Is a More Accurate Gauge of Gold and Silver Bullion Prices on the Way?

Gold and Silver Bars
Gold and Silver Bullion Bars

The Moscow stock exchange has recently announced that they’ll begin trading gold and silver by the end of this year and platinum and palladium sometime in 2014.  This differs from other gold and silver investment opportunities in the Russia stock market, as the other offerings are gold and silver futures contracts; similar to the offerings on the New York Stock Exchange.  For example, GLD and SLV, two of the most popular gold and silver ETFs, do not accurately track the price of gold and silver in the physical bullion market, but rather provide the price in the futures market, which is commonly referred to as the paper market.

The new offerings that will be available on the Moscow stock exchange later this month should help to provide liquidity and stability to the markets, as physical gold and silver bullion will be delivered when individuals exit their position in the holdings.  This differs from the gold and silver futures market, where only about 3% of transactions involve taking physical possession of gold and silver.  In fact, many individuals believe that COMEX (the commodities exchange on which gold and silver futures are traded) doesn’t have enough physical gold and silver bullion on hand to fully back all of the outstanding futures contracts.  This is likely one reason why we commonly see a large discrepancy between the price of gold and silver in the futures market and gold and silver bullion, such as coins, bars and rounds.

In theory, a widely traded, established and trusted precious metals bullion market would be a better benchmark for gold and silver coins than the futures market.  This is because the price of gold and silver in the futures market is heavily driven by technical factors, such as trading ranges, shorts, stops, and margin calls as opposed to market fundamentals.  Individuals that speculate in the gold and silver market or companies that utilize the futures market to hedge against unexpected drops, such as gold mining companies, will continue to use the paper or futures market, but long term gold and silver investors will likely gravitate toward a physical market.

At the moment, very few mutual funds or ETF’s are fully backed by gold and silver bullion.  Even those that are, such as the Central Fund of Canada Unlimited (ticker symbol CEF), don’t allow account holders to take possession of physical bullion.  Rather, they’re paid the current market value of the holdings when a position is liquidated.  Furthermore, closed end funds, such as CEF, can trade at substantial discounts or premiums to the net asset value (NAV) or price per share, which doesn’t provide the type of stability that most investors are seeking with this type of investment.

It is the opinion of this author that whenever possible, investors in gold and silver bullion, such as coins, bars and rounds, should take possession of their bullion at the time of the transaction.  Coin and bullion dealers are two potential sources for this type of transaction.  When purchasing and taking physical possession of gold and silver coins isn’t possible, the next best option is to invest in funds that are fully backed by bullion and that are audited by reputable third parties.  Only in cases where these options aren’t available, should long term gold and silver buyers look to the futures market.

This forthcoming offering from the Moscow stock exchange may ultimately become the next best option to taking immediate possession of your gold and silver bullion, but only time will tell.

Tony Davis
Tony Davis