A respectable number of Americans hold investments in silver and gold in one form or any other. Some hold physical bullion, and some opt for indirect ownership via ETFs or another instruments. A very small minority speculate via the futures markets. But we frequently directory the futures markets – why exactly is the fact that?
Because that is where price is set. The mint certificates, the ETFs, and also the coins in the investor's safe – all of them – are valued, at least in large part, depending on the most recent trade in the nearest delivery month with a futures exchange like the COMEX. These “spot” costs are the ones scrolling across the bottom of one's CNBC screen.
That makes the futures markets a little tail wagging a significantly larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery never been devised. The price reported on TV has less related to physical supply and demand fundamentals and more about lining the pockets of the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in the recent post how the bullion banks fleece futures traders. He contrasted investing in a futures contract with something more investors will be more familiar with – purchasing a stock. The amount of shares is restricted. When a venture capitalist buys shares in Coca-Cola company, they must be paired with another investor online resources actual shares and would like to sell at the prevailing price. That's self-explanatory price discovery.
Not so in a very futures market like the COMEX. If an angel investor buys contracts for gold, they don't be combined with anyone delivering the particular gold. They are associated with someone who would like 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 policy ratio – the variety of ounces represented in some recoverable format contracts relative to the actual stock of registered gold bars – rose above 500 to at least one.
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 are able to actually do that! And as many since they like. All without placing a single additional ounce of actual metal aside to provide.
Gold and silver are believed precious metals as they are scarce and delightful. But those features are barely a factor in setting the COMEX “spot” price. In that market, and also 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, should you bet on the price of gold by either selling a futures contract, the bookie could just 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 so many traders continue to be willing to gamble despite all in the recent evidence that the fix is in. Open interest in 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 more info convey more honest price discovery in metals. It will happen when we figure out the action and either abandon the rigged casino altogether or refer to limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals inside physical metal itself can be a step in that direction. In the meantime, stay with physical bullion and understand “spot” prices for which they are.