A respectable number of Americans hold investments in gold and silver coins in one form or another. Some hold physical bullion, although some opt for indirect ownership via ETFs or any other instruments. A very small minority speculate through futures markets. But we frequently directory the futures markets – why exactly is the fact that?
Because that is certainly where price is set. The mint certificates, the ETFs, along with the coins in an investor's safe – these – are valued, at the very least in large part, in line with the most recent trade inside nearest delivery month over a futures exchange like the COMEX. These “spot” prices are the ones scrolling across the bottom of the CNBC screen.
That makes all the futures markets a small tail wagging a much larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has not been devised. The price reported on TV has less about physical supply and demand fundamentals and more to do with lining the pockets from the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a recent post what sort of bullion banks fleece futures traders. He contrasted purchasing a futures contract with something more investors will be more familiar with – buying a stock. The amount of shares is bound. 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 on the prevailing price. That's easy price discovery.
Not so in the futures market for example the COMEX. If an investor buys contracts for gold, they won't be associated with anyone delivering the particular gold. They are combined with someone who really wants 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 from the thinnest of threads. Recently a policy ratio – the amount of ounces represented in writing contracts relative to the particular stock of registered gold bars – rose above 500 to 1.
The party selling that paper could be another trader with an existing contract. Or, as has been happening really late, it may be the bullion bank itself. They might just print up a brand new contract for you. Yes, they're able to actually do that! And as many because they like. All without placing single additional ounce of actual metal aside to supply.
Gold and silver are viewed precious metals because they're scarce and exquisite. But those features are barely a factor in setting the COMEX “spot” price. In that market, as well as other futures exchanges, derivatives are traded instead. They neither glisten nor shine as well as their supply is virtually unlimited. Quite simply, that's 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 may be a bullion banker. He's now betting against you by having an institutional advantage; he completely controls the supply of the contract.
It's remarkable countless traders are still willing to gamble despite all from the recent evidence how the fix is. Open desire for 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 convey more honest price discovery in metals. It will happen when we figure out the action and either abandon the rigged casino altogether or insist on limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals in the physical metal itself can be a step in that direction. In the click here meantime, stay with physical bullion and understand “spot” prices for which they are.