A respectable number of Americans hold investments in gold and silver coins in one form or another. Some hold physical bullion, while some opt for indirect ownership via ETFs or another instruments. A very small minority speculate through futures markets. But we frequently directory the futures markets – why exactly is?
Because that is where prices are set. The mint certificates, the ETFs, and also the coins in a investor's safe – these – are valued, no less than in large part, based on the most recent trade within the nearest delivery month over a futures exchange including the COMEX. These “spot” costs are the ones scrolling through the bottom of the CNBC screen.
That makes the futures markets a little tail wagging a much larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery hasn't been devised. The price reported on TV has less about physical supply and demand fundamentals and more related to lining the pockets in 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 could be more familiar with – getting a stock. The number of shares is limited. When a venture capitalist buys shares in Coca-Cola company, they should be paired with another investor who owns actual shares and really wants to sell in the prevailing price. That's simple price discovery.
Not so inside a futures market including the COMEX. If an investor buys contracts for gold, they won't be followed by 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 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 be the bullion bank itself. They might just print up a 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 deliver.
Gold and silver are thought precious metals as more info they are scarce and beautiful. But those features are barely one 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, which is a problem.
But it gets worse. As said above, in case you bet about the price of gold by either buying or selling a futures contract, the bookie could just be a bullion banker. He's now betting against you by having an institutional advantage; he completely controls the supply of one's contract.
It's remarkable numerous traders remain willing to gamble despite all with the recent evidence how the fix is at. Open fascination with 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 and either abandon the rigged casino altogether or insist upon 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.