A respectable quantity of Americans hold investments in gold and silver coins 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 via the futures markets. But we frequently directory the futures markets – why exactly is always that?
Because which is where price is set. The mint certificates, the ETFs, as well as the coins in the investor's safe – every one of them – are valued, a minimum of in large part, based on the most recent trade in the nearest delivery month over a futures exchange like the COMEX. These “spot” cost is the ones scrolling over the bottom of your respective CNBC screen.
That helps make the futures markets a smaller tail wagging a significantly larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery never been devised. The price reported on TV has less related to physical supply and demand fundamentals and more about lining the pockets from 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 investing in a futures contract with something more investors is often more familiar with – purchasing a stock. The amount of shares is limited. When an angel investor buys shares in Coca-Cola company, they should be paired with another investor the master of actual shares and wants to sell on the prevailing price. That's self-explanatory price discovery.
Not so in a futures market like the COMEX. If an investor buys contracts for gold, they will not be followed by 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 in writing contracts relative to your stock of registered gold bars – rose above 500 one.
The party selling that paper could possibly be another trader with an existing contract. Or, as has been happening much more of late, it could be the bullion bank itself. They might just print up a whole new contract for you. Yes, they're able to actually do that! And as many since they like. All without locating a single additional ounce of actual metal aside to provide.
Gold and silver are viewed precious metals as they are scarce and delightful. 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, in the event you bet for the price of gold by either 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 your contract.
It's remarkable so many traders are still willing website to gamble despite all of the recent evidence that this fix is. Open desire for silver futures just hit a whole 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 of honest price discovery in metals. It will happen when we 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 within the physical metal itself can be a step in that direction. In the meantime, stick with physical bullion and understand “spot” prices for what they are.