BORROWING OR SHORTING PRECIOUS METALS CAN CREATE UNLIMITED RISK
A. If one borrows or shorts precious metals, such activity can carry unlimited risk. The risks in borrowing or shorting silver, platinum and palladium are usually greater than the risks in borrowing or shorting gold as there is less liquidity in the silver, platinum and palladium markets.
B. The prices of precious metals can fluctuate in wide ranges over relatively short periods of time, and from time to time have done so, and could double or more in an instant under certain circumstances.
C. POTENTIAL UP MARKET RISK
For example, if someone had borrowed 1,000 ounces of gold from A-Mark, basis $300/ounce, giving A-Mark 110% in good funds, or a Letter of Credit as Collateral ($330,000), and, while holding the borrowed gold outstanding, gold closed in the U.S. at $300.00 and then opened a few hours later in Australia at $500, based on that $200/ounce increase, the deficit on the 1,000-ounce short position would be $170,000.
A-Mark, per the terms of its Agreements with its customers, would have the option to “buy in” the position, basis the $500/ounce price, to protect from the possibility that gold could continue to increase in price, which would increase the deficit.
After the above-described liquidation of the position (say at $500/ounce), A-Mark would apply the $330,000 in good funds deposit or L/C against the price of gold plus the deficit. The borrower or shorter would then still owe A-Mark the deficit of $170,000 ($500,000 less the $330,000 of collateral) on the closeout of the 1,000-oz. position.
If at the time of the close out of the above 1,000-ounce position, the party had the gold physically in his possession and unsold, then that inventory would have increased in value from $300,000 to $500,000 and the deficit owed A-Mark would be covered by the increase in the value of the 1,000 ounces of inventory.
However, if the borrower had sold the inventory and hadn’t yet purchased it back or re-loaned it to someone who couldn’t or wouldn’t return it, they could immediately owe the $170,000.