Bullion Shortage and Spot Prices Tell Two Different Gold Stories

by: The Prudent Investor October 13, 2008 | about stocks: GLD    
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Having blogged earlier on a physical silver shortage and the drying up of gold bullion purchases, recent events in the precious metals markets justify an update that again arrives at the conclusion that last Friday's silver and gold price plunge on COMEX has pretty little to do with the actual physical investment demand for gold and silver. Tim Iacono had a good post with the headline "Gold prices getting fishier and fishier," that does away with the myth that the US mint faces unprecedented demand. I stumbled across several more reports that show the ongoing dichotomy between official spot or futures prices and premiums actually paid by investors, if they can get their coins or bars at all.

The British Evening Standard ran a story over the weekend that said demand in Germany had grown 10-fold and dealers were not taking any more orders:

German gold dealers say demand has skyrocketed this past week to 10 times normal so no more orders can be taken for the foreseeable future.

"The demand exceeds our capacities by a great deal," said Heiko Ganss, head of precious metal company Pro Aurum.

"The requests cannot be satisfied right now," a dealer from the Düsseldorf WGZ Bank confirmed.

"Demand for gold as a conservative investment has risen dramatically," said Stephan Henkel. "right now the demand is about 10 times as high as in normal times."

Gold deliveries now take between four and six weeks.

This was confirmed by the Berlin daily Tagesspiegel, which reported in a very insightful article that German gold dealer Pro Aurum has closed its mail-order business due to demand never seen before.

One reportedly has to wait four weeks to take delivery of one kilo gold bars.

Physically backed gold ETCs (Exchange Traded Commodities) see heydays as well, according to a story at investegate:

Physically-backed gold ETCs saw $93m of net inflows, equivalent to 106,000 ounces of gold, in the six business days up to October 6, the largest weekly increase during the past 10 weeks, while silver also saw net inflows.

Despite a fall in gold prices last week, the ETCs' total assets reached $4.5bn, equivalent to 5,340,000 ounces. So far this year the products have seen $992m in inflows, equivalent to 1,530,000 ounces, an increase of 30%.

ETFS Physical Silver experienced a net inflow over the six-day period of USD7m, an increase of 4% or 1,194,729 ounces. Over the past six weeks, the product's volume of silver has increased by 25% to 12.8 million ounces, the highest level since January 30, and its total assets to $141m.

The new gold rush has also taken grip of Dubai's gold market. According to a report from ameinfo:

We have a similar rush in the souks of Dubai. Gold coins are selling at the highest premiums to spot gold price in 30 years, and stocks are running out.

In silver the premium paid for bullion bars is up to 50% above the spot price as dealers are running low and demand remains very strong.

Vietnam saw gold rising strongly last Saturday too. From Vietnam News:

Domestic gold prices increased strongly here yesterday, rising by VND50,000 to between VND17.90 million and VND18.10 million a tael yesterday as the world share situation became more chaotic.

Nguyen Huu Dang, head of the business department of the Ha Noi-based Bao Tin Minh Chau Jewellery Co, said his shop was full of sellers because of the big profits.

Bloomberg fills in the gaps on the world map, reporting excessively strong demand in more places. In Australia: 

The Perth Mint, producer of 10 percent of the world's bullion, doubled output in the past six months, joining a global push to boost production as investors seek protection from the credit crisis.

Perth Mint sold so-called Kangaroo and Nugget coins weighing a total of 62,630 ounces in the three months to Sept. 30, compared with 154,501 ounces for the 12 months to June 30, senior manager Bron Suchecki said in an interview from Perth, Australia yesterday, adding there's been a surge in "moms and dads'' buying over the counter in the past three months.

"It's reflecting a real breakdown in trust in financial products,'' Suchecki said at the mint. "People aren't thinking how do I grow my wealth' but 'how do I protect it."

The shortages don't stop there, reported Bloomberg. In Austria, Muenze Osterreich, producer of gold and silver philharmonics has added a third shift.

