A respectable quantity of Americans hold investments in silver and gold coins in one form or some other. Some hold physical bullion, and some opt for indirect ownership via ETFs or other instruments. A very small minority speculate through futures markets. But we frequently directory the futures markets – why exactly is that?
Because that's where costs are set. The mint certificates, the ETFs, along with the coins in an investor's safe – these – are valued, no less than in large part, based on the most recent trade within the nearest delivery month over a futures exchange for example the COMEX. These “spot” prices are the ones scrolling across the bottom of your CNBC screen.
That makes the futures markets a tiny tail wagging a much 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 in the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in the recent post how a bullion banks fleece futures traders. He contrasted purchasing a futures contract with something more investors may well be more familiar with – purchasing a stock. The quantity of shares is limited. When an investor buys shares in Coca-Cola company, they will be paired with another investor online resources actual shares and really wants to sell at the prevailing price. That's simple price discovery.
Not so inside a futures market such as the COMEX. If a venture capitalist buys contracts for gold, they will not be paired with anyone delivering your gold. They are combined with someone who wants to sell contracts, regardless of whether 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 coverage ratio – the variety of ounces represented on paper contracts relative to the particular stock of registered gold bars – rose above 500 one.
The party selling that paper may be another trader with the existing contract. Or, as has been happening more of late, it may be click here the bullion bank itself. They might just print up a new contract for you. Yes, they can actually do that! And as many because they like. All without locating a single additional ounce of actual metal aside to deliver.
Gold and silver are thought precious metals as they are 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 and their supply is virtually unlimited. Quite simply, this is a problem.
But it gets worse. As said above, should you bet around 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 how the fix is within. Open curiosity about silver futures just hit a brand new all-time record, and gold just isn't far behind. This despite a barrage of news about bankers rigging markets and cheating clients.
Someday we'll have an overabundance of honest price discovery in metals. It will happen when folks 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 the 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.