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Decoupling Of Physical Gold And Paper Gold Prices

by: Joey Keasberry September 01, 2008 | about stocks: GLD / IAU    
Joey Keasberry

Joey Keasberry

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Earlier this month I drove down to Brussels, Belgium, to buy some Krugerrands. I could have bought them in my home country, The Netherlands, but I found the premiums at local dealers to be outrageous.

In Brussels, I found a dealer that only asked a couple of Euros above the spot price, which came down to a 1.5% premium. At that time, it was already surprising that at every local dealer, premiums were over 5% for 1oz Krugerrands. And taking a day off from work, spending a full day traveling to Brussels, a distance of 220kms (about 135 miles), and EUR 60 on fuel was certainly worth the difference.

Now, with the spot price in Euros pretty much similar to the price at the time I bought the coins, the Krugerrands can only be bought at crazy premiums on top of the spot price. At my favorite dealer in Brussels, the bid price is now even higher than the spot price.

According to Bloomberg, the reason for that is that Rand Refinery, the producer of Krugerrands, just received a Swiss order for Krugerrands of an abnormal size. It now appears that no Krugerrands will be available at Rand Refinery until the 3rd of September.

I went to Rand Refinery's website and saw that the premiums charged for large amounts (50+) 1oz Krugerrands went up to 5%! And that will get a retail margin on top of it.

The trend we are now seeing is that there is a clear decoupling of physical gold prices and paper gold prices. While it is suspected that large financials are selling their gold, demand for physical gold remains high and is even increasing at current prices. This results in rising premiums and many times in dealers having to refuse coin sales.

A simple Google search will lead you to websites of many bullion dealers around the world, where you can check what the difference is between bid & ask. Spreads have become enormous and at many websites, you will see that stocks are depleted. The situation with silver is quite similar or possibly even worse.

So, if you read about the metals boom/bust-scenarios and about the gold price targets that most analysts have suddenly reduced to well-below $700, stop worrying. Don't take any risks and buy physical gold or silver, rather than paper. We're approaching times when almost anyone will want to buy your coins or bars. And let's not forget that mining companies do not produce paper gold. This means that that at some stage we will have to include the current premiums that are charged for physical gold into the valuations of the already undervalued mining sector.

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This article has 24 comments:

  •  
    Sep 01 11:02 AM
    I expect that we will have to wait to doomsday to receive an article from $HARK$, probably just as well as it would be infantile.
    Reply
  •  
    Sep 01 11:19 AM
    It appears that $HARK$ and CLH are the one and the same impostering from yet a third party website.
    Reply
  •  
    Sep 01 11:38 AM
    $HARK/Shark/Fark whatever....I read every word of your posts, maybe you are right, we will see. At least you are an excellent trader, and have a sense of humour (albeit offensive to many). It would be a good lesson for us if you tell us about your next GC trade (in advance).

    However, just one pointer on the article above, the author mentioned his purhcase was in Euros, and therefore has likely not lost any capital over the last month (avg EUR 559.62 vs current price EUR 560.27). For investors like me in the UK, physical metals aren't doing too badly as the pound is falling faster (in $ terms). Average GBP closing price for gold in August is £444, vs current price £455.
    Reply
  •  
    Sep 01 11:38 AM
    Good article, which seems to reflect people's overall experience in the real world.
    Reply
  •  
    Sep 01 11:57 AM
    Note that the gold and silver price "fixing" in London each day is for physical deliveries. These non paper transactions instruct the market as to where prices are going. Unless the buyers and sellers are colluding to create a fake "fix" the disconnect is obviously only between gold and silver in retail sizes and the price for 100 oz (gold) or 1000 oz (bars). The gold bugs who are waiting for the Indian wedding season to bail them out are leaning on a weak reed. Now that the dollar appears to be over its sickness, the big money that bought the 2500 tons of gold from the central banks during the last 8 years may be selling at a profit. If so, watch out below!
    Reply
  •  
    Sep 01 12:03 PM
    It's my experience that there is now a difference of about $2/oz between the futures price of silver and the price you can buy it at auction on ebay (the free-market price). That's about a 15% premium of metal over paper. Time was (prior to March) that 90% silver US pre-'65 coinage was obtainable in the same auctions below spot, sometimes as much as 10%. Something has definitely taken place since then. I don't assign much credence to spot prices anymore. The explanation in March was that prices were so high that people were rushing out to buy. Now the same people are saying prices are so low that people are rushing out to buy. Hmmm.
    Reply
  •  
    Sep 01 12:46 PM
    You ask when I will buy GC,so listen everybody:
    Never (it is for fun).
    But really I like GC as a sell more as think this is less risk,I am not going to sell GC today when it's down not to be caught on a dead cat's bounce.
    Let GC rally as much as it can even if it will take GC till 987$ I will not be sorry for not buying now,maybe it sounds stupid to you as it is better to buy today at 820$ sell at 987$,but I have seen how many rallies are false in GC so I think risk buying GC is more than selling,to make 10-20$ on the long from 820$ I can be caught with the boat full with losers and I don't like to swim or eat with pikers.
    Let your GC go to 1000$-2000$ I have nothing against you or GC,I was long Palladium at 292$ sold 305$ made 3500$ and PA went even higher,I am not sorry.It's so hard to make money lately that I bite here and there and close my positions.Only short 8 mini DOW I allow myself overnight forever indefinitely,but not CL,NG,GC or other volatile commodities.
    Let the GC fly and you make all millions,I am happy with my August return of 40,000$ and hope maybe September be kind to me so I can make 10,000-20,000$.
    Reply
  •  
    Sep 01 12:54 PM
    Under the current monetary system, the dollar and all other fiat currency are unlikely to be a good store of wealth (ie maintain purchasing power) thanks to the greed and self interests of those in control of money supply. Who doesn't like free money?

