Archive for the ‘Precious Metals’ Category

Precious Metals Prices: The Tale of Two Markets

November 30, 2008

In my discussion of  alternatives to physical possession of  precious metals a few weeks ago, I alluded to price distortions in the precious metals markets. A multi-million dollar purchase of gold in Toronto, at a price well above that of the official exchange, illustrated the point in a striking way. Price discrepancies of this magnitude have become so commonplace that I feel compelled to say more about them now.

Official commodities markets like the COMEX set the “spot” price for precious metals quoted at places like The Bullion Desk. Ordinarily, when you purchase bullion coins from a dealer, the price you pay includes both the spot price and a “premium.” Under normal circumstances, the premium makes up the dealer’s cut in the transaction.

About eighteen months ago, for example, the per-ounce premium on five, one-ounce Krugerand gold coins from a reasonable dealer came to around 4.5%. With the spot price at around $670 per ounce,  the premium amounted to $30 per ounce. The same premiums held for silver.

Ideally, then, the spot price should reflect the supply-demand dynamics of the marketplace, and the dealer’s transaction costs make up the premium. Today, the premium has taken on a new role: it now compensates for spot prices that are too low given the true demand for gold and silver bullion.

In the Toronto transaction I mentioned above, the buyer paid around $300 per ounce more than spot. In a November 22nd interview with Jim Puplava, veteran precious metals specialist John Dudy (The Goldstock Analyst) told of a client who received a premium of $600 over spot for gold coins.

The divergence between the spot price and the true cost of bullion has led one website to track completed transactions for gold and silver coins on ebay.  Here one finds premiums ranging from 14% to 155% depending on the coin, with the typical prices being in the 40%-60% range.  Analysts now routinely distinguish between the “paper price” of gold determined by the COMEX (that is, the spot price) and the true “phsyical price.”

Demand for gold and silver bullion has reached the point where dealers predict it will take months to fulfill orders. The Perth Mint recently stopped taking orders. The demand for precious metals results from the growing mistrust of national currencies, and in particular the dollar.

According to Bloomberg, the Fed and the Treasury have so far pledged $7.7 Trillion for their interventions to save the banks. “Fed officials have made it clear,” said the New York Times earlier this week, “they are prepared to print as much money as needed to jump-start lending, consumer spending, home buying and investment.” As further business failures cause a cascade of credit defaults through the banking system, more and more phony money will circulate through the economy. $7.7 Trillion is just the beginning. None of this bodes well for the dollar as a reliable store of value.

But why do the spot prices on the COMEX fail to measure the true demand for precious metals? The answer to this question lies in the technical workings of the COMEX. A contract to sell on the COMEX, a so called “short” position, does not obligate the seller to make physical delivery of the item he sells. In fact, most COMEX contracts settle in cash before their delivery date. The COMEX serves as much the purpose of commodities speculators as it does the consumers of commodities. The COMEX even places a limit on physical settlement of a buy or “long” contract. It limits delivery of silver, for example, to 7.5 million ounces, or 1500 contracts, per month.  But it places no limit on the number of short positions.

An analysis by Ted Butler shows that two or three large players are holding extraordinarily large short positions on the COMEX. As of July 1, 2008, two U.S. banks held 6,199 short contracts of COMEX silver (about 31 million ounces). As of August 5, 2008, two U.S. banks held 33,805 short contracts of COMEX silver (about 169 million ounces), a five-fold increase . These short positions cannot possibly be backed by actual production or inventory of the metals. But they have the effect of an increase physical supply: from July 14 to August 15, silver prices dropped from a peak of $19.55 to a low of $12.22 , a decline of 38% . The numbers for gold tell the same story.

Rising precious metals prices reinforce their role as true money, as a store of value more reliable than fiat currencies. By suppressing the price of precious metals through these fraudulent futures contracts, the banking industry maintains the apparent viability of fiat currencies as a store of value. A major shift in storage of wealth to precious metals would accelerate the devaluation and demise of the dollar. Indeed, The Gold Anti-Trust Action Committee has for years made the claim of precious metals price manipulation.

Many observers predict that some large buyers might call the COMEX’s bluff by demanding physical delivery on futures that come due for settlement in December, putting the COMEX in default on these contracts. It’s hard to say how likely this scenario could be. But the wide divergence between the COMEX prices and the physical market has to lead to a reconciliation of some kind: a conspiracy of this magnitude, I hope, cannot go on indefinitely.

