Tuesday, April 13, 2010

Off Track Betting

40 years ago I had a summer job working for Delco as an Engineer in training. It impressed me that there was this one guy that would get off early and go to the race track. Naturally everyone would give him a couple of dollars to bet on a horse or two. On one particular race day several of the requested bets won big. The guy didn’t come back to work for a while. It seems he had been pocketing the money and betting on his own tips. Two workers had asked for a Trifecta ticket of say 711. Those 3 horses won and the payout was astronomical; but no tickets for that combination were sold at the race track. So it got added to the payout for the next day.

This might seem unrelated to the stock market, but look at options. 90% of all options expire worthless. So a big brokerage, could take the orders and not place them, and cover them internally. And on expiration the brokerage gets the money. If there is a small winner, pay the guy off.

If you were to change your mutual fund holdings, and move from investment x to investment y, the question comes up; does the mutual fund go out and change what they are doing just because you move a few things around? Probably not.

Take gold and silver bullion storage facilities. It is not unreasonable to suspect that these companies only keep less than 10% of the demanded holdings in actual metal. It’s rather tempting to hold the rest as some sort of certificate, and invest the proceeds in selling puts and calls on the “bullion in storage?” Remember 90% of options expire worthless.----everyone is not going to ask for their gold at once. Hmmmm--- What happens if they do?

The amount of physical gold and silver in the world to date is a measured known amount. Just like everything else, as long as the system has no real stress applied to it, things function quite well. If everyone decided to take possession of their gold or silver, it just might not be there. It has been suggested that only one ounce of gold for every 100 under contract could be delivered, if demanded. The neat thing about gold and silver, is that the FDIC/Treasury can’t print either one.

The people we trust are not doing what we ask because they can buy an option to satisfy our requirements. The trouble is, these option tools may prove to be very inadequate in a panic. As Buffett suggests, we will see who was swimming nude, the irritating thing is, it could be us.


Anonymous said...

Best to have your gold bars, gold and silver coins in your possession (safe, secret hiding place and never tell anyone about it). Not in a bank safe deposit box either (which could be opened or confiscated by the govmt). These days, I don't trust anyone. So many shell games, fraud, stretching of rules and regulations, greed, etc. today.

Anonymous said...

If 'The Georgia Guidestones' is fulfilled and 9/10s of the population goes away, your silver and gold will be in excess. You need to balance your portfolio with something that increases in value as the population decreases.

Jim in San Marcos said...

Hi Anon 8:48

You had better make a map for your heirs. If you have a stroke or die suddenly, it could be gone forever if hidden well enough.

AIM said...

"Ability to earn" is senior to and more vital that gold and silver. If you can ease people's pain, solve their problems, etc. you will be paid in whatever the existing valid currency is.

Georgia Guidestones? You've got to be kidding me.


Anonymous said...

Some people are solving the problem by leaving. Money and brains will continue to leave the US on an expanding level. Read this...


Jim in San Marcos said...

Hi Anon 7:24

I don't think that 9/10ths of the worlds population will agree to leave this world before their time.

Acquiring gold and silver is a little like sex. There is no reason to stop. If you get tired of it you can always play golf (or have I got that backwards).

Jim in San Marcos said...


Thanks for the support. Its amazing how one comment can hijack the thoughts behind the original post.

Take care

Jim in San Marcos said...

Hi Anon 9:08

Your link is somewhat suspect. 96% of the respondents were more likely to move out of the US?

This is the only country in the world that will never run out of toilet paper, tampons and kitchen cleaners. Your wife is not going to move.

goodrich4bk said...

As a long time gold and silver investor, I agree that one should not use leverage, ETFs or non-custodial accounts when buying precious metals unless the intent is to trade. I buy it to use as a long term store of wealth, but normally no more than 10% of that wealth. Other than physical, my only holding is CEF because I trust that they hold their bullion without leasing it. That trust comes from their simple prospectus, their reported ounces and the length of time they have been in business. It's no guarantee that somebody there won't "Madoff" with my money, but it's a lot more certain than GLD or other ETFs that specifically state they can use futures in lieu of physical.

Anonymous said...

Yes, sorry, the guidestone's comment was off-topic. It is not that I believe those guidestones will happen, I wanted to throw out an alternative view to this 'gold and silver' time we are in.
Back to the point, yes, it is not worth trusting anyone with what you can have in your posession instead.

Anonymous said...

"Your link is somewhat suspect."

Agreed, look at the source for the respondents. It is kind of like asking people at a dog convention if they would ever consider owning a dog.

