A respectable quantity of Americans hold investments in gold and silver coins in one form and other. Some hold physical bullion, and some opt for indirect ownership via ETFs and other instruments. A very small minority speculate through futures markets. But we frequently set of the futures markets – why exactly is that?
Because that is certainly 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 inside nearest delivery month over a futures exchange such as the COMEX. These “spot” prices are the ones scrolling through the bottom of your respective CNBC screen.
That helps to make the futures markets a little 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 to do with 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 a recent post how a bullion banks fleece futures traders. He contrasted purchasing a futures contract with something more investors may well be more familiar with – purchasing a stock. The amount of shares is restricted. When an investor buys shares in Coca-Cola company, they should be paired with another investor the master of actual shares and would like to sell on the prevailing price. That's straight forward price discovery.
Not so in the futures market such as the COMEX. If a trader buys contracts for gold, they don't be combined with anyone delivering your gold. They are followed by someone who really wants to sell contracts, no matter if 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 the protection ratio – the amount of ounces represented on paper contracts relative to your stock of registered gold bars – rose above 500 one.
The party selling that paper could possibly be another trader by having an existing contract. Or, as has been happening really late, it could possibly be the bullion bank itself. They might just print up a new contract for you. Yes, they can actually do that! And as many because they like. All without placing a single additional ounce of actual metal aside to supply.
Gold and silver are believed precious metals as they are scarce and exquisite. But those features are barely a 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 as well as their supply is virtually unlimited. Quite simply, this is a problem.
But it gets worse. As said above, in the event you bet about the price of gold by either selling or buying a futures contract, the bookie could 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 countless traders continue to be willing to gamble despite all with the recent evidence how the fix is within. Open fascination with silver futures just hit a new all-time record, and gold is not far behind. This despite a barrage of news about bankers rigging markets and cheating clients.
Someday we'll have more honest price discovery in metals. It will happen when people more info figure out the overall game 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 might be a step in that direction. In the meantime, stay with physical bullion and understand “spot” prices for which they are.