October 5, 2022

Gold and Silver Paper and Physical Markets Realign

Late last year and early this year, a continual observation of the gold and silver markets was the disconnect between the prices quoted on paper markets and the prices that you would actually need to pay to buy physical precious metals. In the past few weeks premiums for physical gold and silver have declined as the prices quoted on the paper market have risen, basically bringing the two markets back into alignment.

Back in October 2008, I had examined 100 ounce silver bars as an example of the excessive premiums being paid for physical precious metals. I collected some data from recently completed eBay auctions that showed the average price of the 100 ounce silver bar ranging from $1,329 to $1,557 while the market price of silver ranged from $8.88 to $10.89. This represented premiums ranging from $39.62% to 56.45%. This was particularly ridiculous since the 100 ounce silver bar has been traditionally viewed as a low premium method for silver investing.

Reviewing some data for eBay auctions completed yesterday now shows the prices paid for 100 ounce silver bars ranging from $1,450 to $1,500. At yesterday’s closing price of silver of $14.09, this represents a much more reasonable premium of about 3% to 6%.

Peculiarly, the decline in premium is a close match to the increase in price for spot silver. If you invested in silver by buying physical bars back in October, you might be showing zero profit even though the market price is up over 40%.

Future Gold and Silver Price Implications?

When the premiums for physical precious metals were high, it was viewed as a sign of heavy demand amidst a diminished supply that would eventually force market prices to move higher. Now that the disconnect between the paper and physical markets has seemingly resolved itself, is this a signal of slower demand that will lead to lower prices?

Despite the implication of slower demand, I think the realignment of the markets represents a long term positive for the price of gold and silver. Back when premiums were high, I am sure that many potential investors backed away from the market when they were faced with excessive premiums. Potential investors will now actually be able to buy physical gold and silver around the market prices. This is a much better environment for fostering mainstream demand to keep gold and silver moving higher.
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US Mint Bullion Sales for April 2009

The US Mint’s bullion sales figures for April 2009 remained robust. The amount of gold bullion sold during the month was the highest of the year. Silver bullion sold was the second highest figure for the year. Once again, the US Mint did not sell any platinum bullion coins. This offering has been delayed with no indication of when sales might begin. Similarly, the 24 karat Gold Buffalo coins were not offered as they are also delayed.

The sales totals for all bullion coins offered by the United States Mint are presented below.

April 2009 US Mint Bullion Sales
1 oz. 1/2 oz. 1/4 oz. 1/10 oz. Total oz.
Gold Eagle 147,500 147,500
Gold Buffalo
Silver Eagle 2,518,000 2,518,000
Platinum Eagle

There were 147,500 ounces of gold sold during April 2009. This consisted entirely of one ounce gold coins, as fractional coins were still not offered.This represented the highest sales level of the year to date. The prior month had sales of 136,500. Sales for the year ago period of April 2008 were 47,500 ounces.

There were 2,518,000 ounces of silver sold during April 2009. Silver bullion sales continue to be at higher levels, on pace for a record year. Since the coins are subject to rationing, this might be an indication that the Silver Eagle shortage might be ending. The prior month silver bullion sales were 3,132,000. Sales for the year ago period of April 2008 were 1,584,000.

Half Gram Gold Coins

The World Gold Council recently announced their plans to attempt to popularize half gram gold coins. The plan seems mostly targeted towards consumers in India, in advance of the upcoming festival.

How small is a half gram of gold? There are 31.1034768 grams in one ounce. If you are familiar with the one-tenth ounce size gold coin, a half gram of gold would be about one-sixth of that size. The value of one half gram of gold based on Friday’s gold closing price would be about $14.68.

The story about half gram gold caught my attention because it is the opposite of what’s happening with gold in other parts of the world. As the price of gold increases, it makes sense to popularize smaller size coins or bars so that a mainstream audience will continue to have options for investing in gold. In the United States, smaller sized coins have actually been suspended in favor of producing only one ounce coins.

