The trading of paper derivatives of bullion, such as futures contracts and options, often exceeds the actual supply of physical bullion because these paper instruments can be used to gain exposure to the price movements of precious metals without actually having to buy and hold physical bullion.
For example, a futures contract for gold can be bought or sold to gain exposure to the price movements of gold without having to buy or sell physical gold. Similarly, options contracts can be used to gain the right to buy or sell gold at a certain price without having to buy or sell physical gold.
The trading volume of these paper instruments can therefore be much greater than the actual supply of physical bullion, as investors and traders can use these instruments to speculate on the price movements of precious metals, hedge against potential losses in other investments, or diversify their investment portfolios.
However, it’s worth noting that the trading of paper derivatives of bullion can also contribute to market volatility and price fluctuations, as the trading volume of these instruments can sometimes exceed the actual demand for physical bullion or not reflect the actual demand or supply at all. This can lead to situations where the price of paper gold or silver moves independently of the price of physical bullion, which can create opportunities for traders but may also create risks for investors who are not aware of these market dynamics.
Often when people ask for delivery, they do not get delivery and instead get “settled in cash” as the physical either is not there, is owned by someone else or they do not want to send it. Thus if you don’t possess it, do you really own it?