Demand for taking delivery of physical gold and silver has multiplied thanks to institutional investors and investment banks ditching their positions in the asset class. As much as an eleven percent falloff in the spot market over the last week and few days have given investors the opportunity to buy in at relatively lower prices. Although the physical market represents merely a fraction of what occurs on the futures exchange, the two markets really do represent a bit of a dichotomy in the preferences of the two types of investors at present. The institutions are net sellers of the gold backed ETF’s and there is absolutely no shortage of buyers for physical. Demand has been so strong that for the individual investor to purchase physical gold and silver right now, the smaller dealers are quite simply limited or sold out, and our customers despite being able to buy at current prices face wait times of four to six weeks to take delivery.
On top of weeklong wait times for delivery, mints are operating at full tilt. According to statistics from the US Mint, they have produced and sold 153,000 one ounce gold eagles in this month so far. They are on track for their biggest month since May of 2010 when they did 190,000 ounces. This influx of buyers to the physical market could be from customers averaging down the cost of their initial investment, but also many are just taking this selloff in the market as an opportunity to buy. Despite the sharpest two day drop in the gold market since the early 1980’s gold and silver have clearly not lost the status of a precious metal. The current market demand reflected in the premiums that investors across the globe are willing to pay validates this; furthermore, it tells a story of an investors desire to hold the metal.
Over the last decade the desire to hold precious metals stemmed from the perceived status of a safe haven for capital. There was usually a flight to the gold backed ETF’s following a sizeable selloff in the equity markets. Following years of accumulating metal positions, the gold backed funds finally starting dumping some of the tonnes of gold they hold for their investors. And although it was quite easy to gain access to the appreciating price of gold by simply buying into one of these funds backed by bullion and futures contracts, it did come with the same level of assurance in actually holding the metal itself. But as that was not the desired interest of the investor, there really was not a widespread interest in acquiring delivery of physical gold.
Demand for the metal aside, there is still no clear explanation for this kind of downward movement in the price. Across any asset class there is always a reason for why the market moves. When the Dow went from above 14,200 to around 6,500 in a matter of months, it was because the US was entering the worst recession since the Great Depression. The fact that institutional investors have lost their interest in the precious metal as its short term outlook wanes does not really justify this kind of collapse. Of course there is the IMF revising down global growth forecasts, which trims demand for commodities, and China’s growth numbers contributed to this just last Monday, but as the volatile gold market illustrated, it’s a market that is based more on perception and less on fundamentals.
The revelation the European central banks, particularly Cyprus, may start selling gold, but only an amount that is less than a tenth of what we’ve seen the ETF’s sell this year contributes to this. And this just helps me reaffirm my view on gold. It’s not a sure thing. It never was. But gold is an asset that throughout time has been thought of as money. And with the Bank of Japan being the last central bank to embark on an overaggressive monetary policy, as fiat money is naturally inflated, I perceive gold to continue to have value. The market may prove me wrong, as in a short term perspective it has done that too many that have bought before this fall, but gold for me gold represents a small hedge in a portfolio with a longer term holding period.