A respectable amount of Americans hold investments in gold and silver in one form and other. Some hold physical bullion, although some opt for indirect ownership via ETFs or any other instruments. A very small minority speculate using the futures markets. But we frequently set of the futures markets – why exactly is always that?
Because that's where costs are set. The mint certificates, the ETFs, and the coins in a investor's safe – these – are valued, at least in large part, using the most recent trade within the nearest delivery month on a futures exchange including the COMEX. These “spot” costs are the ones scrolling through the bottom of one's CNBC screen.
That makes 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 to do with physical supply and demand fundamentals and more regarding 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 purchasing a futures contract with something more investors could be more familiar with – getting a stock. The quantity of shares is fixed. When a trader buys shares in Coca-Cola company, they will be paired with another investor web-sites actual shares and really wants to sell with the prevailing price. That's simple price discovery.
Not so in a futures market including the COMEX. If an angel investor buys contracts for gold, they won't be associated with anyone delivering the specific gold. They are paired with someone who desires to sell contracts, no matter if he has any physical gold. These paper contracts are tethered to physical gold in a bullion bank's vault from the thinnest of threads. Recently the policy ratio – the variety of ounces represented in some recoverable format contracts relative to the actual stock of registered gold bars – rose above 500 to at least one.
The party selling that paper could be another trader with the existing contract. Or, as has been happening much more of late, it could be the bullion bank itself. They might just print up a new contract for you. Yes, they're able to actually do that! And as many because they like. All without placing a single additional ounce of actual metal aside to supply.
Gold and silver are viewed precious metals as they are scarce and exquisite. But those features are barely a 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 the event you bet about the price of gold by either selling or buying a futures contract, the bookie could 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 remain willing to gamble despite all with the recent evidence the fix is in. Open curiosity about silver futures just hit a brand 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 check here in metals. It will happen when individuals figure out the game and either abandon the rigged casino altogether or refer to limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals inside the physical metal itself can be a step in that direction. In the meantime, stick with physical bullion and understand “spot” prices for which they are.