Muenze Oesterreich, which makes the world's second highest- selling gold coin, increased output of the Philharmonic almost fourfold and doubled production of gold bars in the past year, Vienna-based Marketing Director Kerry Tattersall said yesterday. The 800-year-old mint, located in a former Habsburg palace, has also added a third work shift to press more coins.

The US Mint announced already a week ago that it would expand its production after gold coins have been suspended from sale quite many times since one year.

Now can someone tell me why gold is always falling ahead of the US trading session? Dan Norcini offers daily insights, alleging gold price manipulation for quite some time. Check out his daily commentary at jsmineset.com.

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This article has 44 comments:

  •  
    Oct 13 09:40 AM
    because people saw the huge bounce coming in equities?
    Reply | Link to Comment
  •  
    Oct 13 09:53 AM
    It was me last Friday. I sold a couple ounces of gold and word got out. I guess everyone must have been in a panic and sold theirs too. So the drop in price isn't terribly surprising.

    It only takes the sale of what, 5 or 6 ounces, to bring the price down by $70?

    It's all natural market forces. I'm sure.
    Reply | Link to Comment
  •  
    Oct 13 10:42 AM
    A spike in gold is coming very soon!
    Reply | Link to Comment
  •  
    Oct 13 11:57 AM
    What is truly astonishing is how the world's major CB's have announced "cooperative currency debasement" and gold prices fall. This in a continuing atmosphere of lack of physical supply for investors.

    Who believes this?
    Reply | Link to Comment
  •  
    Oct 13 12:47 PM
    What I don't really understand is if there is such a price divorce between the spot price of gold and silver and demand for it in the physical markets, why don't people just buy spot and then sell it in the physical markets? I mean, that's a pretty big arbitrage opportunity.

    The only real explanation that I can think of is that everyday people that aren't really hip to other ways precious metals can be traded are going out and buying physical gold and silver. However, as The Prudent Investor (ps I dig the name) indicated, physical reserves in ETCs and ETFs have grown quite immensely, which would lead me to speculate that it's not just gold bugs that are snapping up more precious metals.

    I really think that if the dollar loses its forward momentum that we'll see a flight back to gold in the paper markets. Until then, I don't understand how there could be such a difference in the spot market and physical market.
    Reply | Link to Comment
  •  
    Oct 13 01:07 PM
    Sane: Most everyday people can't afford to take delivery of multiples of 1000 oz. silver bars or 400 oz. gold bars trading on COMEX. The Chicago Board of Trade mini contracts are, however, an option for small traders, so yes it's partly ignorance of that option and partly trepidation over dealing in futures.
    Reply | Link to Comment
  •  
    Oct 13 02:56 PM
    Sane: there are also allegations that the exchanges limit the amount of physical delivery, in effect forcing contracts to be settled in paper dollars rather than physical silver and gold. If you search you will find many who allege that there are hundreds of times more contracts for future silver than there is actual physical silver on the planet. I say "allege" because I cannot independently verify.
    Reply | Link to Comment
  •  
    Oct 13 04:09 PM
    Toni,

    The physical shortage and the price movements do not jive with each other. They can't both be true.
    Unless, traders are SELLING the futures and BUYING physical instead???
    Reply | Link to Comment
  •  
    Oct 13 04:33 PM
    The question is, how much of gold is a hedge against inflation, and how much of gold is just another commodity, subject to the same fate as all other commodities over the last few months? What is the percentage, and how do we calculate it? I'm sick of hearing about how the price of paper gold is manipulated. I know that gold is selling off because hedge funds and others are clearing out their positions to lock in profits and offset losses. And I know that many think cash is king right now, and that means selling gold. But I do NOT know how to calculate how high gold will go if say for example the price of corn drops 50%.

    Furthermore, we just had a commodity bubble, so it's really hard to see the same bubble happening again.

    It seems to me that they tried inflation over the last few years, starting especially in 2002. This is what we got as a result. A bout of inflation, and now an even more overvalued market. Even at 8000 it is overvalued, and now its over 9000 again!

