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 the futures markets. But we frequently report on the futures markets – why exactly is always that?
Because that's where cost is set. The mint certificates, the ETFs, as well as the coins in the investor's safe – them all – are valued, at least in large part, using the most recent trade inside the nearest delivery month on a futures exchange for example the COMEX. These “spot” price is the ones scrolling across the bottom of your CNBC screen.
That helps to make the futures markets a little tail wagging an extremely larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery hasn't been devised. The price reported on TV has less to do with 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 the way the bullion banks fleece futures traders. He contrasted buying a futures contract with something more investors could be more familiar with – getting a stock. The number of shares is fixed. When an investor buys shares in Coca-Cola company, they should be paired with another investor web-sites actual shares and wants to sell with the prevailing price. That's simple price discovery.
Not so in a futures market for example the COMEX. If an angel investor buys contracts for gold, they don't be paired with anyone delivering the actual gold. They are paired with someone who wants to sell contracts, regardless of whether he has any physical gold. These paper contracts are tethered to physical gold inside a bullion bank's vault with the thinnest of threads. Recently the coverage ratio – the quantity of ounces represented on paper contracts relative to the actual stock of registered gold bars – rose above 500 to a single.
The party selling that paper could possibly be another trader with an 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 while they like. All without placing a single additional ounce of actual metal aside to deliver.
Gold and silver are viewed precious metals since they're scarce and delightful. But those features are barely a 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 along with their supply is virtually unlimited. Quite simply, what a problem.
But it gets worse. As said above, if you bet around the price of gold by either more info selling a futures contract, the bookie may be a bullion banker. He's now betting against you with the institutional advantage; he completely controls the supply of your contract.
It's remarkable so many traders are still willing to gamble despite all with the recent evidence the fix is in. Open interest in silver futures just hit a 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 in metals. It will happen when people 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, stick with physical bullion and understand “spot” prices for which they are.