A respectable quantity of Americans hold investments in silver and gold in one form or another. Some hold physical bullion, while some opt for indirect ownership via ETFs or other instruments. A very small minority speculate using the futures markets. But we frequently set of the futures markets – why exactly is that?
Because that is certainly where costs are set. The mint certificates, the ETFs, and the coins in a investor's safe – these – are valued, at the very least in large part, depending on the most recent trade in the nearest delivery month over a futures exchange such as the COMEX. These “spot” price is the ones scrolling over the bottom of your respective CNBC screen.
That helps make the futures markets a smaller tail wagging a significantly larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery never been devised. The price reported on TV has less related to physical supply and demand fundamentals and more regarding lining the pockets from the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in the recent post the way the bullion banks fleece futures traders. He contrasted getting a futures contract with something more investors could be more familiar with – getting a stock. The quantity of shares is fixed. When an angel investor buys shares in Coca-Cola company, they will be paired with another investor the master of actual shares and would like to sell at the prevailing price. That's self-explanatory price discovery.
Not so in a very futures market like the COMEX. If an angel investor buys contracts for gold, they don't be paired with anyone delivering your gold. They are followed by someone who wants to sell contracts, no matter whether he has any physical gold. These paper contracts are tethered to physical gold in a very bullion bank's vault by the thinnest of threads. Recently the policy ratio – the variety of ounces represented in some recoverable format contracts relative to the actual stock of registered gold bars – rose above 500 to 1.
The party selling that paper may be website another trader having an existing contract. Or, as has been happening a greater portion of late, it could possibly be the bullion bank itself. They might just print up a brand new contract for you. Yes, they are able to actually do that! And as many while they like. All without placing single additional ounce of actual metal aside to offer.
Gold and silver are considered precious metals because they are scarce and beautiful. But those features are barely an aspect in setting the COMEX “spot” price. In that market, along with other futures exchanges, derivatives are traded instead. They neither glisten nor shine in addition to their supply is virtually unlimited. Quite simply, which is a problem.
But it gets worse. As said above, in the event you bet for the price of gold by either selling a futures contract, the bookie may be a bullion banker. He's now betting against you with the institutional advantage; he completely controls the supply of your respective contract.
It's remarkable so many traders are still willing to gamble despite all of the recent evidence that this fix is. Open desire for silver futures just hit a whole new all-time record, and gold is just not far behind. This despite a barrage of news about bankers rigging markets and cheating clients.
Someday we'll have an overabundance of honest price discovery in metals. It will happen when folks figure out the action and either abandon the rigged casino altogether or require limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals inside the physical metal itself might be a step in that direction. In the meantime, stay with physical bullion and understand “spot” prices for what they are.