Silver lining

Well, here's a thing.   Some  investors  caused considerable pain to a hedge fund.

If I borrow a company's share from you, with a promise to give it back to you after a fixed period of time, I have to pay you something for the privilege.  The amount will depend on many things but will usually be small compared with the value of the share that I borrowed.  If I think that the share will decline in value during the period of the loan, I might decide to sell it, intending to buy it back at the end of the loan period so I can give it back to you.  This is called short selling. 

As a short seller I am taking a risk:  if the share becomes more expensive, I still have to buy it back, whatever the price, if I am to fulfill my promise to you.  Since the price can be whatever the market decides, my potential losses are unlimited.  OK, not unlimited, but certainly enough to bankrupt me, which is about the same thing.

There doesn't seem to me to be anything immoral in the above transaction, but, but.....   the transaction is one where there is, if I have done my homework, a good chance of a finite gain, but there is also, always, a chance of a loss, including a small chance of an infinite loss.   Probability theory tells us that eventually, players must inevitably go bankrupt.

Here we see the asymmetry in the financial markets:  When the shorts make money, the financiers keep the profits, but when they fail, they can be (and have been) "bailed out", as necessary.   That is, taxpayers' money is handed to them so they can fulfill their contracts.   Since they will inevitably eventually go bankrupt, it is a scheme for passing taxpayers' money to the financiers.

The precious metals market (mostly gold and silver) is one that appears to have been manipulated for some time.  Most of what is traded in the gold markets is "paper gold", that is, a promise to deliver gold rather than actual delivery of the real physical stuff.  I believe that there are upwards of 100 promises to deliver, for every ounce of deliverable gold.

Again, I'm not sure that there is anything immoral here.   If my experience tells me that out of every hundred customers to whom I have promised to deliver gold, only one will actually take it, the others taking money to the value of the gold instead, then it's not unreasonable for me to trade paper gold in this way.  But what happens when, instead of just one person out of 100 taking delivery, two do?  Or 50?   Or 100 ?   And the question arises: what is actually being traded?  The gold price is held to be the price at which paper gold is traded, but in reality, its links to the physical market for real gold are thin.

Somethng else is happening at the same time.  Bitcoin, when it started out, was used, as I understand it, as a way of paying for illegal drugs, mostly cannabis.  It used to have almost no value, but now it is quite expensive.  It was and remains a favourite among the IT crowd, that I describe without any malice intended, as nerds.  Many are now extremely rich.   So we have a bunch of nerds, with no loyalty to the financial system, with huge personal financial clout, and with a sense of fairness.   They don't like what they see.

There is noise about the nerds going after the silver market.  Watch this space.

This post does not constitute financial advice of any kind.