A respectable amount of Americans hold investments in silver and gold coins in one form and other. Some hold physical bullion, although some opt for indirect ownership via ETFs or other instruments. A very small minority speculate using the futures markets. But we frequently set of the futures markets – why exactly is that?
Because that is certainly where costs are set. The mint certificates, the ETFs, and the coins in a investor's safe – these – are valued, at the very least in large part, in line with the most recent trade in the nearest delivery month over a futures exchange such as the COMEX. These “spot” price is 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 has not been devised. The price reported on TV has less regarding physical supply and demand fundamentals and more about lining the pockets with the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a recent post how a bullion banks fleece futures traders. He contrasted buying a futures contract with something more investors may well be more familiar with – getting a stock. The quantity of shares is bound. When an investor buys shares in Coca-Cola company, they should be paired with another investor web-sites actual shares and really wants to sell on the prevailing price. That's straight forward price discovery.
Not so inside a futures market for example the COMEX. If an investor buys contracts for gold, they will not be associated with anyone delivering the actual gold. They are combined with someone who desires 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 with the thinnest of threads. Recently the coverage ratio – the quantity of ounces represented in writing contracts relative to your stock of registered gold bars – rose above 500 one.
The party selling that paper may be another trader having an existing contract. Or, as has been happening more of late, it may be the bullion bank itself. They might just print up a fresh contract for you. Yes, they could actually do that! And as many since they like. All without locating a single additional ounce of actual metal aside to deliver.
Gold and silver are considered precious metals since they're scarce and delightful. But those features are barely one 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 along with their supply is virtually unlimited. Quite simply, what a problem.
But it gets worse. As said above, in case you bet for the price of gold by either buying or selling a futures contract, the bookie might just be a bullion banker. He's now betting against you with an institutional advantage; read more he completely controls the supply of your contract.
It's remarkable so many traders are still willing to gamble despite all of the recent evidence that the fix is. Open curiosity about silver futures just hit a brand new all-time record, and gold isn't 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 people figure out the game 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 meantime, stick with physical bullion and understand “spot” prices for what they are.