help with warrants, page-3

Adding to Blue Griffin's advice..

There have been significant developments in the Gold and Silver markets recently.

1. Every paper gold certificate [or in this case - warrant] is supposed to backed equal amount of the physical metal, which is set aside in a depository and quarantined from any further transaction.

2. Various commentators have raised concerns that instead of this process, bullion banks & large gold trading houses are trading along similar lines as "fractional reserve banking."

see this link for an video explaining Fractional Reserve Banking - http://vodpod.com/watch/2459391-magic-money-fractional-reserve-banking

In this system, the bank holds for e.g. 10% cash reserves/gold equivalent and then lends out 9 times that amount, and they then charge interest on this "virtual" money.

3. So in the Gold market, it is claimed that if a bullion dealer has for e.g. $1,000 in gold, they will then issue warrants or "gold certificates" for a multiple of that amount of gold.

4. This means that for every 1 oz of physical gold held, there is potentially anywhere from 3 - 8 similar certificates or "claims" on that same 1 oz of gold.

5. Up until now, trading happens for example, when the underlying price of the physical commodity goes up - then people holding "long" paper derivatives onsell this paper/certificate to someone else, thus making a profit on the transaction.

6. BUT - this system only works when the paper is onsold - if the holder of the certificate wants to take delivery of the underlying physical commodity -- IMAGINE what would happen if these 3 - 8 people turn up with paper certifying them as the "owners" of this 1 oz of gold.

7. This is when pandemonium sets in.....

8. Best advice is to be wary of any warrants/certificates/promissary notes, because it ends up like musical chairs - some poor bunnies lose out.

Here are further sources that explain current concerns.

http://truthingold.blogspot.com/2010/05/physical-bullion-vs-paper-get-your.html

http://fofoa.blogspot.com/2010/03/1001.html

holding gold shares with POG over US$1,240 per oz...