Gold and silver price dive: physical sales surge, prices begin to rise again

Gold and silver are showing some resilience in the face of the recent big dives in prices, but can this continue or are we in for another fall?

The huge dumping of paper gold and the subsequent sales out of the big GLD gold ETF of last week do seem to have generated remarkable buying momentum for both gold and silver, with prices recovering from their nadirs of around $1350 for gold and $22.70 for silver.

There had been some decent recovery by the end of last week, but markets surged again when they opened in Asia this morning and there has been some strength too as markets opened in Europe, with gold hitting $1425 and silver $23.50 – gains of 5.5% and 3.5% respectively meaning potentially quick gains for those who came in at the lowest prices – at least in theory, but premiums due to the apparently enormous demand for physical metal, will have mitigated gains.

Interestingly, on premiums, Ed Steer pointed out in a recent newsletter, with a supporting chart, that  the wholesale premiums bid by U.S. dealers for 90% U.S. silver coinage have started to spike in a manner last seen in 2008, which preceded a bug boom in silver prices from a very low level.

There is a huge degree of anecdotal evidence that individual investor demand for gold and silver coins and bars has been huge, particularly in China and India and other eastern nations, but it has also been very strong in the U.S. and Europe too, and undoubtedly in that other hotbed of the physical precious metals trade in the Middle East as well.  Reports have come in of very strong demand for the U.S. and Canadian Mints’ gold coins, while silver coin sales have been somewhat flat, but apparently primarily because of non-availability.

Consider some of the news which has come out on the internet:  The China Gold Association is reported as saying that demand for physical metal has tripled at one stage last week; Indian gold dealers are reporting a huge buying surge; delivery times on silver bullion coins in particular in the U.S. and Canada are reported as being around 3 weeks or more, while there has been tremendous demand for gold coins – some report the kind of levels seen back in 2008 when there was a similar price plunge, although then it was at a time when markets in general  crashed.  This time, so far, the general stock market has remained resilient, but there is some fear that a 2008 style market crash could be on the cards.  In 2008 gold fell with the markets as some funds had to sell more easily tradeable gold to meet their commitments.  It looks now as though investors could be building up holdings of physical metal against such an eventuality re-occurring.

Respected commentators like Dr Paul Craig Roberts, a former Assistant Secretary of the Treasury have joined the usual suspects  who say U.S. Fed, along with the bullion banks, orchestrated the latest crash through dumping huge volumes of paper gold on the market to force the price down to protect the dollar and convince the world that all is well with the global economy – when it patently is not.  Others have suggested the bankers have been driving the price down so that they can buy back at lower prices and thus make a huge profit when prices recover – and to protect short positions, particularly in the silver market.

There is comment that all this has led to a backlash of demand for physical metal which will see the prices of gold and silver soar back to prior levels – and above – purely due to a shortage of physical metal.  This could be the case, but ….  If indeed those who have suggested that the Fed and/or the banks have been responsible for driving gold and silver prices down, they may not have exhausted all their ammunition yet.  That is the real danger affecting those who have been purchasing bullion in such quantities over the past week.

Thus, if the proposition that the recent drops in the gold price have been so orchestrated – and one has to face it that the recent bullion sales and price patterns with huge dumps of paper metal have not been suggestive of any kind of normal activity in the markets – then the manipulators may still be in the driving seat.  In an economy which sees releasing more and more unbacked money into the system as a means of warding off economic collapse, and convincing the general populace that all is well through stimulating a strong stock market, then the attack on precious metals may not be over yet.  As some have said – all markets nowadays are manipulated in favour of those who have money and want more and more.  Some day this will all come to a sticky end, but it may not be yet!

The other relatively new factor in the equation of course, is Central Bank buying.  It will be interesting to see whether this will continue – perhaps at an even higher volume rate given prices have fallen.  One suspects that if Cyprus is forced to sell its gold reserves to help pay off its debt, this may never come on the general market, but be absorbed by other Central Banks, but it’s by no means certain that this offloading of gold will actually occur.  It is reported that the Cyprus Parliament is to vote again on the troika bail-in bail-out demand and if this is rejected, as is far from unlikely, it seems inevitable that the country will default – and leave the EC – creating even more uncertainty in the markets.

But back to other Central Banks – they can’t be happy with what seems to be an attempt to dent precious metals’ safe haven appeal and to destroy its status as an embarrassing alternative currency.   If they soak up more and more physical gold as a result, this demand for metal, as opposed to paper, coupled with the burgeoning investment demand, will create huge shortages – and shortage inevitably leads to potentially dramatic price rises.  The market manipulators, whoever they may be,  will be well aware of this and may temper their market involvement accordingly.

The gold price is notoriously difficult to predict – particularly with so many diverse forces in play.  A personal view is that it could well be forced down again, before it rises – but once a sustained rise begins this will accelerate–even testing the former high and beyond.  But timing is the key.  This sustained rise could even, as some commentators have suggested, have begun.  The next few days, weeks and months may well prove to be very volatile for both gold and silver.

iPad Version – Picutre: Gold bars are pictured at the Ginza Tanaka store during a photo opportunity in Tokyo: REUTERS/Yuriko Nakao

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