Buying or Selling Gold and Silver?

Many investors consider the recent drop in gold, silver and platinum prices to be the perfect opportunity to build (or add to) their precious metals position. With the price down, the basic law of supply and demand has kicked in and demand for silver bullion and silver coins has risen sharply. Short-term, supply has gotten tight, as some dealers scramble to keep up with demand.

We  also saw a major disconnect between Physical Gold vs. Paper Gold as a massive sell order hit the futures market to sell 400 tons of gold! But at the same time small buyers rushed to their local dealer to take advantage of the price drop and stock up on the physical metal. And of course since gold and silver prices tend to move together we saw similar action in the silver market as well.

In another article, Jeff Clark, Senior Precious Metals Analyst for Casey Research told us that they talked with the wholesalers directly. These are the big boys, the bullion banks, bullion traders, and refiners. They deal in wholesale trades only, in large quantities. These boys supply the dealers and investment funds.

Here’s a summary of what Jeff found out about what occurred during the week after April’s 9.3% selloff in gold…

• Bullion Banks. As a group, there were roughly four times as many buy orders as normal. Generally speaking, the buy/sell ratio was nine to one. Inflows (buying vs. selling) were net positive across the board.
• Bullion Traders: There were twice as many trades placed as usual – and the buy/sell ratio was a whopping 95:1. One anonymous dealer told us it had 995 buy orders that week and just five sell orders. Reports like this were consistent among the group. What’s interesting is that all traders reported higher volume. That the increased buying occurred on large volume instead of small volume means the buying was not a fluke. It also confirms the bull market isn’t over.
• Precious Metals Refiners: These entities deal in large trades only. None would reveal the quantity of their orders, but two stated they had no sell orders. A third told us they had one sell order out of 100 transactions.

In other words, no one was a net seller!  Volumes were up and there was across-the-board buying. The big boys were saying,  “We’ve never seen anything like this.” And that includes during the 2008-2009 period.

Something Strange is Going On

It appears that the drop in price was probably due to massive selling by a single seller and my guess is that the seller was Cyprus in an effort to meet its obligations. The selling was done in one fell swoop on the futures market with no effort to get the best price. Who besides a government central bank just has 400 tons of gold sitting around that they are able to sell? Who else doesn’t try to minimize their effect on the price and just dumps it? But officially Cyprus has denied the sale.

If Cyprus was involved, the key question would be if the dumping was planned by other central banks in an effort to try to put a damper on the price of gold as an added bonus to collecting on their debts from Cyprus? Were there big boys who were short Gold just prior to the dumping making big profits on the drop? Or was it just an effort to discredit gold because it was becoming too popular and giving paper money a bad name?

Either way, what we saw in the crash was that the demand for paper gold fell while the demand for physical gold rose. So even though at this point the prices are theoretically tied together what we saw was that the “premium” i.e. the fee dealers tack on over and above the price the futures market says gold is worth rose drastically in effect creating a two tiered price system. Back in early 2009, the same thing happened as there was a massive shortage of physical silver. At that time, premiums for silver Eagles reached as high as 90-100% before coming back down. In other words, even though an ounce of silver  should have cost say $25 dealers were selling 1 oz Silver Eagles for $45 – $50 and people were willing to pay it. While during “normal” times the premium is often 5%.

The disconnect between the paper price of gold and the demand for physical metal is so great that we want to bring this to your attention so that you can make an informed decision. You can’t just go by the published price of silver and gold anymore, you have to look at the demand for the physical metal.

See Also:

• Physical Gold vs. Paper Gold
• The Greatest Wealth Transfer in History
• NY Times Says End for Gold
• A Rare Opportunity to Make Serious Money on Gold’s Rebound
• Is This the End for Gold?

Recommended by Amazon:

• The True Gold Standard – A Monetary Reform Plan without Official Reserve Currencies
• Gold: The Once and Future Money
• Hard Money: Taking Gold to a Higher Investment Level
• $10,000 Gold: Why Gold’s Inevitable Rise Is the Investor’s Safe Haven
• The Silver Bull Market: Investing in the Other Gold

Image courtesy of Stuart Miles / FreeDigitalPhotos.net