Below's Why the Gold and Silver Futures Sector Is Like a Rigged Casino...

A respectable variety of Americans hold investments in silver and gold coins in one form or some other. Some hold physical bullion, while some 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 in an investor's safe – every one of them – are valued, a minimum of in large part, using the most recent trade within the nearest delivery month with a futures exchange including the COMEX. These “spot” prices are the ones scrolling throughout the bottom of your CNBC screen.
That helps to make the futures markets a tiny tail wagging a lot larger dog.
Too bad. A more corruptible and lopsided mechanism for price discovery has never been devised. The price reported on TV has less regarding physical supply and demand fundamentals and more about lining the pockets from the bullion banks, including JPMorgan Chase.
Craig Hemke of TFMetalsReport.com explained in a very recent post how the bullion banks fleece futures traders. He contrasted investing in a futures contract with something more investors will be more familiar with – purchasing a stock. The amount of shares is limited. When an angel investor buys shares in Coca-Cola company, they must be paired with another investor the master of actual shares and desires to sell with the prevailing price. That's easy price discovery.
Not so in the futures market for example the COMEX. If a trader buys contracts for gold, they will not be followed by anyone delivering the actual gold. They are associated with someone who would like 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 through the thinnest of threads. Recently the protection ratio – the amount of ounces represented on paper contracts relative to the particular stock of registered gold bars – rose above 500 to at least one.

The party selling that paper could be another trader with the existing contract. Or, as has been happening a greater portion of late, it might be the bullion bank itself. They might just print up a fresh contract for you. Yes, they are able to actually do that! And as many while they like. All without placing single additional ounce of actual metal aside to offer.
Gold and silver are viewed precious metals as they are scarce and beautiful. But those features are barely a factor in setting the COMEX “spot” price. In that market, and other futures exchanges, derivatives are traded instead. They neither glisten nor shine as well as 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 here or buying a futures contract, the bookie could just be a bullion banker. He's now betting against you by having an institutional advantage; he completely controls the supply of the contract.
It's remarkable a lot of traders continue to be willing to gamble despite all from the recent evidence that the fix is in. Open interest in silver futures just hit a 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 convey more honest price discovery in metals. It will happen when folks figure out the action 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 might be a step in that direction. In the meantime, stick to physical bullion and understand “spot” prices for the purpose they are.

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