A respectable quantity of Americans hold investments in gold and silver in one form or another. Some hold physical bullion, and some opt for indirect ownership via ETFs or another instruments. A very small minority speculate using the futures markets. But we frequently directory the futures markets – why exactly is?
Because which is where prices are set. The mint certificates, the ETFs, along with the coins within an investor's safe – all of them – are valued, at the very least in large part, in line with the most recent trade inside nearest delivery month over a futures exchange such as the COMEX. These “spot” price is the ones scrolling across the bottom of one's CNBC screen.
That makes the futures markets a tiny tail wagging a lot larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has never been devised. The price reported on TV has less related to physical supply and demand fundamentals and more regarding lining the pockets from the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a very recent post how the bullion banks fleece futures traders. He contrasted purchasing a futures contract with something more investors is often more familiar with – getting a stock. The quantity of shares is limited. When a trader buys shares in Coca-Cola company, they must be paired with another investor online resources actual shares and wants to sell in the prevailing price. That's self-explanatory price discovery.
Not so in a futures market like the COMEX. If a venture capitalist buys contracts for gold, they won't be combined with anyone delivering your gold. They are followed by someone who wants to sell contracts, no matter whether he has any physical gold. These paper contracts are tethered to physical gold in a very bullion bank's vault with the thinnest of threads. Recently a policy ratio – the quantity of ounces represented on paper contracts relative to the specific stock of registered gold bars – rose above 500 to 1.
The party selling that paper may be another trader having an existing contract. Or, as has been happening a greater portion of late, it might be the bullion bank itself. They might just print up a fresh contract for you. Yes, they can actually do that! And as many as they like. All without putting a single additional ounce of actual metal aside to provide.
Gold and silver are thought precious metals since they're scarce and delightful. But those features are barely one factor in setting the COMEX “spot” price. In that market, and also other futures exchanges, derivatives are traded instead. They neither glisten nor shine along with their supply is virtually get more info unlimited. Quite simply, that's a problem.
But it gets worse. As said above, if you bet on 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; he completely controls the supply of your contract.
It's remarkable countless traders remain willing to gamble despite all from the recent evidence how the fix is within. Open fascination with silver futures just hit a fresh 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 we 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, keep with physical bullion and understand “spot” prices for the purpose they are.