A respectable number of Americans hold investments in gold and silver coins in one form or any other. Some hold physical bullion, while others opt for indirect ownership via ETFs or another 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 price is set. The mint certificates, the ETFs, and also the coins in the investor's safe – these – are valued, at the very least in large part, in line with the most recent trade in the nearest delivery month on a futures exchange for example the COMEX. These “spot” costs are the ones scrolling through the bottom of the CNBC screen.
That makes all the futures markets a small tail wagging a much 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 the 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 quantity of shares is fixed. When a trader buys shares in Coca-Cola company, they will be paired with another investor the master of actual shares and desires to sell with the prevailing price. That's easy price discovery.
Not so in the futures market like the COMEX. If an investor buys contracts for gold, they don't be paired with anyone delivering the particular gold. They are associated with someone who would like to sell contracts, whether or not he has any physical gold. These paper contracts are tethered to physical gold inside a bullion bank's vault from the thinnest of threads. Recently the policy ratio – the variety of ounces represented in some recoverable format 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 really late, it could possibly be the bullion bank itself. They might just print up a brand new contract for you. Yes, they can actually do that! And as many because they like. All without placing single additional ounce of actual metal aside to supply.
Gold and silver are viewed precious metals as they are scarce and beautiful. But those features are barely a factor in setting the COMEX “spot” price. In that market, along with 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 a futures contract, the bookie could 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 remain willing to gamble despite all from the recent evidence that the fix is in. Open fascination with silver futures just hit a whole new all-time record, and gold isn't far behind. This despite a barrage of more info news about bankers rigging markets and cheating clients.
Someday we'll have more honest price discovery in metals. It will happen when individuals figure out the overall game and either abandon the rigged casino altogether or refer to 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, stick to physical bullion and understand “spot” prices for which they are.