http://adask.wordpress.com/2011/05/11/are-you-an-investor-or-a-speculator/#more-6640
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Forty years ago, scientists conducted an experiment on habitual gamblers. A laboratory was constructed to look like a casino and included roulette tables, slot machines, and crap tables, etc., that looked just like the games in Las Vegas. However, these lab-games were designed so that scientists could secretly control the rate of payout to the gamblers.
For example, as gamblers were playing, scientists could secretly increase the payouts on a slot machine and a gambler would win more frequently. Alternatively, scientists could decrease the rate of payouts, and the gambler would lose more frequently.
The scientists observed a remarkable tendency: As the games were manipulated to increase the gamblers’ number of wins, the gamblers lost interest in the game and moved to another machine or another game.
The scientists didn’t say so in the study, but one implication was obvious to me: If hard-core gamblers lose interest when they win, they must be (subconsciously) playing to lose.
That principle is borne out by Las Vegas: Who do you suppose is paying for the electricity to light all those fantastic signs outside the Las Vegas casinos—the winners or the losers?
Answer: the losers. Those electric signs are evidence that most people going to Las Vegas casinos lose.
In itself, the fact that most people lose at casinos is unremarkable. What is remarkable is how many people keep going back to Las Vegas to lose again. Las Vegas is profitable because habitual gamblers want to lose.
• “Gambling” is a prediction backed by money that some event that’s not fully understood or controlled (and therefore unpredictable) will take place in the very near future. (We tend to gamble on events that will take place in the next 5 minutes rather than the next five years.)
I.e., I bet/gamble $100 that the roulette ball will land on #7 on the next spin; another gambler bets the ball will land on #23 and a third bets on #00. Typically, one gambler wins; the majority lose.
Gamblers bet on seemingly unpredictable events (whether the ball will land on 7, 23 or 00) that will happen very soon (the next spin of the roulette).
The casino might also seem to be “gambling,” but that’s not exactly true. The casino is not really betting on whether the roulette ball will land on 7, 23 or 00 in the very next spin. That is, the house knows that, over time, under the law of statistics, #23 will, on average, hit once in every 37 spins of the roulette wheel (there are 35 numbers + “0” and “00” = 37 possible results on the roulette wheel). The casino also knows that they are paying 35:1 on a bet (#23) that only happens once every 37 spins. That means that if you play roulette long enough, the house will win 2/37ths (5%) more frequently than the players. That 5% “edge” is enough to keep the gamblers, on average, losing and paying for the electricity to light up the sign outside the casino.
The casino has knowledge of fundamentals (statistics and the gamblers’ subconscious urge to lose) andpatience to wait for their reward. Therefore, the casino takes a long-term view wherein they understand that while it may lose some individual bets at roulette, over time the house will win. For the casino, the game is “fixed” by the fundamentals and therefore not “gambling”.
Relatively speaking, individual gamblers are “speculating” on each new, short-term turn of the roulette wheel but the house is “investing” in the long-term operation of the casino.
• Speculating in today’s commodities markets is virtually identical to gambling in Las Vegas. Just as the roulette wheels are “fixed” by adding “0” and “00” to give the house a 5% advantage, the commodities markets are also “”fixed” by means of 1) low margin requirements; and 2) trading based on paper “commodities” rather thanphysical commodities.
Low margin requirements are justified in part as opening the market to more “investors” (actually, speculators/gamblers). If it costs $1 million to invest in a particular commodity, not many people will enter into that market. However, if margins are reduced so that the initial cost to participate in a particular investment is, say, $1,000, the number of participants can be dramatically increased.
It’s presumed that: 1) low margin requirements allow more people to participate in a market; 2) more participants in the market is supposed to mean more knowledge that will be brought to bear on determining the value of a particular investment; and 3) higher levels of knowledge result in a more accurate determination of current prices for various investments.
But. Low margin requirements also create an opportunity for maximum leverage whereby a relatively small investment (bet) can sometimes generate a spectacular gain—or loss. If you can enter into a particular market with a low margin of, say, $10,000—and if that market goes up just a little, your $10,000 might turn into $1 million, maybe more. Just as the 35:1 possible payouts in roulette attracts gamblers, the 100:1 possible payouts in the commodities markets attract speculators (gamblers) moreso than “investors”.
Conversely, if the commodity market goes down just a little, your relatively small “margin” bet of $10,000 could be wiped out. Low margin requirements create both great opportunity and great risk.
Faced with the inherent opportunity—and danger—inherent in low margin speculations, it’s inevitable that some people would be driven by both greed (for profit) and fear (of loss) to “fix” that market to guarantee that it moved temporarily (“short term”) in a way that would provide extraordinary profits rather than outright losses. Low margins inspire to both greed (for unearned profits) and fear (of complete loss). Low margin requirements thusinspire market manipulation.
For example, if a handful of “heavy hitters” (say, big financial institutions like JP Morgan) combined to act in concert (as was alleged in two lawsuits filed last November against several financial institutions), then it would be entirely possible for those “heavy hitters” to use the leverage provided by low margins to cause temporary, but dramatic and controlled swings in the prices of particular commodities. So long as these heavy hitters know which way the market is going in the short term (and so long as investors can make money on futures by going “long” or “short” on a particular “investment”), it would possible to temporarily cause prices to move up, or down, and make tremendous profits.
By fixing the commodities markets, the heavy hitters come to resemble the “house” in the Las Vegas casinos. Unlike speculators/gamblers, the major financial institutions are not playing to lose. They are rigging the markets to win. In this regard, they become the “house” in the commodities casino. They “invest” long-term in the (fixed) market rather than speculate/gamble on individual, day-to-day investments.
