A respectable variety of Americans hold investments in silver and gold 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 report on the futures markets – why exactly is?
Because that's where prices are set. The mint certificates, the ETFs, as well as the coins within an 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 on the futures exchange for example the COMEX. These “spot” costs are the ones scrolling through the bottom of the CNBC screen.
That makes 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 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 in a recent post how a bullion banks fleece futures traders. He contrasted buying a futures contract with something more investors could be more familiar with – getting a stock. The quantity of shares is fixed. When an investor buys shares in Coca-Cola company, they ought to be paired with another investor web-sites actual shares and wants to sell on the prevailing price. That's simple price discovery.
Not so in a futures market including the COMEX. If a venture capitalist buys contracts for gold, they won't be combined with anyone delivering your gold. They are paired with someone who desires 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 the particular stock of registered gold bars – rose above 500 to at least one.
The party selling that paper could be another trader with the existing contract. Or, as has been happening more of late, it might be the bullion bank itself. They might just print up a fresh contract for you. Yes, they are able to actually do that! And as many while they like. All without placing single additional ounce of actual metal aside to offer.
Gold and silver are viewed precious metals because they are scarce and beautiful. 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 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 numerous traders remain willing to gamble despite all with the recent evidence that the fix is in. Open curiosity about 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 figure out the game and either website abandon the rigged casino altogether or refer to limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals inside physical metal itself might be a step in that direction. In the meantime, stick to physical bullion and understand “spot” prices for which they are.