A respectable number of Americans hold investments in gold and silver in one form or another. Some hold physical bullion, and some opt for indirect ownership via ETFs or any other instruments. A very small minority speculate via 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 – all of them – are valued, at the very least in large part, in line with the most recent trade inside nearest delivery month on the futures exchange including the COMEX. These “spot” prices are the ones scrolling through the bottom of the CNBC screen.
That makes the futures markets a small 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 regarding physical supply and demand fundamentals and more related to lining the pockets with the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained inside a recent post how the bullion banks fleece futures traders. He contrasted investing in a futures contract with something more investors will be more familiar with – purchasing a stock. The variety of shares is fixed. When a venture capitalist buys shares in Coca-Cola company, they must be paired with another investor web-sites actual shares and wants to sell at the prevailing price. That's simple price discovery.
Not so in the futures market such as the COMEX. If a venture capitalist buys contracts for gold, they won't be associated with anyone delivering the actual gold. They are associated with someone who really wants to sell contracts, no matter whether he has any physical gold. These paper contracts are tethered to physical gold in a bullion bank's vault with the thinnest of threads. Recently the coverage ratio – the quantity of ounces represented in writing contracts relative to the specific stock of registered gold bars – rose above 500 to 1.
The party selling that paper may be another trader having an existing contract. Or, as has been happening a greater portion of late, it might be the bullion bank itself. They might just print up a fresh contract for you. Yes, they are able to actually do that! And as many since they like. All without putting a single additional ounce of actual metal aside to provide.
Gold and silver are thought precious metals because they are scarce and delightful. But those features are barely a factor in setting the COMEX “spot” price. In that market, and other futures exchanges, derivatives are traded instead. They neither glisten nor shine along with their supply is virtually unlimited. Quite simply, that's a problem.
But it gets worse. As said above, if you bet about the price of gold by either selling a futures contract, the bookie could just be a bullion banker. He's now betting against you with the institutional advantage; he completely controls the supply of the contract.
It's remarkable numerous traders are nevertheless willing to gamble despite all from the recent evidence that this fix is within. Open desire for silver futures just hit a whole new all-time record, and gold isn't 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 click here will happen when individuals figure out the action and either abandon the rigged casino altogether or insist on limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals within the physical metal itself might be a step in that direction. In the meantime, keep with physical bullion and understand “spot” prices for what they are.