Jim in San Marcos said...

Hi Jeffrey

Here is a link from last Friday about one bullion bank.

I looked into two in the U.S. that were specializing in 401k retirement plans. One sent me a promotional package that had to of cost $20 just to print. My advise is to take possession. There is no reason to store your gold in someone else's house.

When I acquired my gold 20 years ago, I would order mint Canadian Maple Leafs 10 at a time. They come in a nice coin container and they are all proof coins, not a scratch on them.

Gold was just one example of what a storage facility was doing. When your IRA banker invests in Greek bonds and buys insurance in case Greece defaults; you know the Insurance company is either in Russia or Nigeria. The insurance is more suspect than the bonds.

It is the miss calculation of risk by the people we choose to invest with that is the real problem. It's our money not theirs.

My advise, keep your gold and silver close to home, where you can get to it quick if need be, not on some shelf in Alabama.

Thank you for your comments.

Jim in San Marcos said...

Hi Anon 1:01

I was just thinking out loud, no harm done.

What you proposed has happened in the past with the Great Plagues that swept Europe during the Dark Ages (when I was young).

So many people died and those that survived inherited all of this wealth. It created a lot of inflation.

Many times stuff is off topic and it leads to a new blog post. Chime in if you want. There aren't 200 comments to wade through on each post, so be yourself.

Thank you for your comments and take care.

Jim in San Marcos said...

Hi Anon 9:08/1:16

Your comment "Money and brains will continue to leave the US on an expanding level" Has a lot of truth to it. I know of one person submitting resumes in Red China.

You have to admit that 96% is a pretty high percentage for people moving out of the country. I guess I am guilty of not reading each word. "International Living" is as you suggest, akin to your example of a dog convention.

My dog says hi (woof)

rob in ns said...


you raise a good point. I recently stopped contributing to mutual fund RRSP (401k) that I thought was getting a little risky considering the market. The advisor I dealt with tried to convince me otherwise but I thought for time being I would set money aside in safer GIC's. I wonder even now if they are still taking my money and betting with it in stock market. I say that because the market right now is just a glorified casino. Your post is a great analogy for current market conditions. I suppose the only way I'll ever find out what is really going on is if there is a bank run and I am one of the unlucky ones that gets there too late to get my money. Until the money runs out they can sell us whatever story they want.

Jim in San Marcos said...

Hi Rob

My wife has stopped contributing to her retirement plan at work and I have decided to keep with mine at a FDIC insured bank. I'm old enough to withdraw it, so it is more for tax reasons, which are not a very good excuse.

I don't think that the banks are in bad shape yet. The majority of their investments weren't in residential real estate but rather commercial real estate. I believe that the banks sold most of the residential stuff to private investors (like your 401k retirement plan).

The banks are probably quite vulnerable in construction loans of any sort. These loans are usually from 1 to 5 years with interest rates that would make you cry if you missed one payment.

We are beginning to see a complete collapse of the residential real estate market, but the banks are just managing these properties for the owners of the notes.

I don't thing that with electronic banking, you can run out of specie. What I would suspect is that eggs could jump to $100 a dozen. You could run out of money trying to buy groceries.

What we are looking at here is people are getting unemployment, health care, and Social Security without having to produce anything. You can print money, but you can't print bacon and eggs.

I really can't figure out the stock market; unemployment, foreclosures, bank failures and the market goes up. I guess it is the only party in town and the government seems to find ways to "invest" in it. Common sense suggests that this is not going to end well.

Anonymous said...

I can remeber back in 1984 a friend of mine used to buy gold bars and coins all the time. I bought fifths of Jack Daniels (I was young and in the Navy). Lost contact with the guy back in '87 but I have often wondered what he ended up doing with all the gold he had. What is better to hold...coin or bars? It's not like you will use either at the local grocery. Is it just a matter of preference? Is one easier to uload than the other?

Jim in San Marcos said...

Hi Anon 10:35

I like the gold Canadian Maple Leafs. They are shinny and look like gold. The American Eagles seem to tarnish and lack a real gold look to them.

I'd need a very big increase in pay to really want to try gold bars. Credit Suisse makes a neat 1 gram gold bar. Remember there are 32 grams in a troy ounce not 28. These are a tad bit on the small side. I have on a few occasions bought Chinese 1/4 oz Pandas, and their value increases faster than most other coins. They make great gifts.

I think the coins would be easier to spend, gold bars might not be as fungable, most people have never seen one.