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 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 costs are set. The mint certificates, the ETFs, and the coins in a investor's safe – these – are valued, at the very least in large part, depending on 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 a much larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has not been devised. The price reported on TV has less to do with physical supply and demand fundamentals and more regarding lining the pockets of 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 – purchasing a stock. The quantity of shares is restricted. When a trader buys shares in Coca-Cola company, they should be paired with another investor who owns actual shares and desires to sell with the prevailing price. That's easy price discovery.
Not so in the 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 followed by someone who wants to sell contracts, whether or not he has any physical gold. These paper contracts are tethered to physical gold in the bullion bank's vault with the thinnest of threads. Recently the coverage ratio – the variety of ounces represented in some recoverable format 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 really late, it could possibly 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 putting a single additional ounce of actual metal aside to provide.
Gold and silver are thought precious metals as they check here are scarce and delightful. But those features are barely one factor 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 could just be a bullion banker. He's now betting against you by having an institutional advantage; he completely controls the supply of the 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 curiosity about silver futures just hit a brand new all-time record, and gold isn't far behind. This despite a barrage of news about bankers rigging markets and cheating clients.
Someday we'll convey more honest price discovery in metals. It will happen when individuals figure out the game and either abandon the rigged casino altogether or insist upon limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals within the physical metal itself might be a step in that direction. In the meantime, stick to physical bullion and understand “spot” prices for the purpose they are.