A respectable amount 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 directory the futures markets – why exactly is the fact that?
Because that is certainly 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, depending on the most recent trade in the nearest delivery month over a futures exchange such as the COMEX. These “spot” costs are the ones scrolling through the bottom of your respective CNBC screen.
That makes the futures markets a small tail wagging a much larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has not been devised. The price reported on TV has less to do with 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 in a recent post how a bullion banks fleece futures traders. He contrasted buying a futures contract with something more investors could be more familiar with – getting a stock. The quantity of shares is fixed. When an investor buys shares in Coca-Cola company, they should be paired with another investor who owns actual shares and really wants to sell with the prevailing price. That's straight forward price discovery.
Not so inside a futures market for example the COMEX. If an investor buys contracts for gold, they will not be followed by anyone delivering the actual gold. They are combined with someone who desires 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 protection ratio – the amount of ounces represented on paper contracts relative to the particular stock of registered gold bars – rose above 500 to at least one.
The party selling that paper could be another trader by having an existing contract. Or, as has been happening much more of late, it could be the bullion bank itself. They might just print up a fresh contract for you. Yes, they're able to actually do that! And as many as they like. All without placing single additional ounce of actual metal aside to offer.
Gold and silver are thought precious metals because they're 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 in addition to their supply is virtually unlimited. Quite simply, which is a problem.
But it gets worse. As said above, in case 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 countless traders are nevertheless willing to gamble despite all in the recent evidence that this fix is. Open desire for silver futures just hit a fresh 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 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 and reasonable coverage ratios. check here The new Shanghai Gold Exchange which deals in the physical metal itself may be a step in that direction. In the meantime, stick with physical bullion and understand “spot” prices for the purpose they are.