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Comment by cf141q5325 | Hacker News Reader

Edit: This should do

>The ratio of iron-ore derivatives to physical trading volume was about 25 times, far lower than the 80-100 time for more mature commodities such as gold and copper, according to a study by Hong Kong Exchanges & Clearing.

https://www.bloomberg.com/professional/blog/expect-chinas-fu...

Silver is quite a lot worse btw

Might be worth pointing out that this isnt surprising given the activity of speculators in the market. Without markets would get cornered for investment and industry would cease.

edit1: There is however also an incentive to keep individuals from investing into precious metals due to monetary considerations. Derivate induced volatility is one way to do that. https://wikileaks.org/plusd/cables/1974LONDON16154_b.html

edit2: Also worth considering is that the large central bank holdings can and will be loaned out to maintain price stability if push comes to shove and gold were to rise drastically.

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Derivatives are not the same thing as paper gold and conflating the two is just a sales tactic to push the oversubscription meme.

Paper gold is something like the gold ETFs where a share represents gold in the fund’s vault. If those were actually fraudulent in reserves, then you would have a point.

Every commodity that has a futures and options market will have a huge ratio of derivatives to the underlying. That’s the nature of producers and consumers locking in prices and speculators getting in between.

If i am not mistaken those gold ETFs are backed by derivatives. Please do share a differing definition for "paper".

I also didnt disagree with derivative overhang being normal. Not sure why you thought it necessary to repeat.

It’s like two seconds of googling. The biggest ones are backed by the asset. https://www.ssga.com/us/en/intermediary/etfs/funds/spdr-gold...

This one even lets you convert: https://www.vaneck.com/us/en/education/investment-ideas/phys...

I thought it necessary to spell it out because your understanding is clearly based on the false assumption that most of the gold investments aren’t backed.

Another poster (tim333) made a great summary of the concept behind GLD (your first link) a few posts up. Those backed assets are otherwise owned and loaned against. IShares is the other one with a similar concept. You can read up on this in the context of Basel 3's net stable funding ratio and the exemption LBMA (the biggest backer of COMEX) achieved.

https://www.gold.org/goldhub/gold-focus/2021/06/basel-iii-an...

Or directly from the LBMA:

https://cdn.lbma.org.uk/downloads/Pages/NSFR-PRA-Letter-fina... https://www.lbma.org.uk/articles/pra-clearing-banks-may-now-...

This is not to say that all ETFs work this way. I believe Xetra is one example of being fully physically backed. But this naturally increases running cost due to storage. Last i checked i believe you pay in the rough region of 0.1% a year in storage cost at the reputable physical gold bullion storage sites as a large customers (tons / room). That sums up. This also explains why physical copper is not something you can easily invest in.

But again, this kind of misses the point, i would really appreciate a definition of paper differing from backed by derivatives. I think you might be onto something here, i ran into this argument a few times now so i believe i might be missing something.

I would also like to reiterate that i do not share the conclusion the initial post made about run away gold prices. I elaborated on that in the other posts.

Sorry for the late edits, had to double check the numbers.

“Paper gold” is meant to refer to a claim on real gold. I.e. if the ETF share exists, there is a small piece of gold backing that and only that share.

A /GC futures contract—-even with physical settlement—- is not paper gold because two parties can create the contract without any actual gold existing anywhere.

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