The gold and silver futures markets were designed to increase volatility and discourage physical ownership of precious metals, as revealed in 1970s-era disclosures. The futures markets have also created opportunities for manipulation.
Today, the corruption is on full display for anyone who cares to look at the Wiki-Leaks documents, criminal prosecutions, and the other piles of evidence detailing foul play.
Yet the global price for precious metals is still set by these futures markets. And the trading volume has even grown, even as prices appear increasingly unhinged from fundamental drivers impacting supply and demand for the underlying metals.
High frequency and algorithmic trading is now dominant.
Why these markets continue to function as the primary mechanism for price discovery, given they are a playground for criminals, is a reasonable question.
Futures markets are used for honest hedging (and honest speculation). Gold and silver producers, refiners, and other interested parties buy and sell contracts to help assure profits or control losses associated with major price swings.
It is easy to understand why a mining company might want some certainty as to the price of the metal in the near term, but it is hard to understand why they put up with the longer-term effects of participating in questionable exchanges.
Counting on a fair shake from the criminal enterprises which play a market-making role in futures doesn’t seem like a good plan. And it’s ironic to see participants trying to manage volatility using a market which was designed to increase volatility.
The other reasons as to why these markets continue to operate are less than legitimate. They are a great mechanism for bankers and regulators to control the price and demoralize gold bugs.
Plenty of speculative longs are still willing to play in the rigged casino. A constant stream of capital comes in from speculators who are lured by the great fundamentals for gold and silver and hopes of a big payday if their highly levered bets pay off.
Some of these people are blissfully unaware the game they are playing in is crooked. Others know there is cheating. They believe they understand their adversaries and plan to get out of long positions before the bankers orchestrate the next price smash.
It’s not likely the current crop of bankers, politicians and bureaucrats will clean up the act.
Absent some sort of big regulatory overhaul and a functioning justice system to hold crooked bankers accountable, the solution is for more investors to leave the futures exchanges and go into the physical market instead.