Although precious metals are still relatively under-owned and unloved, retail investors have been pouring into the metals markets since early last year.
Lots of newer investors have high hopes about where prices are headed in the near term. Even seasoned metals investors are optimistic about the current set-up for higher prices.
The difference is that seasoned investors also know they may not get what they expect.
When it comes to the metals markets, fundamentals don’t always matter in the short run. Successful bullion investing is about persevering when the market does the opposite of what you anticipate, and that happens a lot.
Craig Hemke with TFMetalsReport.com covered last week’s price smash in gold.
“So now, in total over just the five-day period of last Friday through yesterday, price was actively capped at the 200-day by The Banks adding a total of over 30,000 new gold contracts. Yes, that's 3,000,000 digital ounces created from nothing and dumped on the Spec buyers. And yes, 3,000,000 ounces is almost 100 metric tonnes.”
While investors bought near record amounts of physical coins, bars and rounds, somebody sold almost 100 metric tonnes of paper gold in the futures market.
Supply and demand for physical metal is disconnected from the futures market where the base price for metals is still being set. Wall Street, with plenty of aid and comfort from central plans, are known to intervene in the leveraged markets to push around the price.
Some key components make it all work. One of the keys is to capture the regulators. There has been a parade of former regulators getting high paid jobs with the banks. The relationship between Wall Street and Washington DC is the absolute best that money can buy.
This is how bullion bankers cheat their own clients and other honest market participants.
The evidence is public, and the fraud has been widespread. Occasionally the cheating is too much for regulators to ignore.
Unfortunately, most crimes go overlooked, the fines paid represent a slap on the wrist, and the bankers maintain their privileges for trading in markets they have at times manipulated.
Another factor is high leverage. The bullion banks are trading with counterparties who are leveraged at least ten to one but don’t have deep pockets.
So those well-financed traders can orchestrate a price smash by selling as much paper metal as needed to get prices moving lower -- just as they did last week. As prices fall, they can count on weak-handed longs cover to cover their losses (and the bank’s gain).
The sad reality is that bullion banks can wield significant control over the paper price in the short term.
One might wonder what keeps this problematic futures market intact? Legitimate hedgers do use it as a vehicle for price certainty. Silver producers can sell silver at today’s price and ensure profits on the metal they intend to produce in the months ahead
A never-ending flow of fortune seekers walk through the front door of the rigged futures market casino. They see the incredible fundamentals for gold and silver and expect prices to explode.
These hapless speculators make two wrong assumptions. They think supply and demand for physical metal matters in the futures market. And they may not realize the banks aren’t selling actual metal. They just peddle paper contracts with metal written on them -- and the supply is unlimited.
They also assume they will be treated fairly. We would refer them to WallStreetOnParade.com as a cure for that type of naivete.
Metals do perform well as an investment and as a store of value over time. Aside from avoiding the futures markets and instead focusing on buying physical, investors need thick skin, patience, and resolve. Gold actually outperformed stocks, the darling of bankers, over the past two decades.