A respectable variety of Americans hold investments in gold and silver 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 via the futures markets. But we frequently directory the futures markets – why exactly is the fact that?
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 for example the COMEX. These “spot” cost is the ones scrolling over the bottom of your CNBC screen.
That makes all 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 about physical supply and demand fundamentals and more related to lining the pockets with 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 investing in a futures contract with something more investors will be more familiar with – getting a stock. The quantity of shares is fixed. When a trader buys shares in Coca-Cola company, they should be paired with another investor who owns actual shares and really wants to sell with the prevailing price. That's straight forward 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 your gold. They are combined 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 by the thinnest of threads. Recently the coverage ratio – the number of ounces represented on paper contracts relative to your 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 really late, it may be the bullion bank itself. They might just print up a new contract for you. Yes, they can actually do that! And as many as they like. All without placing a single additional ounce of actual metal aside to provide.
Gold and silver are believed precious metals because they're scarce and exquisite. But those features are barely an aspect in setting the COMEX “spot” price. In that market, and other futures exchanges, derivatives are traded instead. They neither glisten nor shine as well as their supply is virtually unlimited. Quite simply, this 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 the contract.
It's remarkable so many traders continue to be willing to gamble despite all from the recent evidence the fix is. Open fascination with 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 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 inside the physical metal itself can be a step in that direction. In the meantime, stay with physical bullion and understand “spot” more info prices for what they are.