A respectable quantity of Americans hold investments in silver and gold 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 using the futures markets. But we frequently directory the futures markets – why exactly is the fact that?
Because that is where price is set. The mint certificates, the ETFs, and also the coins in an investor's safe – them all – are valued, a minimum of in large part, using the most recent trade within the nearest delivery month with a futures exchange including the COMEX. These “spot” prices are the ones scrolling throughout the bottom of your CNBC screen.
That helps to make the futures markets a tiny tail wagging a lot larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has never been devised. The price reported on TV has less regarding physical supply and demand fundamentals and more to do with lining the pockets with the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a 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 number of shares is fixed. When an investor buys shares in Coca-Cola company, they ought to be paired with another investor web-sites actual shares and wants to sell in the prevailing price. That's simple price discovery.
Not so in a futures market like the COMEX. If a venture capitalist buys contracts for gold, they won't be combined with anyone delivering your gold. They are followed by someone who wants to sell contracts, no matter whether he has any physical gold. These more info 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 specific stock of registered gold bars – rose above 500 to 1.
The party selling that paper may be another trader by 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 a single additional ounce of actual metal aside to supply.
Gold and silver are believed precious metals as they are scarce and exquisite. But those features are barely an aspect 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, this is a problem.
But it gets worse. As said above, should you bet on the price of gold by either buying or selling a futures contract, the bookie might just be a bullion banker. He's now betting against you with an institutional advantage; he completely controls the supply of the contract.
It's remarkable so many traders are still willing to gamble despite all of the recent evidence that the fix is in. Open interest in silver futures just hit a new all-time record, and gold is 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.