A respectable quantity of Americans hold investments in gold and silver coins in one form or any other. Some hold physical bullion, and some opt for indirect ownership via ETFs or another instruments. A very small minority speculate via the futures markets. But we frequently directory the futures markets – why exactly is the fact that?
Because that is certainly where price is set. The mint certificates, the ETFs, and the coins in a investor's safe – them all – are valued, no less than in large part, depending on the most recent trade in the nearest delivery month with a futures exchange like the COMEX. These “spot” prices are the ones scrolling across the bottom of your respective CNBC screen.
That helps make the futures markets a smaller tail wagging a significantly larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery never 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 is often more familiar with – buying a stock. The variety of shares is limited. When an angel investor buys shares in Coca-Cola company, they will be paired with another investor the master of actual shares and desires to sell with the prevailing price. That's self-explanatory price discovery.
Not so in the futures market such as the COMEX. If a trader buys contracts for gold, they won't be paired with anyone delivering the actual gold. They are paired with someone who wants 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 a policy ratio – the number of ounces represented on paper contracts relative to the particular stock of registered gold bars – rose above 500 one.
The party selling that paper could possibly be another trader with the existing contract. Or, as has been happening much more of late, it may be the bullion bank itself. They might just print up a new contract for you. Yes, they are able to actually do that! And as many since they like. All without putting a single additional ounce of actual metal aside to supply.
Gold and silver are believed precious metals because they are scarce and beautiful. But those features are barely an issue in setting the COMEX “spot” price. In that market, and also other futures exchanges, derivatives are traded instead. They neither glisten nor shine and their supply is virtually unlimited. Quite simply, that's a problem.
But it gets worse. As said above, should you bet around the price of gold by either buying or selling a futures contract, the bookie may be a bullion banker. He's now betting against you by having an institutional advantage; he completely get more info controls the supply of the contract.
It's remarkable numerous traders are nevertheless willing to gamble despite all in the recent evidence that this fix is. Open desire for silver futures just hit a whole new all-time record, and gold is just not 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 we figure out the overall game and either abandon the rigged casino altogether or insist upon limited and reasonable coverage ratios. The new Shanghai Gold Exchange which deals within the physical metal itself may be a step in that direction. In the meantime, keep with physical bullion and understand “spot” prices for what they are.