    So... now we are either headed to hyperinflation, or DOW @ 1600 and gold @ $90 per ounce.

    IF we go the hyperinflation route, then this criminal cabal in washington will surely attempt to confiscate all gold, because we cant have any intelligent people profitting off their engineered destruction, now can we? Heavens no. And maybe that is ultimately why gold is not rising. It is just not a free market, and maybe gold is simply reflecting that fact.
    Reply | Link to Comment
  •  
    Oct 13 04:38 PM
    Do you really think the GLD or SLV fully account for bullion with custodians like Barclays or JP Morgan? Do you really think the paper gold in the world will be accepted in the future? I do not... If you are not in the CEF or GTU you might be in a paper derivative for trading but nothing backed by real bullion... Of course the banks supress the COMEX price... Check out the declining open interest in gold with the stock market collapsing... Traders are realizing there are less and less free markets here in USSR/USA. C
    Reply | Link to Comment
  •  
    Oct 13 06:31 PM
    Gold elevator up will by-pass Dow Jones elevator down at 3000...
    Reply | Link to Comment
  •  
    Oct 13 11:18 PM
    Come on. Something smells very fishy. At the announcement that all the Central banks of the world were going to inflate their currencies gold went down? I mean any gold bug worth his salt would NEVER sell gold with info like that. This was all the hell in the hand box crowd feeling comfy dumping their positions. Silver did kick up, but everyone watching this thing knows that gold is the real truth sayer when it comes to value preservation, silver sometimes marches to a different tune due its industrial use.

    I think gold is goin up and I'am looking for a good, hard, downturn to go double dog long. I think oil might lead the way. This imposter of a bail out plan is going to be dis-robed by good old oil and gold.
    Reply | Link to Comment
  •  
    Oct 14 01:02 AM
    There is no shortage of physical metal in the wholesale markets (ie 400oz gold bars and 1000oz silver bars), it is the conversion of that metal into retail coins and bars that is causing a shortage of retail product, pushing up their prices. In other words it is a production capacity shortage. See goldchat.blogspot.com/...

    It is also helpful if you use "spot price" correctly. By definition it means physical for delivery, so it is not a "paper price". See goldchat.blogspot.com/...
    Reply | Link to Comment
  •  
    Oct 14 04:26 AM
    Somebody told me that the ultra rich (with vaults bigger than my house) are buying up gold coins (or anything small enough for the peasants to be able to afford), melting it, and hoarding the bars. True? Heck if I know.

    But it's fishy that the price of gold is going down and so is the availability of anything smaller than a whole bar. Somebody above my pay grade is manipulating the market. Lucky for me I can't afford to buy it anyway :)
    Reply | Link to Comment
  •  
    Oct 14 08:26 AM
    If there could be a regularly reported 'street price' for gold, in a way that would equal or even replace the NYMEX/COMEX spot price, it would be interesting to see what the retail free market price of gold is. I have a feeling that would more closely give the 'real-life' value of gold. It doesn't make sense, really, that gold seems to be going down or at best treading water when on Friday people were lined up outside the doors of gold dealers in London. We need some reporting of the free-market price of gold.

    Gold dropping in price on Friday and Monday does have a rational explaination, however.

    On Friday, the hedge funds and mutual funds were facing unprecedented withdrawals as ordinary people want out. Probably a huge majority of the larger funds have been investing in foreign stocks. Even today I read an article of why one should invest in China. In their efforts to meet the withdrawal demands, these funds have been selling their foreign stocks and bringing the funds home to meet the withdrawal demands. The mad effort to convert the funds back to dollars has driven the cost of dollars up significantly. Of course, these funds were selling their gold to raise cash as well.