This step was taken by the US Mint at the end of 2008. At least one other world mint that I follow, took similar action. For all of 2009, the US Mint has only produced gold bullion coins in the one ounce size. Based on the current price of gold plus the standard markup, the price tag for the smallest possible gold purchase approaches $1,000. This may be out of reach for many potential investors.

In advance of Y2K, there was a renewed interest in precious metals investing as a disaster hedge. Even mainstream consumers began to buy into the story, bringing in many new gold investors with budgets both large and small. When Y2K precious metals investment reached its peak in 1999, the US Mint sold 2,750,338 1/10 ounce gold coins which would have cost around $40 each. The 275,000 ounces sold via 1/10 ounce coins actually exceeded the total amount of gold bullion sold by the US Mint for some prior years.

The current lack of fractional sized bullion coins has effectively cut off a significant portion of gold investment demand. Importantly, this is demand which would come from a mainstream investment audience, which gold currently lacks.

US Mint Reports Highest Monthly Silver Bullion Sales Since 1986

As I have in the past, I have compiled the total bullion sales from the US Mint’s bullion coin programs. The numbers for March 2009 bullion sales carry a bit of a surprise. The US Mint recorded the highest monthly silver bullion sales since December 1986, which was the second month the silver bullion coins were offered.

During March 2009, the US Mint only sold one ounce American Gold Eagles and one ounce American Silver Eagles. They continue to delay production of the 24 karat Gold Buffalo coins, all Platinum Eagle bullion coins, and fractional versions of the Gold Eagle. The sales totals for the two available bullion coins are presented below.

March 2009 US Mint Bullion Sales
1 oz. 1/2 oz. 1/4 oz. 1/10 oz. Total oz.
Gold Eagle 136,500 136,500
Gold Buffalo
Silver Eagle 3,132,000 3,132,000
Platinum Eagle

Total ounces of gold sold during March 2009 was 136,500 ounces. This is an increase from the prior month when 113,500 ounces were sold. It’s a big jump from the year ago period of March 2008 when 50,000 ounces were sold.

Total ounce of silver sold in March 2009 was a whopping 3,132,000. This is up from the prior month when 2,125,000 ounces were sold and the year ago period when 1,855,000 ounces were sold. This represents the second highest total since the bullion coins were first offered in 1986. The highest total was attained for the month of December 1986 at 3,696,000.

There are two ways to interpret last month’s surge Silver Eagle bullion coin sales. As readers of this blog will know, the US Mint has cut, delayed, or suspended nearly every gold and silver product except for the one ounce Gold Eagle and Silver Eagle coins, which continue to be subject to rationing. That being the case, the level of sales is not really an indicator of demand, but an indicator of how many precious metals blanks the US Mint was able to obtain and mint into coins.

On one hand, the increased amount of sales could suggest that the scarcity for precious metals blanks is finally abating. The US Mint was able to obtain more blanks to produce bullion coins than any other month since the rationing program began in February 2008.

On the other hand, the demand for precious metals has continued in full force even during the month when the stock market supposedly “bottomed” and the world economy supposedly “turned the corner.” Beyond the reported sales, there also remains a wall of unmet demand ready, willing, and able to buy more silver when and if the rationing programs are ever removed.

Gold, Silver & Platinum 2009 First Quarter Performance

With the first quarter at an end, let’s take a look at the performance of gold, silver, and platinum so far this year.

When putting the numbers together, I knew what to expect, but its still surprising to see where the final numbers landed. Gold, silver, and platinum’s performance relative to one another has basically been turned upside down from the 2008 annual performance.

2009 First Quarter Gold, Silver, and Platinum Performance
30-Dec-08 31-Mar-09 Change Percent
Gold 869.75 916.50 46.75 5.38%
Silver 10.79 13.11 2.32 21.50%
Platinum 898.00 1,124.00 226.00 25.17%

For 2008, gold had performed the best with a gain of 4.32%, followed by silver with a loss of 26.90%, with platinum in last place with a loss of 41.31%.

