A respectable variety of Americans hold investments in gold and silver in one form and other. Some hold physical bullion, while some opt for indirect ownership via ETFs and other instruments. A very small minority speculate through the futures markets. But we frequently directory the futures markets – why exactly is the fact that?
Because that is certainly where costs are set. The mint certificates, the ETFs, and also the coins in a investor's safe – all of them – are valued, a minimum of in large part, depending on the most recent trade within the nearest delivery month over a futures exchange for example the COMEX. These “spot” cost is the ones scrolling through the bottom of the CNBC screen.
That helps to make the futures markets a small tail wagging an extremely larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has never been devised. The price reported on TV has less to do with physical supply and demand fundamentals and more about lining the pockets of the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained inside a recent post the way the bullion banks fleece futures traders. He contrasted purchasing a futures contract with something more investors will be more familiar with – investing in a stock. The variety of shares is restricted. When an angel investor buys shares in Coca-Cola company, they will be paired with another investor online resources actual shares and desires to sell in the prevailing price. That's straight forward price discovery.
Not so in a very futures market such as the COMEX. If an angel investor buys contracts for gold, they don't be associated with anyone delivering the particular 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 inside a bullion bank's vault by the thinnest of threads. Recently the protection ratio – the quantity of ounces represented in some recoverable format contracts relative to your stock of registered gold bars – rose above 500 to at least one.
The party selling that paper might check here be another trader having an existing contract. Or, as has been happening more of late, it could 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 locating a single additional ounce of actual metal aside to supply.
Gold and silver are believed precious metals because they're scarce and exquisite. But those features are barely an issue in setting the COMEX “spot” price. In that market, as well as other futures exchanges, derivatives are traded instead. They neither glisten nor shine and their supply is virtually unlimited. Quite simply, this is 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 just be a bullion banker. He's now betting against you having an institutional advantage; he completely controls the supply of one's contract.
It's remarkable numerous traders are nevertheless willing to gamble despite all with the recent evidence that this fix is. Open interest in silver futures just hit a 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 more honest price discovery in metals. It will happen when people figure out the action and either abandon the rigged casino altogether or refer to limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals inside physical metal itself is often a step in that direction. In the meantime, stay with physical bullion and understand “spot” prices for what they are.