVXY is not up.
There is something seriously wrong with your spreadsheet. Just reading the values between 1/16/1990 and 2/14/1990, you can see that some of the total value just vanishes, which is not possible in between distributions. I'm not willing to pay $24.95 to help you fix it, so why don't you just share an unlocked version for everyone to see and pick apart your formulas?
the 4% lands in the hands of the short-seller who sold you the share the night before and covered today
I know this reply is a little late, but I think you meant $1,700. Quoted options prices have to be multiplied by $100 for each contract covering 100 shares.
What if the conspiracy theorists got it backwards, in that Gold is actually a worthless commodity whose value is constantly propped up by governments, central banks, and other conspirators. Why do central banks hold on to literally tons of the stuff if not to prop up the value? The COMEX drawdown could be simply an attempt to manufacture a physical shortage and push up the value. Central banks can do this indefinitely BTW, they just print more fiat money to remove more gold out of circulation.
@Author, perhaps you can clarify something for me actually, as part of your research. When those shorter-term notes mature, is the Fed required to remit the principal payoff back to the Treasury? In that case the money really isn't extinguished. I'm just not sure. Thanks
The Fed's ability to issue infinite amounts of money is severely hamstrung by the mandate to keep inflation in check. So the author may have a point, even though it's not articulated: excessive balance sheet losses may result in failure to control the money supply, therefore the Fed may care. With a 5-year bond, the Fed is guaranteed the principal amount will be sucked out of circulation in 5 years' time. With a 30-year, the removal of principal from circulation is just too far off to make an effective reversal of monetary policy. The "losses" represent money that cannot be easily removed from the economy when it heats up.
what ARE the two risks? Sorry, your article is very difficult to "skim", and too long to read... a Conclusion paragraph would be nice.
I believe the major risk right now is an unexpected string of good news leading to overblown fears of Fed tightening.
What this market and general blogsphere and mainstream media all seem to be overlooking, and which I see no articles about, is that any unexpected string of good economic news can come out of left field at any time. Any unexpected good economic news will bring "Tapering" to the front pages and will cause a massive sell-off of anything that's not nailed to raising rates. This would be like a 1987-like crash in which equities are obliterated while economic prospects actually turn positive.
Of course this is not guaranteed to happen. But I bet that the probability of such an event is currently under-priced, as evidenced by a low VIX.
Your article made me curious about tradeable opportunities... but I only found two Cypriot ADRs trading in the U.S., symbols: BACPY and PRSEY.. do you know of any other ones? I guess it's not big enough to have a diversified index ETF.
Total Market Indexes are far more passive than the two indexes the author picked to illustrate his point.
Show me a credible source. All Google hits for "LBMA Default" can be sourced back to King World News Blog and some guy named Maguire. KWNB also claims physical gold is trading at $2,000/oz. General perusal of the site shows similar style and techniques to those used by pennystock promoters.
The word Default has specific meaning generally associated with bankruptcy, forced liquidation, etc. It is not an appropriate word to describe what happens when a COMEX Failure To Deliver clause is exercised.
NYMEX Rule 7B14:
"In the event a clearing member fails to fulfill its specific delivery obligations pursuant to Exchange rules, in connection with a product listed for trading and clearing or for clearing-only by the NYMEX Division or the COMEX Division, the sole obligation of the Clearing House is to pay reasonable damages proximately caused by such delivery obligation failure, in an amount which shall not exceed the difference between the delivery price of the specific commodity and the reasonable market price of such commodity at the time delivery is required according to the rules of the Exchange. The Clearing House shall not be obligated to: (1) make or accept delivery of the actual commodity; or (2) pay any damages relating to the accuracy, genuineness, completeness, or acceptableness of certificates, instruments, warehouse receipts, shipping certificates, or other similar documents; or (3) pay any damages relating to the failure or insolvency of banks, depositories, warehouses, shipping stations, or similar organizations or entities that may be involved with a delivery."
So there, is the first point of my article. Failure to deliver physical to a futures buyer is not a default. Use of the word Default in this context is a scare tactic by sellers of physical gold, which I may add, as a financial product ranks way up there with Annuities and Loaded Mutual Funds in terms of costs.
My second point, is that you have to make up your mind about what type of market breakdown you are trying to describe. There is just no conceivable situation in which paper trades cheaper than physical AND physical failures to deliver are going to occur. If you say the paper is actually trading below physical, you are saying there are longs willing to let go of the paper for less than the physical spot price (that is what trading means: sellers selling to buyers). And as long as that market condition exists, a short-seller can opt to close out the position rather than make delivery. So, make up your mind. If the paper is trading cheaply, shorts will close out at a profit and open interest will decline. If you think there will be a failure to deliver in a paper discounted environment, explain why the shorts are so dumb as to not cover with paper.
too bad there's no Physical Uranium ETF
>> Comex has an obligation to deliver should buyers decide to receive delivery.
That is a fantasy and is absolutely not true.
NYMEX Rulebook. 7B14 - FAILURE TO DELIVER, limits the obligation to "reasonable damages", "in an amount which shall not exceed the difference between the delivery price of the specific commodity and the reasonable market price of such commodity at the time delivery is required".
Here - scroll down to 7B: http://bit.ly/117DU2x
>> Paper will never trade at a premium to physical. Ever. Please explain why someone would rather own a worthless IOU.