As you can see the performance for the first quarter of 2009 has been the opposite with platinum performing best with a gain of 25.17%, followed by silver with a gain of 21.50%, with gold in last place with a gain of 5.38%.

Platinum and silver were in some respects recovering from the beating they took last year. Over the past several years gold has emerged as more of a steady performer, as compared to the more volatile performance of the other metals, commodities, equities, real estate, etc. It’s ironic that whenever a mainstream publication discusses the possibility of investing in gold, they never fail to caution about gold’s “volatile” prices.

At any rate, precious metals outperformed stocks for the quarter, mostly by a wide margin. The Dow, S&P 500, and Nasdaq lost 14.29%, 12.81%, and 3.07% respectively.

What Can Google Trends Tell Us About Gold?

Every now and then I find myself playing around with Google Trends. For anyone who hasn’t tried it before, it’s a Google product in the early stages of development that allows you to see historic search volume trends for given search terms. When I recently ran some gold related searches, I came up with some interesting results.

Here are the results for the search volumes for “Sell Gold” and “Buy Gold” followed by a chart of gold scaled to align. I added the red arrows to emphasize the extremes.

The large spike in search volume for “Sell Gold” appeared just as gold was hitting its peak. Similarly, there was a spike of search volume for the term “Buy Gold” just as gold reached an intermediate low. The broad, aggregated intent of internet searchers as determined by Google Trends called the exact high and low for gold. Maybe Google Labs has created a perfect communicator for the “wisdom of internet searches.”

What does the internet crowd say about gold’s run to $1,000 and subsequent fall back to the $900 level? The response seems mixed. There were small increases in both the “Buy and “Sell” searches that don’t seem to suggest strong conviction in either direction. I have a feeling that the Google Trends indicator might work well for extremes or broad trends, but not so well for other situations.

To finish, here’s one final Google Trends search that is worth noting. Below are the results for “Gold Investment.” If a search term does not have sufficient search volume, data is not displayed. “Gold Investment” finally received enough searches to show up around September 2008 and once again in February 2008. Is investing in gold starting to go mainstream?

February 2009 US Mint Gold, Silver, and Platinum Bullion Sales

Another month has gone by already, so let’s take a look at the US Mint’s bullion sales for the month of February.

As an indicator of demand the bullion sales are not as useful as they used to be. This is because the US Mint continues to ration sales of one ounce Silver Eagles and one ounce Gold Eagles due to heavy demand and low supplies of blanks. They still have not begun production or sales of fractional gold bullion coins, their 24 karat gold bullion coin, or platinum bullion coins.

February 2009 US Mint Bullion Sales
1 oz. 1/2 oz. 1/4 oz. 1/10 oz. Total oz.
Gold Eagle 113,500 113,000
Gold Buffalo
Silver Eagle 2,125,000 2,125,000
Platinum Eagle

The total ounces of gold sold during February 2009 was 113,500. That was up from the prior month when 92,000 ounces were sold and way up from the year ago period when 27,500 ounces were sold. If the current pace continues the US Mint will be on track to sell over one million ounces during 2009.

The total ounces of silver sold for February 2009 was 2,125,000. This is up from the prior month total of 1,900,000 ounces. In the year ago period only 200,000 ounces of silver were sold due to a lengthy sales suspension.

As mentioned, the suspension of platinum bullion coin production continued through February 2009.

Examining the Gold ETFs, Gold Reaches New Highs

With gold continuing its run, there’s been plenty of gold appearances in the mainstream press. But the more interesting discussions usually happen elsewhere. Here’s a few noteworthy blog posts and articles related to gold.

One thousand tonnes in the trust!

