A respectable variety of Americans hold investments in silver and gold in one form or some other. Some hold physical bullion, although some opt for indirect ownership via ETFs or any other instruments. A very small minority speculate through the futures markets. But we frequently directory the futures markets – why exactly is the fact that?
Because that is where prices are set. The mint certificates, the ETFs, along with the coins in a investor's safe – these – are valued, at the very least in large part, depending on the most recent trade inside nearest delivery month on 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 a much 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 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 – purchasing a stock. The amount of shares is restricted. When an angel investor buys shares in Coca-Cola company, they must be paired with another investor the master of actual shares and would like to sell at the prevailing price. That's easy price discovery.
Not so in a very futures market such as the COMEX. If a trader buys contracts for gold, they don't be paired with anyone delivering the particular gold. They are associated with someone who would like to sell contracts, regardless of whether he has any physical gold. These paper contracts are tethered to physical gold inside a bullion bank's vault with the thinnest of threads. Recently the protection 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 with 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 while they like. All without placing single additional ounce of actual metal aside to offer.
Gold and silver are viewed precious metals as they are scarce and exquisite. But those features are barely a factor 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, should you bet around the price of gold by either selling or buying a futures contract, the bookie might just 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 a lot of traders continue to be willing to gamble despite all from the recent evidence the fix is within. Open curiosity about silver futures just hit a fresh all-time record, and gold just 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 read more and either abandon the rigged casino altogether or require limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals within the physical metal itself can be a step in that direction. In the meantime, stick with physical bullion and understand “spot” prices for what they are.