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April 24, 2020
Mike Gleason
Director @Money Metals Exchange
-The credibility of the gold and silver futures markets is also being called into question. Earlier this month the spread between COMEX gold futures and the London so-called spot price grew to a record high of more than $80.
Something strange is going on. The COMEX and London markets curiously changed their rules to allow 400-ounce gold bars located in London to be substituted for delivery of 100-ounce bars in satisfaction of U.S. contracts, actions which have drawn the attention of Congressman Alex Mooney of West Virginia.
Rep. Mooney is now demanding the CFTC explain why U.S. markets are permitted to carry so little deliverable physical gold and silver to back the exchanges. If there are widespread defaults, it could throw the entire financial system into chaos, Mooney warned.
At the same time, an enormous divergence between spot prices and the prices on bullion coin, bars, and rounds have developed.
So what is the real price of gold? What is the real price of silver?
The answer is that it depends on the form in which it is traded. Paper contract settlements carry one price. Bullion bars carry another. And American Eagles carry yet another.
For example, while the silver spot price closed at $15.36 on Thursday, Silver Eagles were selling for $27 or more at Money Metals’ higher-priced competitors.
Certainly a few of these dealers are getting greedy or struggling with insufficient capital, but the elevated premiums in general DO reflect extraordinarily strong retail demand on the one hand – and on the other, higher sourcing costs and U.S. Mint closures that threaten to crimp supply.
Coin values cannot be manipulated arbitrarily on a futures exchange. No physical bullion product will suddenly acquire a negative price because a handful of traders desperately need to unload contracts at a particular time and can’t find buyers.
As long as you aren’t using leverage, your downside risk in bullion is limited. That’s certainly not the case if you choose to play gold and silver futures. There, as you heard the head of the CME/COMEX admit, you could potentially lose more than 100% of the capital you deploy.
The upshot for holders of physical is that in the event the highly leveraged precious metals futures markets lose credibility, and especially if they melt down and default on obligations to deliver, a squeeze on available inventories of physical metal could push bullion prices explosively higher – regardless of what the paper quotes for gold and silver happen to be.