Wrong. Futures trade at a premium when there is a shortage of the physical. As expiration date approaches, the short-sellers who have no physical to deliver are forced to close-out their positions by bidding up the paper price until enough longs let go of their delivery demands. In a normally functioning market the spot and futures prices converge as expiration approaches. In a nightmarish scenario where there truly is not enough physical to close out all short positions, paper prices will go up sufficiently to the point where taking delivery becomes stupid. In this case the shorts will just buy physical in the spot market to cover the paper short at a profit.
Hebba/Cagdas -
What both of you are missing regarding Fact#3 is "In the case of a catastrophic situation where the physical price is over the paper price" the shorts will simply buy-to-cover, effectively opting out of physical delivery, because by your own statement the paper price is lower than the physical price in this situation. If enough long holders hang on and refuse to close their positions, very soon the paper is trading at a premium, leading to Fact#4.
I have not seen this much misinformation in a seekingalpha article and ensuing comments in a long time.
Comenter 'daro' is correct. Author and most other commenters are utterly clueless.
Fact #1 - Anyone who's ever read the terms and conditions of a futures contract, knows the Exchange is NEVER liable to deliver physical for settlement (in the event of default of a counterparty and their clearinghouse). The exchange liability is ALWAYS in the form of 'reasonable damages' payable in legal tender (USD). This is written into the futures contract. If invoked, it's not a default, it's fulfillment of contractual obligation.
Fact #2. Short-sellers of futures contracts are under no obligation to deliver physical either. They can simply close out their futures position instead. Which they are sure to do if the alleged "paper-vs-physical disconnect" exists: Why would anyone deliver expensive physical gold, when they can close-out the paper futures at a much cheaper price?
Fact #3. Short-sellers who choose to deliver have a whole month to procure the physical. The same physical can get delivered and re-delivered several times over during that month. During the month they can also be margin-called and forced to close out the position. None of those things constitute a default, despite the heavy losses and legal liability to the short-sellers.
Fact #4. If there is indeed an impending shortage of physical at the Comex and this starts to be picked up by real players (rather than conspiracy nuts with no money to trade), the futures will very naturally start trading at a PREMIUM to physical. That will cause two things to happen, first, more physical will be brought in by the shorts to be delivered at a profit, and second, more longs will choose to cash out at an inflated price rather than take delivery of cheaper physical gold. The premium will continue to expand until an adequate supply of physical is re-established.
A true 'default' in which Comex longs are left holding the bag with worthless paper will only occur if the entire social and legal system collapses. In this case your only protection is physical gold in a discrete location very well stocked with food and ammo! But this is an opinion, not a fact.
I own AGNC and I like your article, but I chuckled when I read this part:
"I was confident the dividend rate was safe before performing this analysis, but after completing all three calculations, I am even more confident the dividend rate is secure for several quarters to come."
Have you heard of Confirmation Bias? Just wondering :)
the author says we're blowing up by June. He didn't say what year
It is too bad MacroShares failed. I've been searching everywhere for a new and improved incarnation of the concept. They provided a way to invest in commodities without the drag of futures roll (contango). Why has nothing like it popped up since???
Does the Fed mark-to-market?
I'd like to see evidence that even a single truck has left HSBC's vaults carrying gold.
What's stopping a well-funded player from introducing and then heavily promoting a competitor to Bitcoin, relegating Bitcoin to the forgotten footnotes of history?
@ntalebfan, your view is shortsighted.
If you have a standard 80% mortgage, and home values go up 3% in a 4% inflation environment, you may have "lost" 1% in real terms in some abstract inflation calculator, but in reality you've just made a 15% return after-leverage on your invested cash.
What baffles me about incompetence at the Fed is that they've not been able to get inflation to go up meaningfully.
Thank you for posting this "pro-Fed" article. Do you have any thoughts whether the Fed may eventually start buying Gold? That would seem to be the ultimate QE... fresh money that never has to be paid back and "unprinted".
> seeing as Ben is currently enforcing negative real rates (i.e.,
> inflation is running at 2% vs. Ben's ZIRP), what will happen to the
> value of Joe Blow's house when rates normalize and Joe Blow
> then has to find a buyer in an era of "non-artificially low" mortgage
> rates?
Rates won't matter when there is a housing Shortage.
It was a good article until this totally baseless statement: "However, the server space is quite different. The software here is designed for x86-64, and this is very meticulous, hand-optimized code that has been maintained and updated over many years. All the neat tricks to squeeze every last ounce of juice from these Intel and AMD processors is there in the code. So switching from x86 to ARM on an instruction set level would be extremely painful, especially for mission-critical data centers."
This is wrong. The most "hand-optimized code" you'll ever find is actually in games. Business applications running on servers often follow the "machines are cheaper than programmers" mantra and are the most horribly sloppy code ever written.
64-bit server code in particular is very poorly optimized today. ARM has been around much longer than x86_64.
Plenty of people would like you to believe ETFs are not derivatives :-)
Thanks for excellent article.
I just tried iOS 6. Apple Maps actually beats the pants off Google Maps. You heard it here first.
A lot of people, especially Gold Bugs, would have you believe 2.5% is high inflation and the end of the world as we know it.