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Thread: Could derivatives bubble burst happen?

  1. #1 Could derivatives bubble burst happen? 
    Forum Professor
    Join Date
    Apr 2009
    Currently total ``price`` of all derivatives in the World are evaluated somewhere
    between 600 trillions and 1.4 quadrillions of US $.
    Some people predict that one day it may burst like a bubble.
    Could this really happen?And if yes,what consequences will be?

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  3. #2  
    Time Lord
    Join Date
    Mar 2007
    If it burst, then the level of uncertainty for investors would get even bigger than it is already. They lose the ability to hedge their bets. A less popular, but often believed, theory of economics is that recessions are driven by "fear" or "uncertainty about the future". It's half true. When you can't be sure what will sell in 6 months time, then you can't set up a business and hire workers to produce it without rolling the dice on whether all that effort will have been a total waste.

    If the uncertainty is great enough that the probability of being right is small, say 33%, then for every 3 items produced, only one is selling. That's a lot of repetition of effort and wasted production. So it should be clear that no economy can bear a level of uncertainty that gets beyond a certain point.

    Some clocks are only right twice a day, but they are still right when they are right.
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  4. #3  
    Forum Professor
    Join Date
    Dec 2011
    Quote Originally Posted by Stanley514 View Post
    Currently total ``price`` of all derivatives in the World are evaluated somewhere
    between 600 trillions and 1.4 quadrillions of US $.
    Some people predict that one day it may burst like a bubble.
    Could this really happen?And if yes,what consequences will be?
    Commodity derivatives, these "contracts" and these markets, have very little to do with, and are often completely separate from, the commodities they are said to represent or back. Commodity derivatives are not tied to the supply and demand of commodities. They are fake markets.

    I mentioned silver in another post and so I will use Silver again to explain how it works. Global silver production from mines every year is about 600 to 750 million ounces a year. Total consumption of silver each year is about 850 to 900 million ounces. The difference is made up by governments releasing their stock piles (between 15 and 50 million ounces a year... The US now has 0 ounces and has to purchase silver on the open market) and common people giving up about 200 million ounces a year (which cannot be counted on or even sustained).

    Industrial applications use about 500 million ounces a year.
    Photography uses about 50 million ounces a year.
    Jewelry uses about 160 million ounces a year.
    Silverware uses about 50 million ounces a year.
    Coins and medals use about 100-150 million ounces a year.

    On top of this there are private bullion investors who purchase millions and millions of ounces of silver every year and store it away.

    There is just no physical silver left (or very little) but, silver derivatives (futures, papers, contracts) are bought, sold and traded by the billions (in ounces) every week. These futures, papers and contracts are not based on silver, and they do not have to deliver Silver to anyone in these paper markets. It is a fake market.

    I am just not sure how someone or something can burst a fake market. Investors who play in the paper commodity markets know they are fake and they prefer it that way. The goal of the game is to make paper money and fake paper commodity markets allow them to make a lot of it... Well, to the tune of trillions and trillions of dollars.
    Last edited by gonzales56; April 4th, 2012 at 11:25 AM.
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  5. #4  
    Forum Professor
    Join Date
    Dec 2011
    If it is OK, I just want to explain how commodity futures (derivatives) work.


    1. No one selling commodities in the futures markets (derivatives market) needs to have a flake, drop or pinch of the commodity they are selling. In fact, most of these sellers do not have anything.

    2. Anyone can sell a futures contract in commodities. All they need to do is put up a little bit of money, a very small fraction (5-10%) of what real commodities costs, in order to sell a full and fake futures commodity contract (banks are the biggest sellers and the money is either given to them, backed for them or insured by Governments who have, or have access to, the ability to create/print their own money).

    Example - (we will stick with silver)
    Physical Silver is $35.00 oz
    A Futures contract (derivatives) in the silver market is 5,000 oz per a contract
    5,000 x 35.00 = $175,000 USD <----------- This is the Value of each futures contract being sold
    However, $8,750-17,500 is all someone needs to put up in-order to sell a 5,000 oz silver paper contract

    3. Sellers must pay the remaining balance when the contract expires (if prices go up) or they get paid money if prices go down. A seller can also close out their own sell contract by purchasing a buy contract.

    4. Banks, for themselves and their "clients" (mainly other banks and government entities - They love to wash each others hands clean and make it harder to track), will often put in sell orders for thousands of individual contracts, let those sell orders hit the computer and then cancel them without paying a dime. However, the minute these sell orders hit the computer the price drops, stop loss orders are then triggered and more selling occurs, many others get scared and start selling which drops the price even more and then the bank/s buy up the contracts everyone is selling at the reduced rate they created/triggered in order to close out their own sell orders/contracts and to manipulate prices down for governments.

    5. Governments tend not to care about making money, especially for governments that can print, or can have currency printed. Their goal is to simply manipulate prices as much as they can in a way that they deem or think is beneficial to them regardless of the amount of money they have to print or need printed in order to manipulate markets.
    Last edited by gonzales56; April 10th, 2012 at 05:33 AM.
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