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Spreads, Spreads, Spreads...

Why they matter..

In a multi-billion-dollar industry, it has become quite problematic.

The seemingly innocuous bid-ask spread can exert a surprisingly detrimental influence on your overall investment performance. Notably, this cost can vary significantly across dealers and product types. Unscrupulous spot (cash) dealers may exploit this to target less informed investors through a bait-and-switch tactic.

This practice has become particularly concerning in the post-Covid era, with spot dealers increasingly focusing on Roth IRAs and traditional IRAs. To shed light on this deceptive strategy, let’s dissect the issue and explore potential solutions. We will first delve into the inherent conflict of interest embedded within the spread, then propose strategies to mitigate its impact on your hard-earned capital.

ProFuturesTrader | Gold Bars

Demonstrating how much wealth is lost due to high spreads, this is a major spot dealer out of Newport Beach, CA.

LA Times Article Excerpt

According to the LA Times Andrew Khouri wrote:

“The difference, or spread, between the price set by the firm and the underlying price on tracked spot markets was generally about 3%, the commission said. That means, according to an example cited in the complaint, it would cost a Monex customer $2,550 to trade 5,000 ounces of silver, versus $25 to enter into a substantially similar futures contract on one regulated exchange.”

Compared to trades on a regulated exchange, the commission alleged Monex charged “outsized price spreads, commissions, interest on loans, and administrative fees.”

Monex-Injunction-Relief
Spreads Chart
Spreads Add Up

Crucial Distinction: Spot vs. Futures

A fundamental understanding of spot and futures markets is paramount for any investor. Seasoned participants often gravitate towards futures due to their well-defined regulatory framework, capital efficiency, and robust risk management instruments. After all, the primary objective is to safeguard your capital, not inadvertently relinquish it.

The Pitfalls of Spot Storage

Frequent trading within spot storage accounts can erode returns due to significant spread charges. This highlights the importance of exercising due diligence when selecting the best instrument for trading and investment purposes.

Beware of Predatory Practices

Be particularly wary of unlicensed spot dealers and their account executives who might employ deceptive tactics, such as “bait and switch” strategies, to lure you into illiquid assets like rare pneumatic coins with exorbitant spreads exceeding 30%.

Solution

Use ProGoldTrader for their professional advice and guidance. With cost-saving spreads, software, live quotes, liquidity, and no-haggle pricing, back to USD in seconds not days. Regulated by the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) designed for consumer protection.

Disclaimer: There is a risk of loss in any investment. Spreads can and do vary. This is just to demonstrate the disparity between futures and spot storage account transactions. This excludes Commissions, NFA, Transaction, FCM, Software Quotes, and Inactivity Fees and is only focused on spreads.