A respectable number 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 using the futures markets. But we frequently report on the futures markets – why exactly is the fact that?
Because which is where cost is set. The mint certificates, the ETFs, and also the coins in the investor's safe – these – are valued, a minimum of in large part, based on the most recent trade within the nearest delivery month on the futures exchange for example the COMEX. These “spot” prices are the ones scrolling across the bottom of the CNBC screen.
That helps make the futures markets a little tail wagging a significantly larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has not been devised. The price reported on TV has less regarding physical supply and demand fundamentals and more about lining the pockets in 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 purchasing a futures contract with something more investors could be more familiar with – purchasing a stock. The number of shares is limited. When an investor buys shares in Coca-Cola company, they will be paired with another investor online resources actual shares and really wants to sell at the prevailing price. That's simple price discovery.
Not so in the futures market like the COMEX. If a venture capitalist buys contracts for gold, they will not be associated with anyone delivering the particular gold. They are associated with someone who would like to sell contracts, no matter if he has any physical gold. These paper contracts are tethered to physical gold inside a bullion bank's vault by the thinnest of threads. Recently the protection ratio – the variety of ounces represented in writing contracts relative to the actual stock of registered gold bars – rose above 500 to a single.
The party selling that paper might be another trader having an existing contract. Or, as has been happening more of late, it could be the bullion bank itself. They might just print up a new contract for you. Yes, they are able to actually do that! And as many since they like. All without putting 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 one factor in setting the COMEX “spot” price. In that market, and also other futures exchanges, derivatives are traded instead. They neither glisten nor shine and their supply is here virtually unlimited. Quite simply, what a problem.
But it gets worse. As said above, if you bet about the price of gold by either selling or buying a futures contract, the bookie may be a bullion banker. He's now betting against you with an institutional advantage; he completely controls the supply of your contract.
It's remarkable a lot of traders continue to be willing to gamble despite all from the recent evidence the fix is within. Open curiosity about 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 people figure out the game and either abandon the rigged casino altogether or insist upon limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals inside 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.