Physical Gold and Silver Are Safe Havens, Futures Are Not

Last week’s market activity was another reminder that not all precious metals investments are created equal.

Investors worried about a virus outbreak and watching the blood bath on Wall Street rushed to buy coins, rounds, and bars.

As one of the largest and most respected U.S. dealers, Money Metals saw the biggest surge of buying activity in years. Clients bought the physical metal as a safe haven, knowing it is scarce, intrinsically valuable and carries no counterparty risk.

Meanwhile, the opposite occurred on the COMEX because buying contracts there is anything but safe.

For starters, futures contracts for gold and silver are unlimited in supply. We don’t care what any COMEX official or sleepy CFTC regulator might say. No one who wants a contract is being turned away regardless of how large the float of paper gold and silver gets relative to the number of actual bars in exchange vaults.

A futures contract is not an asset with intrinsic value. It is nothing more than a wager on the price of the metal on a particular future date. There is ultimately a winner and a loser for each wager. And retail investors gambling in futures are the losers a lot more often than not.

In contrast to an investment in physical metal, it’s highly possible to lose everything when trading futures. In fact, lots of people just did.

The few speculators lucky enough to have been short the market last week are winners. No doubt they are happy to have made the right call. If they are smart, they will cash out and head for the door.

Not only are the odds stacked against them, it is possible to win and still wind up losing. Making the right call is one thing, collecting on the wager is something else.

The holders of this paper either don’t know or don’t care that the contract provides no claim on any actual metal. Traders also aren’t worried about what happens should the counterparties involved in their contract fail.

And, yes, there is more than one counterparty. The company behind the COMEX can collapse. So can the dodgy bullion banks selling hundreds of paper ounces for every ounce they have stored in exchange vaults.

Is that likely? Probably not as long as markets are functioning. We certainly wouldn’t rule out the possibility the next time a black swan event causes markets to seize or if the mother of all bubbles – the global debt bubble – finally bursts, and renders banks insolvent.

Futures are high risk, but that isn’t the worst thing about these markets. Exchanges like the COMEX are essentially a rigged casino. That’s the capper.

Speculators walk in and make bets using 10 to 1 leverage. They have to worry about bad luck. They ought to worry even more about the bad bankers taking the other side of their wager then handing them a set of loaded dice.

Bullion bankers have lied, swindled, and cheated to win in precious metals futures. This is a fact, not a theory. We now know for certain that multiple banks and many bankers spent the better part of a decade (at least) rigging prices against their own clients.

When, by hook or by crook, the losses pile up, many traders get margin calls. They have to decide whether to send more money to stay in their losing bet or close out of the position.

There was plenty of forced selling in gold and silver futures last Friday. The high risk, and naive, gamblers betting long there got slaughtered.

Gambling in the metals futures markets has about as much in common with an investment in physical gold and silver as a visit to the pari-mutuel window at a mafia run horse track has in common with buying a horse farm.

Perhaps more people are figuring this out. We saw plenty of new clients jumping into physical bullion last week.

These people were looking for a genuine safe haven – outside and away from Wall Street. And they were able to take full advantage of the lower spot prices. They should consider it a gift from the less wise who are still gambling, and losing, on the COMEX.