@Ophir - can you please explain this to a newbie like me? I'm confused
The normal understanding is that that if you invest in a gold stock ("long"), and sell part or all - which I hope people have done, before losing all paper profits as gold loses all gains of the YTD - then you have scaled off (former case) and are still long, or totally squared your long position (latter case), now holding no position.
Most Austr. brokers don't permit shorting of common stocks, i.e. selling borrowed stock, in a margin account, on which you pay interest for the borrowing - but some must (mine doesn't, bummer). Don't ask from whom and how they are borrowed. I know, but it's back office stuff, and with a good broker should be seamless to Customer. I'm sure, however, it's not seamless in Australia. I'm sure it's a hassle. Most things are more difficult here than they need to be.
In CME Futures, CFD's etc, then there is no concept of shorting.....you BUY or you SELL a Contract...there is no ownership involved, no borrowing. There are only contracts, for a specific amount of the instrument traded. There is no SELL SHORT button.
If I believed, say, the EURO would fall against the USD last weekend, I would have SOLD EURUSD currency pair. Colloquially, that guy would tell his friend he "just shorted Fiber" (EURUSD slang), but note the difference with stocks. Very different.
If I BUY/ SELL gold (GC) on the CME - which I have done decades ago, I put USD 6,000 down for one contract up front ("Performance Bond" - a good faith deposit - now called margin, an overloaded term), or many more contracts if flush with cash, like Ophir, martis others - by the way CME just hiked the margin very recently - and I have control of exactly 100 Ozs of gold, of a precise quality, to be delivered or acquired at a specific place, time etc....in the future. If I SOLD gold, and it fell from $1,175 to $1,160, I'd make $15 * 100 = 1,500, or 25% on a 1.2% price move. If the Contract cost less (as it did until recently), and the instrument cost more (say, the recent high of $1,375) the leverage would be higher. Similar scenarios for oil, orange juice, S&P 500 Futures , whatever.
Every Aussie who has a mortgage understands this leverage (here called gearing).
This is sometimes called "paper gold". This drives the gold market.
Originally introduced in the US agricultural Mid-West 19thC (hence the primacy of Chicago in this market) as a hedging practice, for real producers and buyers of, say wheat, whatever, in case Shiite happens (no rain, pests etc...), speculators came in, with no interest in taking delivery of x thousand bushels of wheat (or vice versa), but realized money could be made on price movement and leverage.
These participants typically only hold for a short period from hours to days to weeks etc.
The "COT" Report reports on the Open Interest of the various categories of Market Participants.
CFD's are a poor man's CME Futures contract, banned in many countries incl USA under post GFC Dodd-Frank Act, but offer smaller entries, diverse position sizes and higher leverage, but no trader protection if the provider goes under. Go to any financial website, and you'll be flooded with ads for CFD;s.
Finally, there are Bear ETF's, which rise in price as an instrument falls (counter-intuitive to the normal short, when as price falls, you profit), they may or may not be leveraged. DUST (popular on this Forum) is such an example, traded on BATS Exchange. Once again, this is not a direct short, but a direct BUY of an ETF. The Fund Manager will himself probably be SELLing gold Futures Contracts on CME, but the Customer is less leveraged than were he doing the same on CME...DUST offers about 3:1 leverage (it's in the instrument name ".. BEAR 3X shares")....to protect the Customer from himself, I imagine.
BBOZ is a local ETF that rises as the ASX / 200 falls, and vice versa, leveraged 2-3 to 1 (only), for the same reason....paternalism.
P.S It should be remembered that a short position in any instrument is closed, squared off, whatever you want to call it, be it at profit or loss by BUYing. So, shorts are a second source of buyers, in addition to the more commonly understood longs. Hence after a price fall, we might see a rally as shorts buy to close out and take profits. This is often confused with a a "reversal" (Hah!)....it's called short covering. It's not a rampaging of the bulls. Longs have to be careful not to confuse this covering (buying) with a bona
fried fide rally, be attentive...they need to actually think, a bit.
If in a losing position, and price rises (or is "engineered" up to meet MM requirements) , they'll again have to buy. This can also be manipulated by a bear BUY stop raid (as common as it is with sweeping the bull SELL stops, at lows), or more simply, it can happen on "good news", and hence generate a "short squeeze", as they scramble to cover. Price rises even faster than it would otherwise,
Also, shorts are often despised (I don't know why - especially in a case of systemic market collapse, what's an Investor to do? Bend over and take it? Yes.). Read what I just wrote above. A position is opened with a sell. A long closes his position with a sell. They are both sells. They are identical. Just as is the buy to cover above..a buy is a buy.
So
@Ophir This is how it works, in my limited understanding (you'll recall I worked in, and was once an IT Manager of one or more Wall St. brokerages (Merrill Lynch, 1985-86), and worked in many Major Commercial and Investment banks).
To clear up the present confusion, in which of these camp(s) do you reside (if any), when it comes to your Investing / Trading?
In case anyone asks me, I am not permitted to short stocks, period ( the Law, for Super, and CommSec Policy even for regular Accounts - amazing).
I might also add that I think stocks s**k, but that's an entirely different discussion, that doesn't belong here.
Thanks.
