Jun 11, 2020
The Comex seems like a very mysterious entity where precious metals prices somehow are set and supplies get shifted around the globe. But according to CPM Group's Jeffrey Christian, it's a lot simpler than it looks. Anyone who's in the precious metals food chain, miners, fabricators, jewelry manufacturers, bullion dealers, etc., must hedge their inventory and production to avoid sudden unexpected moves in metal prices. Volatile moves could otherwise easily bankrupt the industry in a very short period of time.
Banks often require their pm borrowers to fully hedge their position, thereby lowering default risk. For fabricators and jewelry manufacturers, this has led to an extensive leasing market. They lease gold and silver until it's been made into finished product, at which time it's sold to customers. The manufacturer then purchases the leased metal. And the process is repeated over and over. Since all participants in the market are hedging, this helps explain why there's such a huge multiple of contracts to actual physical metal. We hope this helps clear things up. For a better explanation, listen to Jeffrey Christian's own words.
Oh and about those huge silver and gold inventories that JP Morgan Chase is holding, Jeff says they're being held for customers, not on the bank's own account. Next time, we'll find out why their inventories have gotten so enormous.