Physical Bullion Demand 'On Fire'

Late last week and into the early part of this week, gold and silver prices experienced some of the largest daily price drops, both on a dollars and cents basis and on a percentage basis, than has been seen in years or decades. 

Normally, prices drop because of an actual or an anticipated glut of supply. But that isn’t what is happening with physical gold and silver right now. There are reports out of Japan of people trying to get rid of their yen (which the government is promising to depreciate rapidly) and into assets like precious metals that will hold their value – and having to wait in line as long as three hours to be able to buy gold and silver. 

Yesterday in our store, the further price drop brought out even more eager buyers of precious metals. Even though we recently moved to much larger quarters (the size of the showroom quadrupled and we added several phone lines), customers were waiting as long as 30-60 minutes to be served. Many people simply could not get through on the telephone lines because they were jammed with calls. 

The premium over silver value on $1,000 bags of U.S. 90 percent silver coin topped 20 percent. Dealers and wholesalers have almost nothing in stock for immediate delivery and premiums are rising across the board. 

Because of slowing deliveries on bullion-priced physical gold and silver coins and ingots, we had to implement a limitation of $5,000 in sales to new mail-order customers. We accepted orders from established mail-order customers and from in-store customers who were ready to made immediate payments. (Note: there is value in having a relationship with a coin dealer who will take care of you on days like today rather than risking not being able to trade at all because a dealer doesn’t know you.) 

I’ve heard all the technical and chart signs that several commentators refer to in saying that gold and silver prices are due to decline. However, just charting price movements without examining why prices are moving only gives you half the story. That leaves you at risk of making incorrect decisions that will cost you dearly in the future, simply because you don’t understand what is going on today. 

Here’s what I seen going on in the physical market. In COMEX trading, silver demand has soared to near record levels, meaning that there are a huge number of buyers as the price has been dropping for more than the past six months. This continuing strong interest in purchasing precious metals puts the value of the U.S. dollar at risk. If people are trying to get out of paper currencies that are falling as a result of worldwide currency devaluation wars, their ability to do so only accelerates the decline of major currencies.

For the U.S. government, issuer of what until now has been the international reserve currency, this risk of a falling dollar would normally push up U.S. interest rates for all debt, including U.S. government debt. Therefore, the U.S. government has a strong incentive to tell its trading partners and allies to clobber the prices of gold and silver. In theory, if the prices can be suppressed enough that they break down through key technical trading points, investors with long positions can be intimidated into selling their holdings. Since much of the trading on the COMEX market involves leveraged trading up to about 20 times the cash investment, it isn’t that hard to create a string of temporary margin calls that will force holders of long positions out of the market.

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