A respectable amount of Americans hold investments in silver and gold in one form or some other. Some hold physical bullion, while some opt for indirect ownership via ETFs or other instruments. A very small minority speculate using the futures markets. But we frequently set of the futures markets – why exactly is?
Because that is where cost is set. The mint certificates, the ETFs, as well as the coins in an investor's safe – every one of them – are valued, a minimum of in large part, based on the most recent trade inside the nearest delivery month on a futures exchange including the COMEX. These “spot” prices are the ones scrolling through the bottom of the CNBC screen.
That makes all the futures markets a little tail wagging a lot larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has never been devised. The price reported on TV has less regarding physical supply and demand fundamentals and more to do with lining the pockets with the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a very recent post how a bullion banks fleece futures traders. He contrasted getting a futures contract with something more investors may well be more familiar with – buying a stock. The quantity of shares is bound. When a trader buys shares in Coca-Cola company, they will be paired with another investor who owns actual shares and would like to sell in the prevailing price. That's simple price discovery.
Not so in a futures market like the COMEX. If an angel investor buys contracts for gold, they don't be combined with anyone delivering your gold. They are followed by someone who wants to sell contracts, no matter whether 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 actual 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 a greater portion of late, it might be the bullion bank itself. They might just print up a fresh contract for you. Yes, they're able to 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, along with other futures exchanges, derivatives are traded instead. They neither glisten nor shine in addition to their supply is virtually unlimited. Quite simply, which is a problem.
But it gets worse. As said above, in case you bet for the price of gold by either selling a futures contract, the bookie may be a bullion banker. He's now betting against you with the institutional advantage; he completely controls the supply of your respective contract.
It's remarkable countless 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 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, read more stick with physical bullion and understand “spot” prices for what they are.