    My thought is that on Monday gold went down further because of the European plan to 'do whatever it takes' to solve the crisis. This means printing more money., the only tool governments have. I read that they were throwing something like two to three times as much money at the crisis as the U.S.'s $700-Billion. So, when they announce they are inflating their currencies two to three times Uncle Sam's rate, that would drive the value of their currencies down in relation to the dollar, making it appear that the dollar is rising in value. Since gold is prices in dollars and the dollar was 'rising,' gold seemed to go down when priced in dollars.
    Reply | Link to Comment
  •  
    Oct 14 08:39 AM
    The answer is very simple. A rising gold price is an indicator that the central banks are printing too much money. It is also widely seen as a barometer for inflationary expectations and confidence in the financial system. Since the central banks find themselves in a crisis situation and a position where they need to create an unprecedented supply of new money, it is imperative for them at the same time to prevent a sustained rise in the price of gold, which is the only competitor to their fiat.

    If the gold shortage moves to the institutional level however, then the price suppression scheme could fail.
    Reply | Link to Comment
  •  
    Oct 14 08:51 AM
    because you cant get the physical of sufficient quantity to deliver

    that's the whole point, financial exchanges are supposed to reflect physical supply/demand and they dont.

    the better question is why not?

    why don't you try taking delivery of an ETF and/or a comex contact and see what happens

    regards
    Reply | Link to Comment
  •  
    Oct 14 09:21 AM
    CEF, Central fund of Canada, easy way to own physical gold cheaply and safely. CDE, easy way to buy a lot of cheap silver in a long-established miner with new production coming online.
    own the juniors, they are so cheap now they are practically free!
    Long PAL, SWC, NXG, CDE, buying into CEF and hold some GFI for good measure. Not a large portion of my portfolio but that 5-10% you need when the governments are running printing presses full out. Interest rates are already starting to rise. Big fall in Utilities is a precursor to interest rate rises and inflation, ALA the 70's.
    Reply | Link to Comment
  •  
    Oct 14 09:50 AM
    Gold coins and gold bullion? Buy 18ct gold or higher chains and other gold jewelry, go online find a reputable seller like Target and make your purchase. I have been buying gold jewelry for my wife, she likes it, and not only do I get credit for it, I also consider it as an investment.

    If hyperinflation materializes, the present markup at regular stores won't matter. Links from gold chains can be used for purchases. There are online stores who have occasional specials. These specials sometimes remove the markup entirely.
    Reply | Link to Comment
  •  
    Oct 14 10:43 AM
    In times of market decline and recession, investors will naturally go to precious metals, such as gold and silver. During the last couple weeks we’ve seen a large influx of investors cashing out of equities and jumping into gold in particular. Given the fact that no currency is no longer pegged to gold, the once “safe haven” doesn’t hold it’s true value as it once did, IE our fiat money. We currently have a rally in the market, some say this won’t last, while others are taking advantage of the lower gold prices. Either way gold usually stands true over the long run during periods of uncertainty. I’ve been reading on mining valuation, and the differences between the intrinsic value and the market’s perception, very good read.
    See Mining Valuation <br>
    Emotionless Investing.
    Reply | Link to Comment
  •  
    Oct 14 10:43 AM
    working link www.stockresearchporta...
    Reply | Link to Comment
  •  
    Oct 14 12:21 PM
    Beabaggage - and anyone else interested in CEF - This Canadian precious metals ETF is made up of approximately half gold and half silver. So, when you own CEF you are playing both gold and silver. One other thing - since the Canadian dollar plunged to about 85-cents U.S., and nobody expects it to stay that low, you should benefit when the Canadian dollar goes up. Therefore, CEF is a play on gold, silver, and the Canadian dollar!

    [Disclosure: I have 1,000 shares/units of CEF.]
    Reply | Link to Comment
  •  
    Oct 14 12:29 PM
    Gold elevator up will pass by Dow Jones elevator down at 3000...
    Reply | Link to Comment
  •  
    Oct 14 06:27 PM
    opec meeting 15th november.drastic oil production cuts planned do you think opec are stupid enough to dole out oil for worthless printed dollars commodities are not a bubble.they respond to supply and demand particularly supply of worthless dollars.welcome to the new america the weimar republic of america.i told you our communist ideology would we just took the long term view.

    leonid breshnev
    Reply | Link to Comment
  •  
    Oct 15 07:10 AM
    Retail is buying overnight and buying coins. Smart money is selling the pops. In a deflation, all commodities go down. Not hard to figure unless you have a fixed idea that is wrong.
    Reply | Link to Comment
  •  
    Oct 15 07:34 AM
    A point to the specific risk on paper gold and why people may think it is manipulated.

