A respectable quantity of Americans hold investments in gold and silver coins 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 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 an investor's safe – them all – are valued, at least in large part, using the most recent trade in the nearest delivery month on a futures exchange for example the COMEX. These “spot” price is the ones scrolling across the bottom of your respective CNBC screen.
That makes all the futures markets a smaller 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 purchasing a futures contract with something more investors is often more familiar with – buying a stock. The variety of shares is limited. When an angel investor buys shares in Coca-Cola company, they will be paired with another investor the master of actual shares and desires to sell with the prevailing price. That's easy price discovery.
Not so in the futures market such as the COMEX. If a venture capitalist buys contracts for gold, they won't be associated with anyone delivering the specific gold. They are associated with someone who desires 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 some recoverable format contracts relative to the specific stock of registered gold bars – rose above 500 to 1.
The party selling that paper may be another trader having an existing contract. Or, as has been happening really late, it could possibly be the bullion bank itself. They might just print up a brand new contract for you. Yes, they can actually do that! And as many because they like. All without placing a single additional ounce of actual metal aside to offer.
Gold and silver are considered precious metals since they're scarce and delightful. 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 in addition to their supply is virtually unlimited. Quite simply, which 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 could 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 a lot of traders are still willing to gamble despite all in the recent evidence that this fix is in. Open curiosity about silver futures just hit a brand new all-time record, and gold just isn't click here 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 people figure out the overall game and either abandon the rigged casino altogether or insist on 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, keep with physical bullion and understand “spot” prices for what they are.