A respectable variety of Americans hold investments in silver and gold coins in one form and other. Some hold physical bullion, although some opt for indirect ownership via ETFs or other instruments. A very small minority speculate via the futures markets. But we frequently set of the futures markets – why exactly is the fact that?
Because that is where price is set. The mint certificates, the ETFs, and also the coins in the investor's safe – them all – are valued, a minimum of in large part, depending on the most recent trade in the nearest delivery month with 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 regarding 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 in the recent post how the bullion banks fleece futures traders. He contrasted purchasing a futures contract with something more investors is often more familiar with – purchasing a stock. The number of shares is fixed. 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 including the COMEX. If a trader 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 with the thinnest of threads. Recently a policy here ratio – the number of ounces represented on paper 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 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 could actually do that! And as many since they like. All without putting a single additional ounce of actual metal aside to provide.
Gold and silver are believed precious metals because they're scarce and exquisite. But those features are barely an issue in setting the COMEX “spot” price. In that market, and also other futures exchanges, derivatives are traded instead. They neither glisten nor shine as well as their supply is virtually unlimited. Quite simply, which is a problem.
But it gets worse. As said above, in case you bet around the price of gold by either selling or buying a futures contract, the bookie could just be a bullion banker. He's now betting against you having an institutional advantage; he completely controls the supply of one's contract.
It's remarkable numerous traders remain willing to gamble despite all in the recent evidence that the fix is at. 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 we figure out the action and either abandon the rigged casino altogether or refer to limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals inside the physical metal itself is often a step in that direction. In the meantime, stay with physical bullion and understand “spot” prices for the purpose they are.