    Reference was made to GLD, SPDR Gold Trust that sells paper gold. The price of the share is supposed to track the price of a 1/10 oz bullion, ~ $84 a piece today. What do you get for your money if you buy GLD?

    I am reading from GLD’s 10 Q report ending June 30, 08:

    Gold investment and receivables is all there is on the asset side of the GLD balance sheet.

    Gold Assets/ Number of shares = $ 13.8 B/ 0.21 B Shares = $ 65.7/ Share. But you pay today ~ $82.50 /Share. Are you not shortchanged by 25 % + buying the paper instead of physical gold.

    Plus this trust has negative equity due to excessive redemption share liabilities, strongly deteriorating yoy and the buyer takes on all the credit and counter party risk of this trust.

    This all looks like a terrible deal to me. Looking at the price volume action of GLD today I sense there is a high volume shorting of GLD going on since Friday.

    The GLD price curve looks awful since it broke in Mar 08.

    I think alajac is right, when the hoi polloi believes it is common sense to buy gold, the smart money has already left the place.
    Reply | Link to Comment
  •  
    Oct 15 09:07 AM
    Demand may be at a record, but supply (paper comex at least) is literally infinite. Commercials have no limit on the number of contracts they may take, plus, several large banks have the luxury of being defined as commercials and have huge positions.

    So high demand is still completely swapped by supply (which could not deliver if it had to, but fortunately the rules are such that they dont have to - how convenient).

    It will take something more than record demand - hyper inflation or teotwawki scenarios (obama/2012/666/mabus/... all related).
    Reply | Link to Comment
  •  
    Oct 15 10:18 AM
    I went to the largest coin/metals dealer in Fargo yesterday and tried to buy some silver. They were completely out, and have no idea when they might be receiving some. They have a LOOOONG waiting list of people who want to buy. And---they will be taking delivery of several futures contracts when they expire.

    What does this mean? I'm not very savvy about these futures markets, and wonder if it's possible to buy a mini contract and take delivery. Anyone out there with experience on doing this?
    Reply | Link to Comment
  •  
    Oct 15 12:47 PM
    Gold elevator up will pass by Dow Jones elevator down at 3000...
    Reply | Link to Comment
  •  
    Oct 15 01:05 PM
    IT is a matter of TRUST.
    Do you trust the FED, the us$, Bush....?

    Well then Vote them out, sell paper,buy silver,gold and canned food.

    In 1960 + there used to be a silver dollar = 1$ for 1 OZ og silver.
    Even today's 22% smash, silver is STILL over 10$
    So, if Americans had kept there silver dollars, petrol would be dirt cheap.

    Why do Arabs call the usa for the GREAT satan.......

    Well, I have Decided to SAVE General Motors, by NOT buying their cars, since they loose money - 4-8000$ on each car, this should help them break EVEN.
    Sorry to be Sooo ironic, but this is the same logic they use to explain gold prices dropping.
    there is NO shorting on 799 + + stocks, but shorting metals is NOT robbing Africa,mining Company's or OTHER central Banks....????
    THIS is the most scary thing about all this, the fact That NOT even 1 central bank in the world dare call the us $ BLUFF.
    WHY does'nt Russia dump all there paper $ and snap up all the remaining silver on the COMEX, and crush USA...???
    Is that because, there is NO real differences to their plans, but only used the cold war to profit and seduce all nations ?

    Do we ALREADY have a NEW world unORDER ?

    MC
    Reply | Link to Comment
  •  
    Oct 15 01:47 PM
    jhm - minis are not deliverable. and good luck trying to get delivery on the full contracts for that matter....
    Reply | Link to Comment