A respectable amount of Americans hold investments in silver and gold in one form or any other. Some hold physical bullion, while others opt for indirect ownership via ETFs and other instruments. A very small minority speculate through futures markets. But we frequently report on the futures markets – why exactly is?
Because that's where prices are set. The mint certificates, the ETFs, as well as the coins within an investor's safe – every one of them – are valued, a minimum of in large part, based on the most recent trade inside the nearest delivery month on the futures exchange for example the COMEX. These “spot” prices are 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 hasn't been devised. The price reported on TV has less about physical supply and demand fundamentals and more to do with lining the pockets with the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a recent post how a bullion banks fleece futures traders. He contrasted buying a futures contract with something more investors may well be more familiar with – getting a stock. The quantity of shares is bound. When a trader buys shares in Coca-Cola company, they should be paired with another investor who owns actual shares and really wants to sell with the prevailing price. That's straight forward price discovery.
Not so in the futures market for example the COMEX. If a trader buys contracts for gold, they don't be combined with anyone delivering your gold. They are associated with someone who would like to sell contracts, whether or not he has any physical gold. These paper contracts are tethered to physical gold in the bullion bank's vault by the thinnest of threads. Recently the policy ratio – the variety of ounces represented in some recoverable format contracts relative to the specific stock of registered gold bars – rose above 500 to 1.
The party selling that paper may be another trader by having an existing contract. Or, as has been happening really late, it could possibly be the bullion bank itself. They might just print up a new contract for you. Yes, they can actually do that! And as many as they like. All without placing a single additional ounce of actual metal aside to provide.
Gold and silver are believed precious metals because they're scarce and exquisite. But those features are barely an aspect 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 check here it gets worse. As said above, if you bet on the price of gold by either 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 the contract.
It's remarkable numerous traders are nevertheless willing to gamble despite all from the recent evidence how the fix is at. Open fascination with silver futures just hit a fresh all-time record, and gold isn't 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 individuals figure out the sport 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, stay with physical bullion and understand “spot” prices for which they are.