The SPDR Gold Shares ETF continued its rapid inventory growth and surpassed one thousand tonnes this week. An astounding 229 tonnes have been added so far during 2009.

Where do all the gold etfs get their bullion from?

While many mainstream news reports were quick to highlight the one thousand tonne level, others started raising questions. In an atmosphere of gold scarcity, where are the Gold ETFs getting the gold for their massive daily additions?

Ten Reasons to Avoid the Gold ETF

Elaborating on the above, an article that will make you seriously reconsider any investments in Gold ETFs.

Gold Around the Globe: Setting Records

While gold in US Dollars is still laboring below its all time high reached last March, gold in other major currencies has been setting new all time highs.

January 2009 US Mint Gold, Silver, and Platinum Bullion Sales

Many track the tonnes in the trust for Gold and Silver ETFs in order to gauge the continuing growth in investment demand for precious metals. This year, I wanted to try my own version of tracking precious metals investment demand by reporting monthly sales totals for the US Mint’s bullion coin programs. Hopefully this will provide another aspect of information for investors to ponder.

Under normal circumstances, this information would be an excellent indicator for physical precious metals demand. However, we are not currently in an environment of normal circumstances.

The US Mint continues to ration sales of one ounce Gold Eagle and Silver Eagle coins. Additionally, they still have not yet begun offering Platinum Eagle or fractional Gold Eagle coins. This implies that there is an undefined amount of unmet physical demand which exists above and beyond the numbers. Nonetheless, I will get into the habit of posting this information.

January 2009 US Mint Bullion Sales
1 oz. 1/2 oz. 1/4 oz. 1/10 oz. Total oz.
Gold Eagle 92,000 92,000
Gold Buffalo
Silver Eagle 1,900,000 1,900,000
Platinum Eagle

Total ounces of gold sold during January 2009 was 92,000 ounces. This compares to 26,000 in January 2008. The amount does represent a decline from the prior month of December 2008 when 176,000 ounces were sold. However, as mentioned above, this may be a reuslt of ratoining and not necessarily decreased demand.

Total ounces of silver sold duing Janaury 2009 was 1,900,000 ounces. This is down from both the year ago period January 2008 when 2,170,000 ounces were sold and the prior month when 2,158,500 ounces were sold. Again, this might not necessarily be a result of decreased demand.

No platinum was sold during January 2009, as the US Mint has not resumed productoin after a suspension instated late last year.

Analysts Pile on the Gold Bull

Gold’s recent move above $900 has analysts scrambling to increase their price targets.

The last time I looked at gold price targets from analysts was in early December, when a similar flurry of activity took place. Morgan Stanley got the ball rolling by saying that gold could reach $1,000 in three years, Merrill Lynch followed with a price of $1,500 at an unspecified date, and Citigroup topped them all by mentioning $2,000.

This time around started in the same way with Morgan Stanley making a timid call for $1,075 gold in three years. From their report: “A globally synchronous and aggressive fiscal and monetary stimulus may be needed to re-inflate the global economy, and we think this continues to present significant upside to gold prices.” For their rhetoric, their target price is ridiculous, unless you consider “significant upside” to be a 6% annual gain for three years.

Merrill Lynch chimed in next with their Chief Investment Officer reiterating their prediction of $1,500 gold, but this time with a time frame of 12 to 15 months. Quote from the CIO: “With confidence in currencies shaken to the core, the yellow metal is increasingly assuming the role of “the most trusted currency. We have never seen such a rush to buy gold. It’s bringing in security and it’s still affordable.”

A few days following, both UBS and Goldman Sachs updated their previously underwater gold price targets. UBS raised their 2009 price target from $700 to $1,000. Goldman Sachs raised its forecast of $700 to $1,000 within a three month time frame.

As expressed before, I do not think we have reached the point where these periodic analyst pile ons can be used as a contrary indicator for gold. Analysts are still showing restraint, and for the most part raising their targets simply to keep up with the rising price of gold.