That’s straight forward price discovery.
The party selling that paper might be another trader with an existing contract. 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 contrasted buying a futures contract with something more investors will be more familiar with – buying a stock. A graduate of Linfield College in Oregon, Siegner puts his experience in business management along with his passion for personal liberty, limited government, and honest money into the development of Money Metals’ brand and reach. The new Shanghai Gold Exchange which deals in the physical metal itself may be a step in that direction.
Craig Hemke of TFMetalsReport.com explained in a recent post how the bullion banks fleece futures traders. These paper contracts are tethered to physical gold in a bullion bank’s vault by the thinnest of threads. In the meantime, stick with physical bullion and understand “spot” prices for what they are.
That makes the futures markets a tiny tail wagging a much larger dog.. These “spot” prices are the ones scrolling across the bottom of your CNBC screen.
Not so in a futures market such as the COMEX. All without putting a single additional ounce of actual metal aside to deliver.
Gold and silver are considered precious metals because they are scarce and beautiful. They might just print up a brand new contract for you. They are paired with someone who wants to sell contracts, regardless of whether he has any physical gold. A very small minority speculate via the futures markets. Or, as has been happening more of late, it might be the bullion bank itself. Yes, they can actually do that! And as many as they like. But we frequently report on the futures markets – why exactly is that?
It’s remarkable so many traders are still willing to gamble despite all of the recent evidence that the fix is in. The number of shares is limited. The price reported on TV has less to do with physical supply and demand fundamentals and more to do with lining the pockets of the bullion banks, including JPMorgan Chase.
Someday we’ll have more honest price discovery in metals. Recently the coverage ratio – the number of ounces represented on paper contracts relative to the actual stock of registered gold bars – rose above 500 to 1.
Too bad. This despite a barrage of news about bankers rigging markets and cheating clients.
But it gets worse. Quite simply, that’s a problem.
Clint Siegner is a Director at Money Metals Exchange, the national precious metals company named 2015 “Dealer of the Year” in the United States by an independent global ratings group. This includes writing extensively on the bullion markets and their intersection with policy and world affairs.
A respectable number of Americans hold investments in gold and silver in one form or another. Some hold physical bullion, while others opt for indirect ownership via ETFs or other instruments. The mint certificates, the ETFs, and the coins in an investor’s safe – all of them – are valued, at least in large part, based on the most recent trade in the nearest delivery month on a futures exchange such as the COMEX. But those features are barely a factor in setting the COMEX “spot” price. If an investor buys contracts for gold, they won’t be paired with anyone delivering the actual gold. A more corruptible and lopsided mechanism for price discovery has never been devised. In that market, and other futures exchanges, derivatives are traded instead. When an investor buys shares in Coca-Cola company, they must be paired with another investor who owns actual shares and wants to sell at the prevailing price. They neither glisten nor shine and their supply is virtually unlimited. Open interest in silver futures just hit a new all-time record, and gold is not far behind. He’s now betting against you with an institutional advantage; he completely controls the supply of your contract.
Because that is where prices are set. It will happen when people figure out the game and either abandon the rigged casino altogether or insist on limited and reasonable coverage ratios