© 2008 Philip Glaser


Physical Versus “Paper” Silver And Gold

October 29, 2008

A few days ago I began writing a very different piece. With the concept of Limits to Growth as background, I introduced Financial Permaculture and The Great Turning. These ideas can inspire us to envision and work towards a future in which communities, at the local level, manage their resources to foster reasonable and sustainable prosperity for themselves. Such a vision can be a comfort in times like these when the world’s anonymous mega-economy heads into a terrifying collapse, dragging many innocent bystanders down with it.

But the cosmos did not want me to write such an article this week: Despite having carefully saved the draft of the piece in my blogging service Monday evening, the content had just disappeared when I went to work on it on Tuesday morning. And of course I did not have a backup on my own hard drive. The cosmos is probably right. The chaotic busyness of October burnt me out and I needed a little bit of a break. I’ll do the Deep Thinking next week. Or whenever.

So now I shall, instead, write rather briefly about what to do if the idea of holding physical silver or gold makes you uncomfortable. I also need to give you an update on the latest precious metals market gossip.

A relative of mine, nervous about owning and storing silver bullion coins, recently began purchasing shares in SLV, an Exchange Traded Fund  that you buy through a broker like a regular stock. I do not trust SLV and similar instruments (e.g., the gold ETF, GLD) because I don’t know for sure that they really own the metals that they say they do. Funds like these also purchase futures and other paper proxies that follow the official market price of gold.

Without ounce-for-ounce backing in real silver and gold, these funds have some characteristics in common with fiat currency. In particular, at some point the market may figure out that they do not actually own the metals and downgrade their price.

However, having done some research into this question, I can confidently recommend two alternatives to physically holding silver and gold.

  • Central Fund of Canada: This fund has only one purpose: to own physical gold and silver (roughly half of each). You buy shares of this fund (ticker symbol CEF) on the stock market just like any other stock. Unlike the ETFs, it employs rigorous and redundant third-party accounting mechanisms to ensure that the shares traded on the exchange do represent real ounces of silver and gold.
  • This company’s propieter, James Turk, contributes frequently to the Financial Sense Newshour and is endorsed by Catherine Austin Fitts. The operation runs very differently from CEF. You open a personal account with and purchase a specific amount of gold or silver. holds the physical metal, also under redundant third-party accounting mechanisms, in vaults in London and Zurich. It is an easy and cost-effective way to secure precious metals.

I personally use both of these mechanisms — I trust no one else to hold precious metals on my behalf.

I have already discussed the price volatility of precious metals. Let me reiterate: I do not advocate that you put all of your savings into precious metals. I advocate putting some percentage of your savings into precious metals as a hedge against inflation, counterparty default, and currency collapse. Their price volatility makes them a poor choice for money that you need to use in the short to near term.

I believe that silver and gold are real money. The fiat currency system enables the banking system to manipulate the economy in ways that, over the long term, penalize people who live within their means and spend only what they can afford rather than what they can get credit for. So the sharply dropping price of precious metals in the official commodities markets lately leaves me disheartened.

But actual transactions of physical gold and silver tell a price story rather different from the official spot price on the COMEX (the official commodity exchange). Bullion dealers and mints cannot keep up with demand for physical gold and silver. Consequently, buyers are paying a premium of 100% for some types of silver bullion coins on ebay. In essence, buyers are willing to pay double the spot price for some coins. In a recent article, Jim Willie describes a gold transaction of conspiratorial proportions. Last week in Toronto a multi-million dollar purchase of gold took place at $1075 per ounce, while the COMEX price of gold last week was around $300 per ounce less.

In other words, good old fashioned supply-demand dynamics are pushing up the price price for physically held precious metals. The disconnect between the official market price and the physical price can only mean that the paper representations of the metals (futures, certificates, etc.) do not really represent the metals themselves. But the official market price is bound to catch up with that the physical market.

Jim Willie’s article also observes, by the way, that the foreign entity purchasing gold at $1075 per ounce settled the transaction in Euros. He also draws our attention to similar transactions over the past several months where foreign entities settle transactions for large amounts of gold in foreign currencies. For example, a few months ago a sovreign entity moved four hundred metric tons of gold into storage with the Royal Canadian Mint. Might some central bank in Europe or elsewhere be taking steps to back its currency with gold? Willie thinks so. If he’s right, the official metals markets would have quite a reaction!

Please review my usual disclaimer: I am not a professional financial planner and have no credentials in this area. You should always review your long-term financial plan with a qualified financial planner. I recommend finding one who understands monetary inflation and peak oil. Also, I have no affiliation with or other reason to promote the Central Fund of Canada or

© 2008 Philip Glaser