    Indian buying and 'seasonal strength' may not be enough to kick start a new up leg. No one knows, and long term physical holders should not care. It may take years to reach new highs again, but that doesn't change the fundamentals.

    If history is any guide, the current high retail premiums probably won't last, as there is no evidence of shortage in the OTC/physical market. It should only be a matter of time before fabrication supply meets the higher demand. Hopefully by early next year we can all get our hands on as much retail supply as we need at lower prices and lower premiums.
    Reply
  •  
    Sep 01 03:14 PM
    For gold, more so than any other, the higher the price the more buyers. Folks whose fathers bought at $800 and rode it down to $300's, finally selling, will themselves spawn in higher pools yet. Only to rush down stream. It's a round trip play, at best, for most.
    Reply
  •  
    Sep 01 03:19 PM
    of course at any time the govt. can declare the ownership of gold illegal.did it not just happen in vietnam? who can trust the crooks,scammers,skimme... un ethicals of our govt? our currency should be backed up by gold.it would avoid a lot of this mess.
    Reply
  •  
    Sep 01 03:23 PM
    Nothing is a forever investment. But now is a bull market in commodities and I prefer to make the trend my friend, as the saying goes, and not swim upstream. The time will come to get out of real assets and into paper. Let me know when an ounce of gold will buy the Dow, and when the P/E of the broad market is around 5 or 6.
    Reply
  •  
    Sep 01 07:56 PM
    Only an idiot would be overpaying for metals.

    Let them keep it until the price reflects reality.

    Nothing nuttier than a gold nut
    Reply
  •  
    Sep 01 10:51 PM
    SIMPLE TEST:

    Which is easier to create?
    a) Fiat money
    b) Precious metals

    You know the answer.....
    Reply
  •  
    Sep 02 03:07 AM
    GC is 805$ boldbugs,run and buy your Amerivan Eagles,Krugerrands,min... penny stocks you advertise on SA so much,go buy some more it just got cheaper.
    But don't forget to answer margin call first.
    So many idiots wrote here on SA that there is no GC that China and India swallowed all the metals n the world.
    All the stupid stories from egghead named LEE who mentioned how he damned chinatown boy can not find available GC Eagle as there are no more coins available.
    Now go you yellowjack to your nearest bloody pawnshop,you will see under what stress dealer is,today when all the manipilators cought by declining GC prices,when they are placed in the corner by beast they prayed so much to,GC,today they will sell the beast at lower price than they bough as their baby just swallows them alive.
    Reply
  •  
    Sep 02 04:19 AM
    $fark$ - I've never heard of a gold bug that trades on margin - that is only for disciplined and controlled traders like yourself. Anyone who has even a remote interest in long term wealth preservation knows that physical holdings are the only option. Most articles and commentators here refer to fully paid up holdings (physical, ETF's). If you want to talk about futures and short term price movements, a day trading website might be more worthwhile.

    Seacher - I reckon stocks and property are the two biggest asset classes for sucking in new investors with ever higher prices. As the current decline in metals has accelerated, retail demand has gone "off the charts" according to the biggest US dealers. I think this is very rare for any asset class. 25% and 40% declines in 6 months approx for G&S and the public are buying (or at least trying) in record quantities. Is there any historic precedence for this, in any asset class?
    Reply
  •  
    Sep 02 04:31 AM
    Margin calls? On gold? You must be insane. Gold isn't a trade and it isn't an investment; it's how you preserve your wealth. Borrowing dollars and selling them for gold is best described as being short dollars. It's a costly bet that may or may not pay off. Why gamble? Owning physical gold free and clear is a sure thing. Save in gold, hold it forever.
    Reply
  •  
    Sep 02 08:13 AM
    I see you have not enough bugs,

