A respectable number 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 the coins in the investor's safe – these – are valued, at the very least in large part, in line with the most recent trade in the nearest delivery month over a 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 an extremely larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery hasn't been devised. The price reported on TV has less about 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 getting a futures contract with something more investors could be more familiar with – getting a stock. The number of shares is restricted. When a venture capitalist buys shares in Coca-Cola company, they must be paired with another investor online resources actual shares and would like to sell at the prevailing price. That's self-explanatory price discovery.
Not so in a very futures market such as the COMEX. If a trader buys contracts for gold, they don't be paired with anyone delivering the particular gold. They are associated with someone who would like to sell contracts, regardless of whether he has any physical gold. These paper contracts are tethered to physical gold inside a bullion bank's vault from the thinnest of threads. Recently a policy ratio – the number of ounces represented on paper contracts relative to the particular stock of registered gold bars – rose above 500 to a single.
The party selling that paper could be another trader with the existing contract. Or, as has been happening more 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 supply.
Gold and silver are viewed 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 also other futures exchanges, derivatives are traded instead. They neither glisten nor shine and their supply is virtually unlimited. Quite simply, that's a problem.
But it gets worse. As said above, if 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 website the supply of your contract.
It's remarkable so many traders are nevertheless willing to gamble despite all in the recent evidence that this fix is. Open fascination with silver futures just hit a fresh all-time record, and gold just isn't 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 individuals figure out the sport and either abandon the rigged casino altogether or insist on limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals in the physical metal itself is often a step in that direction. In the meantime, keep with physical bullion and understand “spot” prices for which they are.