A respectable quantity of Americans hold investments in silver and gold coins in one form and other. Some hold physical bullion, and some opt for indirect ownership via ETFs or another instruments. A very small minority speculate through the futures markets. But we frequently directory the futures markets – why exactly is always that?
Because that is where price is set. The mint certificates, the ETFs, along with the coins within an investor's safe – every one of them – are valued, a minimum of in large part, using the most recent trade in the nearest delivery month on the futures exchange for example the COMEX. These “spot” prices are the ones scrolling over the bottom of your respective CNBC screen.
That makes the futures markets a little tail wagging a lot larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery never been devised. The price reported on TV has less to do with physical supply and demand fundamentals and more related to lining the pockets with the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a recent post the way the bullion banks fleece futures traders. He contrasted investing in a futures contract with something more investors is often more familiar with – buying a stock. The number of shares is limited. When a trader buys shares in Coca-Cola company, they ought to be paired with another investor online resources actual shares and desires to sell on the prevailing price. That's self-explanatory price discovery.
Not so in the futures market including the COMEX. If an angel investor buys contracts for gold, they will not be combined with anyone delivering the specific gold. They are paired with someone who would like to sell contracts, no matter if 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 the coverage 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 by having an existing contract. Or, as has been happening more of late, it could possibly be the bullion bank itself. They might just print up a fresh contract for you. Yes, they're able to actually do that! And as many while they like. All without putting a single additional ounce of actual metal aside to offer.
Gold and silver are considered precious metals because they're 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 in addition to their supply is virtually unlimited. Quite simply, that's a problem.
But it gets worse. As said above, in the event you bet for the price of gold by either buying or selling 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 the contract.
It's remarkable numerous traders are nevertheless willing to gamble despite all of the recent evidence the fix is within. Open fascination with silver futures just hit a whole new all-time record, and gold is not 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 folks figure out the game check here 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 to physical bullion and understand “spot” prices for which they are.