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 or another instruments. A very small minority speculate through the futures markets. But we frequently report on the futures markets – why exactly is always that?
Because that's where cost is set. The mint certificates, the ETFs, as well as the coins in the investor's safe – them all – are valued, a minimum of in large part, using the most recent trade within the nearest delivery month on a futures exchange including the COMEX. These “spot” prices are the ones scrolling throughout the bottom of your 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 never been devised. The price reported on TV has less about physical supply and demand fundamentals and more about lining the pockets from 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 – investing in a stock. The amount of shares is restricted. When a venture capitalist buys shares in Coca-Cola company, they ought to be paired with another investor web-sites actual shares and desires to sell at the prevailing price. That's easy price discovery.
Not so in a very futures market including the COMEX. If an investor buys contracts for gold, they won't be associated with anyone delivering your 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 coverage ratio – the quantity of ounces represented in writing contracts relative to your stock of registered gold bars – rose above 500 one.
The party selling that paper might be another trader by having an existing contract. Or, as has been happening really late, it could be the bullion bank itself. They might just print up a new contract for you. Yes, they're able to 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 considered precious metals since they're scarce and delightful. But those features are barely one factor in setting the COMEX “spot” price. In that market, and also other futures exchanges, derivatives are traded instead. They neither glisten nor shine and their supply is more info virtually unlimited. Quite simply, this is a problem.
But it gets worse. As said above, in case you bet around 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 remain willing to gamble despite all of the recent evidence that the fix is in. Open interest in silver futures just hit a whole new all-time record, and gold is just 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 folks 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 the physical metal itself might be a step in that direction. In the meantime, stay with physical bullion and understand “spot” prices for what they are.