A respectable number of Americans hold investments in silver and gold in one form or any other. Some hold physical bullion, and some opt for indirect ownership via ETFs and other instruments. A very small minority speculate through the futures markets. But we frequently directory the futures markets – why exactly is always that?
Because that is where prices 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 for example the COMEX. These “spot” costs are the ones scrolling throughout the bottom of the 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 about lining the pockets from the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a very recent post how the bullion banks fleece futures traders. He contrasted investing in a futures contract with something more investors is often more familiar with – purchasing a stock. The amount of shares is fixed. When a venture capitalist buys shares in Coca-Cola company, they should be paired with another investor who owns 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 won't be combined with anyone delivering your gold. They are paired 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 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 at least one.
The party selling that paper could be another trader with the existing contract. Or, as has been happening more of late, it may be the bullion bank itself. They might just print up a whole new contract for you. Yes, they're able to actually do that! And as many since they like. All without placing a single additional ounce of actual metal aside to supply.
Gold and silver are viewed 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 as well as their supply is virtually unlimited. Quite simply, which is a problem.
But it gets worse. As said above, in the event you bet about the price of gold by either selling or buying a futures contract, the bookie could be a bullion banker. He's now betting against you having an institutional advantage; he completely controls the supply of one's contract.
It's remarkable numerous traders remain willing to gamble despite all with the recent evidence how the fix is at. Open fascination with silver futures just hit a fresh 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 convey more honest price discovery in metals. It will happen when individuals figure out the sport and either abandon the rigged casino altogether or insist upon limited here and reasonable coverage ratios. The new Shanghai Gold Exchange which deals within the physical metal itself may be a step in that direction. In the meantime, stay with physical bullion and understand “spot” prices for which they are.