• Paper Silver. In February, there were about 53,000 silver contracts for 5000 oz. each (265 million ounces, total) on the COMEX. At the time, the four COMEX-approved warehouses reportedly held only about 100 million ounces of physical silver. Thus, for every 2.65 ounces of silver “sold” on the COMEX, there was only 1 ounce of physical silver available for actual delivery. I.e., for every ounce of physical silver available for delivery, there were an additional 1.65 ounces of paper silver being traded. Thus, 62% of the “silver” traded on COMEX did not actually exist, but was only “paper” silver (promises to deliver silver that could not possibly be kept because there was no physical silver to back that “paper” silver).
This system of selling non-existent, “paper silver” worked because most silver market participants werespeculators (gamblers) rather than investors. If they were investors, they’d demand to take physical delivery of the silver and hold it for some considerable time. However, the speculators/gamblers didn’t want to take delivery of the physical silver. They were happy to merely take a paper check for paper currency according to however much they’d “won” on their silver commodity market “bet”.
So long as the commodities market was dominated by speculators and didn’t have to actually deliver all of the silver allegedly sold, the alleged sellers could deliver paper checks instead of the physical silver that was promised. So long as the checks were secretly backed by the Federal Reserve (and its ability to “spin” currency out of thin air), no real losses would be incurred by the sellers of “paper silver”.
The net result of selling 1.65 ounces of paper silver in addition to every ounce of physical silver was to increase the apparent supply of silver by 165%. Under the laws of supply and demand, if the supply is increased while demand remains stable, the price will fall. By means of selling paper silver, the commodity market was rigged to suppress the price of physical silver.
This suggests that there are two prices for silver: the speculators’/gamblers’ price for paper silver and the investors’ price for physical silver. The speculators’ price on COMEX gets all the attention. The investors’ price for physical silver is largely unknown or at least unpublicized. But it could be argued that if the actual supply of physical silver on the commodities market was only 40% of the silver that was allegedly being sold, then the true price of physical silver might be double (maybe more) the price for largely paper silver sold on the COMEX.
If so, when the price of predominately paper silver sold among the speculators/gamblers on COMEX falls from $50 to $35, the proper price for physical silver might still be over $70. If so, every investor (those who actually bought and held physical silver) would be crazy to sell their physical silver for paper silver prices. Likewise, those investors whose analysis of long-term fundamentals pointed to even higher prices of silver, should see $35 silver as a virtual giveaway.
• Thanks to manipulation of the gold and silver markets, the prices of precious metals have been artificially suppressed and the apparent value of the dollar has been artificially increased. On the one hand, this manipulation is frustrating to those who’ve speculated (gambled) in gold and silver since the manipulated prices have often been used to rob the speculators.
But for investors—those who study fundamentals, pay full price for silver and gold, take actual delivery of the physical metals and hold them for the long term—market manipulation is an enormous blessing. Speculators are literally giving their silver away for a mere $35 per ounce because its price fell 25% in one week. But theinvestors are buying and holding every physical ounce they can afford because they understand fundamentals, have patience and—because they’re not gamblers—they are willing to invest a sure thing (higher prices for precious metals of the next several years) rather than chase a fast (but risky) buck by betting on what COMEX prices may be this afternoon or tomorrow morning.
• In the end, the truth will out. COMEX manipulators may be able to temporarily defy the laws of supply and demand in order to temporarily create artificial prices for particular commodities among speculators/gamblers. But sooner or later, their manipulations will be exposed.
When that happens, the investors will recognize a new “fundamental” (precious metals are artificially and hugely underpriced on COMEX), swarm in on the speculators’ market and demand to take delivery of underpriced physical products (gold/silver); the prices of gold and silver will rise dramatically; the speculators who’d been happy to take delivery of paper checks rather than physical silver will lament; and those who manipulated the markets so as to exploit the speculators will be bankrupted or even imprisoned by the investors.
Although a few speculators will always win big, most will lose (exactly as most gamblers secretly desire). Ultimately, investors (those who understand fundamentals, buy without margins, take delivery and patiently hold)rule.
If you’re frightened by the recent downturn in gold and silver prices, you’re probably a speculator. If you’re annoyed but not overly concerned, you’re probably an investor.
If you want to win, stop speculating. Stop “betting” on the day-to-day price changes in gold and silver. Look at the fundamentals. Make up your mind as to what those fundamentals mean, and invest (buy) accordingly. Take physical delivery. Hold your investments.
Insofar as today’s silver market is populated by speculators/gamblers betting on margins, they’re prone to panic whenever the price of silver falls. That panic can become contagious as the paper price of silver falls further and faster. But silver investors—the people who don’t buy on margin and actually hold their investments in silver (and gold)—won’t panic. And if they’re smart, they won’t sell their physical silver/gold for the low prices dictated by the paper/marginalized/COMEX/casinos.
Recognize that there are two prices for silver: 1) the highly-publicized price of paper silver on the COMEX; and 2) the almost unknown, free-market, unmanipulated price of physical silver that we seek to discover. Today, the price of paper silver is roughly $35 per “ounce”. But what is the proper, free-market price of real, physical silver coin that you hold in your hand? $70? $80? $200?
The financial system is trying to convince the world that the prices of the paper silver and paper gold as set by speculators/gamblers and manipulators on the COMEX futures market are also the true prices of physical silver and gold held by investors. Insofar as the world believes that the paper price and physical price are identical, the system can deceive the speculators into selling their physical silver to the “system” for the price of paper silver.
Don’t be a speculator. Don’t be deceived. Learn the fundamentals. Don’t sell physical silver/gold for the price of paper silver/gold. Buy all the physical silver/gold you can afford, take delivery, and hold it.
Be a winner. Be an investor.
Written at arm’s length and without the singular “United States” (“this state”) by Alfred Adask
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