A respectable variety of Americans hold investments in gold and silver in one form or any other. Some hold physical bullion, while others opt for indirect ownership via ETFs or any 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's where cost is set. The mint certificates, the ETFs, and also the coins in an investor's safe – every one of them – are valued, no less than in large part, in line with the most recent trade inside nearest delivery month on the futures exchange such as the COMEX. These “spot” price is the ones scrolling across the bottom of one's 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 in the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a recent post what sort of bullion banks fleece futures traders. He contrasted purchasing a futures contract with something more investors is often more familiar with – buying a stock. The variety of shares is fixed. When a venture capitalist buys shares in Coca-Cola company, they ought to be paired with another investor who owns actual shares and desires to sell with the prevailing price. That's easy price discovery.
Not so in the 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 if he has any physical gold. These paper contracts are tethered to physical gold in a bullion bank's vault through the thinnest of threads. Recently the protection ratio – the amount 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 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 while they like. All without placing single additional ounce of actual metal aside to offer.
Gold and silver are viewed precious metals because they are scarce and beautiful. But those features are barely one factor in setting the COMEX “spot” price. In that market, as well as other futures exchanges, derivatives are traded instead. They neither glisten nor shine as well as their supply is virtually unlimited. check here 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 your respective 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 brand 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 convey more honest price discovery in metals. It will happen when individuals figure out the game and either abandon the rigged casino altogether or insist on limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals inside physical metal itself can be a step in that direction. In the meantime, stay with physical bullion and understand “spot” prices for which they are.