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Why Gold Is Down, But You Can't Get Your Hands on Any



November 18, 2008 – Comments (4) | RELATED TICKERS: AUY , GLD

Why Gold Is Down, But You Can't Get Your Hands on Any

At first glance, it appears as if the gold bugs, those bullish on gold, have been stepped on this year. Spot gold is down nearly 30% from its peak of $1033 an ounce set earlier in the year.

But a two tiered market has developed where speculators have been badly burned trading gold futures, while some investors holding actual physical gold have not only managed to keep their shirts, but have held on to gains for the year.

Dealers and analysts are calling it an “upside down” market where physical gold, including coins and bars, are in short supply and far more expensive than the price quoted on New York Mercantile Exchange’s COMEX division.

What’s sparking the demand for physical gold? You need to look no further than the financial landscape surrounding investors.

“I’ve never seen anything like this,” says Scott A. Travers, author of The Coin Collector’s Survival Manual. “1979 and 1980, the go-go years of Jimmy Carter, gas lines, inflation, interest rates at extraordinary levels had people rushing to tangibles. The frenzied pace for yellow metal today has exceeded those tumultuous levels.”

On top of a slowing economy, liquidation by cash hungry hedge funds has gotten much of the blame for the slide in commodities futures prices including the metals group.

In recent trading, the active December contract has traded in the area of $740 per ounce, while one-ounce bars of gold have been trading at or near 20% premiums to the front-month futures contract, according to gold dealers. Usually the premium is only about 5%.

The same goes for silver, where Comex paper futures are trading at just over $9 an ounce, compared to physical supplies commanding prices above $12 an ounce.

There’s an even greater discrepancy involving average uncirculated one-ounce late 19th and early 20th century gold coins known as $20 Liberty and $20 St. Gaudens coins. These particular gold coins, which normally attract a price of about $70 an ounce above spot, are attracting bids of at least $1,100 a piece.

Online auction sites have experienced active auctions for one-ounce gold coins. A quick check of eBay yields a variety of examples of gold coins trading at big premiums to the spot price. A 1908 one ounce $20 Double Gold Eagle had attracted more than two dozen bids and price of over $1200.

Says Travers, “physical gold does well in times of economic distress, calamity and blood in the streets,” adding that “gold is really a quasi-currency; as people worry about a possible collapse of the banking system. With (Treasury Secretary) Paulson’s change of policy on how to use TARP funds, the collapse of the global banking system is still not off the table.”

While the price of gold futures has sunk into the low $700 per ounce range, World Gold Council data show that a pricing floor may be developing, even for beaten-down Comex contracts, due to lower gold production. Through the second half of the year, the Gold Council reported a 4% drop in mining output and a decline in central bank sales.

4 Comments – Post Your Own

#1) On November 18, 2008 at 6:23 PM, nuf2bdangrus (< 20) wrote:

The public is very different than traders.  The public has NO confidence in the currency, because they see the writing on the wall.  Traders simply trade anything up or down as the swings go.


APMEX has gold in stock and is shipping.  Nobody else does.

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#2) On November 18, 2008 at 6:59 PM, Harold71 (< 20) wrote:

Kitco recently updated their inventory listing.  I assume this means the products are shipping again.  Gold Eagle 1 oz is $806.

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#3) On November 22, 2008 at 9:32 PM, Silverbids (< 20) wrote: has put up graphs of spot versus physical metal prices.

These price gaps are economic indicators, and have been important before. 

Now we can check them easily the, insead of having to track, analyze, and graph thousands of eBay auctions ourselves.

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#4) On November 24, 2008 at 1:13 PM, captwildbill (< 20) wrote:

It is possible to find gold coins but you have to be willing to make a buch of calls, and pay a bunch over spot.  I have been able to buy from Kitco (although they virtually never have what is listed on their site, and take weeks to actually ship), Fidelitrade (they also only have a tiny fraction of what they list on their site, and they take a long time to ship), Tulving (has pretty much what is listed on his site and ships immediately, unless he shows a back order on his site).  I have also occasionally been able to get some at a local coin store.  Interestingly the local coin dealer wasn't willing to raise his price to more than a few percent over spot.  He felt that he needed to keep the good will of his long time customers, so he wouldn't simply rip them off in a crisis.

 Many website that list gold don't actually have it.  Some have a few coins at a wildly inflated price.  Some sites will sell you gold that they claim they will get in a few months.  All the dealers I have spoken to say that they have never in their lives seen such demand for physical metal.  As for Platinum, it seems essentially impossible to get.  If you see any, buy it becasue it won't last.  I don't know if those comex trades that set the platinum price actually involve any platinum changing hands, but I do know I can't get my hands on any.  A couple of months ago I did manage to put my hands on a couple of 50 ounce platinum plates (ugly as cast bars with the manufacurer, weight, purity and a serial# stamped on them), but I am told that the 50 ounce bars are hard to trade (may need an assay).

I would say the bottom line is that there is a huge disconnect between the Comex price and the real value of precious metals.  I have always said that in the short term the stock morkets can be irrational but in the long term they tend to be rational.  I am guessing that the precious metals market is similar.  We may have an artifically low price based on margin calls or manipulation, but eventually the price will move toward a balance between supply and demand.  I have heard that the price to produce an ounce of platinum is substantially higher than the present Comex price.  Obviously that is unsustainable for any length of time.  I do not know the price of gold production but there is an obviously limited supply.  I believe the entire world gold reserves are only worth several hundred billion dollars at todays price.  That is obviously not nearly enough to satisfy a market looking for something tangible to put their dollars into. 

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