A respectable variety 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 other instruments. A very small minority speculate through futures markets. But we frequently report on the futures markets – why exactly is?
Because that is where costs are set. The mint certificates, the ETFs, along with the coins within an investor's safe – every one of them – are valued, at the very least in large part, in line with the most recent trade in the nearest delivery month with a futures exchange like the COMEX. These “spot” cost is the ones scrolling through the bottom of your respective CNBC screen.
That makes all the futures markets a tiny tail wagging an extremely larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery never been devised. The price reported on TV has less to do with physical supply and demand fundamentals and more to do with lining the pockets in the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained inside 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 limited. When an angel investor buys shares in Coca-Cola company, they must be paired with another investor the master of actual shares and would like to sell at the prevailing price. That's self-explanatory price discovery.
Not so in a very futures market like the COMEX. If an angel investor buys contracts for gold, they won't be followed by anyone delivering the actual gold. They are paired 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 bullion bank's vault through the thinnest of threads. Recently a policy ratio – the amount of ounces represented in writing 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 a greater portion of late, it might be the bullion bank itself. They might just print up a brand new 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 considered precious metals since they're scarce and delightful. 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 along with their supply here is virtually unlimited. Quite simply, that's a problem.
But it gets worse. As said above, if you bet around the price of gold by either buying or selling a futures contract, the bookie could just be a bullion banker. He's now betting against you by having 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 fascination with silver futures just hit a brand new 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 an overabundance honest price discovery in metals. It will happen when folks figure out the overall game 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 which they are.