Cash is the main means of settlement in pricing gold and silver in the future markets. It is however not consistent with the demand and supply situations observed in the actual market. Trade in the current market is done using bullion. Increase in bullion supply in future markets results from the printing of uncovered contracts which represent gold claims. This is temporary and false. The rise in paper bullion supply contracts results in a decrease in the price in future markets regardless of the high bullion demand in the physical market and its reduced supply. Using empirical evidence and economic analysis, it is easy to conclude that the bear market in bullion has been created artificially.
The principles of supply and demand are the backbone economics. In the Comex future market, 5,000 ounces of silver and 100 troy ounces of gold are transacted. The prices of gold and silver are represented in paper contracts. This is not consistent compared to the real demand and supply realities in the actual bullion market. The bullion price has been reduced for four years in the future markets, however, the demand for possessing the actual metal has increased and the supply has many challenges.
The horizontal axis in a demand and supply graph represents quantity. The vertical axis is the price of a given commodity. The demand curves slant downwards in the right direction, the amount required raises with a decrease in price. Where the supply and demand curves intersect determines the price of the commodity.
Source: (Roberts, 2016).
A change in the required quantity or the supplied quantity results in a shift along the curve given. A variation in supply or demand means a change in the curve. A rise in demand, that is, a rightward movement of the demand curve, results in a rise in the supplied quantity, that is, change along the curve of supply. Variations in income, preferences and tastes and for a particular commodity result in a shift in the demand curve. For instance, if the currency is expected to lose value, gold and silver demand will increase. This is a rightward shift.
The variations in resources and technology may result in movement of the supply curve. New mines of gold and advances in mining technology may result in a rightward shift of the supply curve. Exhausting the already discovered gold mines would result in reduced supply. This is a leftward shift.
Two things can make the price of gold to reduce. Its demand can reduce. This will result in a left shift of the demand curve. The point of intersection with the supply curve will occur at a lesser price. Decrease of demand leads to a reduction of the supplied quantity. The reduction in demand indicates that less amount of gold is required at any price. The graph below shows that.
Source: (Roberts, 2016).
There could also be an increase in the supply. This means there could be a rightward shift in the supply curve. The point of intersection with the demand curve will take place at a much lower price. An increase in supply will lead to rise in the required quantity. A rise in supply indicates that great quantities of gold are readily obtainable at any price.
Source: (Roberts, 2016).
In summary, reduction in the gold price can result from a decrease in its demand or by its increased supply.
A reduction in demand or a raise in supply has not been observed in the physical markets for gold and silver. The price of bullion has been reduced despite the fact that the demand for real bullion has been increasing and bullion’s supply has faced problems. A rising price is being indicated from the observations in the physical market. However, in the future markets where nearly all the contracts, transactions are made in cash, the price of bullion has been observed to be reduced.
For instance, the U.S Mint on July 7 2015 announced that it had sold Silver Eagles because of a substantial rise in demand. Out. The Mint said that it had suspended sales until the following month, August. The coins’ premiums rose. However, silver price decreased by 7 percent to the last level that year as at that month. That was the second time in a period of 9 months that the Mint had failed to maintain the market demand resulting in suspension of sales.
Clearly, it can be easily noted that the physical metals demand is very high. The ability to satisfy the demand faces a lot of challenges. The bullion prices have, however continued to fall consistently. This can only occur due to manipulation. This occurs because their prices are determined in the future markets and not in the physical market. In the future markets, transactions are settled by bullion unlike the physical markets where they are settled with cash.
It is not possible to say that the regulatory authorities do not know the fraudulent manipulation being done on the prices of bullion. The observation that no measures being taken shows that laws are not being followed in the US financial markets.
References.
Roberts, P. C. (2016, March 15). Demand and Supply of Gold and Silver. Retrieved May 23, 2016, from http://www.paulcraigroberts.org/2015/07/27/supply-demand-gold-silver- futures-markets-paul-craig-roberts-dave-kranzler/
Shifts Shown Graphically. (n.d.). Retrieved May 23, 2016, from http://www.econport.org/content/handbook/Equilibrium/shifts-graph.html