    Today when I went in Frankfurt to my Commerzbank AG branch to take 12400EUR that just arrived from my American profits on NYMEX,COMEX,CME,CBOT. Commerzbank sells bullion and GC coins as well and have their own metals refinery,on the advertising display,behind the window near each cashier's desk,were many different GC bars on display from 100oz to 1 gram and all kind of GC coins,ALL REAL as I asked,then I asked teller why is this displays placed,she told me that Commerzbank sell GC in all those on display you can order anything.I said,no thanks.
    Then I asked if many people are buying,as you made me crazy with your GC ideas,she said nobody!She said the opposite many people bring their own fine GC bars and GC coins from before and sell to a bank.Then bank checks if it is real and then deposits EUR into your account at cash value of GC minus bid/ask depends on price but for 100oz it is about 1% and for 10g bar about 6% for coins same as small bars.
    You can think for yourself,if bank keeps this GC on it's balance sheet or sells each time 100oz on futures markets pocketing 1% premium on the sot and higher.
    Reply
  •  
    Sep 02 10:46 AM
    Like all investments, being in gold or silver should not be the one thing you do. It should be no more then 10% of your total weath. Yes it is used as a dollar edge, but there is easier ways to do this. Just open a bank account in a forgien country, it can be done on the web now. The play in phyical metal (bullion) is simply a bet againt fiat money. However the investment in Rare Coins is just like other invenstment of a non-financial type, buy what you like, enjoy it and maybe it will go up in value. Dont think you can walk in off the street and buy up coins and get rich. Like the art or wine market it is driven by professional collectors who spend a lifetime figuering out the market. As for the future, there is nothing wrong with some gold and silver as the credit cruch will continue for sometime and may be reflected in the markets and dollars for a while.
    Reply
  •  
    Sep 02 12:44 PM
    Secmaven is right on. When gigantor investors buy gold they buy enormous bars at low markup. Now, as they dump their bars, small investors are scrambling to pick up small size bullion items (krugerrands...etc.) Hence the heavy markup in coins.

    It may be that fiat money is eventually doomed, but that doesn't mean it's doomed in the immediate future. This is just one man's opinion, but I really think a lot of small time gold investors are going to take a bath on this one.
    Reply
  •  
    Sep 03 10:08 AM
    6 months ago at the gas station I heard people talking about buying gold. That was when I knew it was time to sell.
    Reply
  •  
    Sep 03 02:03 PM
    The paradox evident from these these discussions is that for the past year or so holding any investment of any class - including cash - has been a losing proposition. This is a near impossibility, but actually has and is going on. The only explanation is massive, forced selling (aka deleveriging) on a scale never seen before to satisfy margin calls, bank regulators and redeeming hedge-fund owners. Further, there is no end in sight even though CB's have lent, swapped and printed more than $1 trillion with credit still getting tighter. Swaps, and lending are not doing the trick. Only real expansion of the monetary base will alieve this crisis.

    This craving for liquidity has created a monstrous dollar shortage that is a total illusion.Yes, the demand is there, but it is like oxygen for a man stuck inside a box; he will do anything to keep the supply coming in so he can live; make any promises, give away anything he has to keep the oxygen flowing.

    How can this end? Only one way. CB's will create more oxygen, more dollars, to allow the man to breathe. He needs only to satisfy his creditors with paper, not wealth. When this finally occurs, the demand for dollars will drop, credit will loosen, commodities will behave more like they have for the past 500 years, gold will rise and companies will start making money again and presumably their stocks will rise too.

    So when will this occur? When the maximum point of pain is reached by the most amount of people. A 'political' event, when the pain of not acting is greater than following the inevitable course that they must.

    One more cliche is appropriate. It's always darkest before the dawn.
    Reply
  •  
    Sep 03 07:42 PM
    Coins have always sold at a premium to bullion, the bullion premium is little compared to paper.

    Gold is headed to $700 because there is a bubble in all commodities.

    Gold is no better a holder of value than zinc, copper or silver and is inferior to oil, except that all commodities are busting, so gold is crap as well.

    And if gold is money, go to an Apple store and try to buy a PowerBook with it.

    Reply
  •  
    Sep 03 11:41 PM
    Two points:

    1) I remember going through all this before in the 80s. Fiat paper was dead, only hard metals had real value and would be our future currency, yadda, yadda, yadda…

    Back then it was all just hysteria from retail investors. Nothing is different this time.

    2) As the great credit supercycle winds down and society is forced to de-lever , almost everything is going to contract in value; real estate, consumer goods, etc. Why would gold and silver be any different, especially now that central bankers have taken a stand and have started raising rates?
    Reply
  •  
    Sep 07 01:37 PM
    Five points:

    1. We did not have trillions of dollars of debt.
    2. We were a nation of net savers then. Now we are net spenders.
    3. US$ is currently the world reserve currency, which means the rest of the world holds an ocean full of this stuff.
    4. Back then the dollar is backed by silver and gold. Today it is backed by the government's promise.
    5. Gold and silver have over 3,000 years of history. US dollar has been around for about 40 years (after Bretton Woods).
    Reply
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