A respectable amount of Americans hold investments in gold and silver in one form and other. Some hold physical bullion, although some opt for indirect ownership via ETFs or any other instruments. A very small minority speculate using the 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 within an investor's safe – all of them – are valued, at least in large part, depending on the most recent trade within the nearest delivery month with 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 an extremely larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has not been devised. The price reported on TV has less about physical supply and demand fundamentals and more related to lining the pockets in 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 – buying a stock. The variety of shares is limited. When a trader buys shares in Coca-Cola company, they will be paired with another investor the master of actual shares and really wants to sell with the prevailing price. That's straight forward price discovery.
Not so inside a futures market for example the COMEX. If an investor buys contracts for gold, they will not be followed by anyone delivering the particular gold. They are paired with someone who really wants to sell contracts, no matter if he has any physical gold. These paper contracts are tethered to physical gold in read more a bullion bank's vault through the thinnest of threads. Recently the protection ratio – the amount of ounces represented on paper contracts relative to the particular stock of registered gold bars – rose above 500 to a single.
The party selling that paper could possibly be another trader with an existing contract. Or, as has been happening more of late, it may 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 deliver.
Gold and silver are thought precious metals since they're scarce and delightful. 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 and their supply is virtually unlimited. Quite simply, that's 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 by having an institutional advantage; he completely controls the supply of your contract.
It's remarkable so many traders remain willing to gamble despite all from the recent evidence that the fix is. Open fascination with silver futures just hit a brand 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 an overabundance of honest price discovery in metals. It will happen when individuals figure out the overall game and either abandon the rigged casino altogether or insist upon limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals inside the physical metal itself can be a step in that direction. In the meantime, keep with physical bullion and understand “spot” prices for which they are.