The Truth About Today's Gold Market

Just what is the link between retail gold coin prices and the apparent manipulation of gold futures & options...?

You may have seen some rather wild commentary of late concerning gold and silver prices.

I can't vouch for the silver market – small, tight and still dependent on fast-falling industrial demand though it is. But as regards Gold Bullion, this sensational "analysis" mistakes the key basics of how the gold market actually works.

First it confused a surge in gold-coin prices for a surge in the price of gold itself. Then it confused dealing in physical and paper Gold Futures, by ignoring the world's very largest, deepest and most heavily traded gold market.

How so? By the start of 2008, Gold Prices the world over had been steadily climbing for more than six years. A growing handful of people were already invested, with the very earliest gold buyers tripling their money and more since the turn of the decade.

Come July of last year – and driven by the sharp drop in prices from March's all-time dollar-highs above $1,000 an ounce – many of these existing gold owners, especially coin buyers, snapped up more gold as the world economy slowed and financial markets went into tailspin.

But the leading metals refineries weren't expecting a rush until the usual autumn-time spree. (You can see the typical impact of India's October Gold Buying here...) That caught the big gold-coin mints napping as well. So their clients – meaning your local coin shop – hit a genuine shortage of gold coins and bars thanks to this summer's frenzy.

Come August and September, the global meltdown in stocks sparked by the collapse of Lehman Bros. then sent in a flood of new buyers. And standing in long queues outside big-city coin shops, these new buyers proved a god-send for financial journalists needing bullish copy to file.

Gold was the only bull market running – and so a third wave of buyers cleared out what little inventory the coin-shops had left, sparking in turn a fresh wave of "Sold Out" signs worldwide.

First the US Mint and then even the Rand Refinery in South Africa – the world's biggest gold mint – were forced to suspend shipments, unable to keep up with demand. The big online gold dealers were all out emptied too, leaving would-be coin buyers stuck with nowhere to turn.

Even now, according to German-based giant Heraeus, furnaces worldwide are still booked solid to try and catch up. But with the stock market crash gathering pace yet again, demand from new buyers has only raced on again.

"Production [of one-ounce retail gold coins] has dramatically increased since the middle of the year," agrees Bernhard Schnellmann, director at fellow refinery Argor-Heraeus in Switzerland, but "we cannot cope with demand."

The result for Gold Coin prices? Still greater mark-ups and premiums than coin dealers usually charge. Even Krugerrand gold coins, typically the cheapest gold coins compared to the wholesale "spot" gold price, now carry a 10% or even 15% mark-up – two or three times the normal premium to their actual gold-content value – according to the Coin Dealer Newsletter.

On the other side of the trade, in fact, some gold-coin owners now looking to sell report being offered more than the spot price when they go back to their dealers... just so the dealer can secure new supplies, ready to sell on to new buyers for a still wider margin.

Exactly how much you pay for gold coins? That will depend on your dealer. But the disconnect from the "spot" price (or internationally recognized raw value of bullion) is clear to see.

Now, at the very same moment as gold-coin demand leapt in 2008, the "paper gold" market of futures and options was also hit by a shock – a shock rise in financing costs.

These two events were entirely related, of course, because both were sparked by the worldwide shutdown in lending. But unlike eager physical buyers looking to defend their savings with physical metal, all those hedge funds and other "large speculators" trading the Gold Price for three, six or 12 months in the future could no longer roll forward their bets. Because their brokers could no longer lend money to finance their trades.

The net effect? It depressed paper-gold prices – the unsettled price of future delivery – even as retail gold prices moved sharply higher. And that's why many respected gold analysts began talking about a "disconnect" between gold futures and physical metal – a disconnect that some people believe proves a conspiracy to keep Gold Prices down via the derivatives market.

Either way, "Gold is gold, paper is paper," as Alex Wallenwein of the Euro vs. Dollar & Gold Monitor writes, "and Comex gold [meaning the US Gold Futures market] is nothing but paper masquerading as gold.

"Simultaneously [it's] pretending to be the price-setting medium for actual gold in the world. Now, finally, it is in the process of being unmasked."

Even smart analysts trying to get a handle on the great gold disconnect missed the key point, however – the key point that sits in-between paper and coins – the huge global market in wholesale Gold Bullion Bars.

This wholesale, professional market in large 400-oz bars "accounted for nearly three-quarters of gold trading and 56% of silver trading" in 2008 as new research published by IFSL here in London showed earlier this week.

"Most of this activity was transacted through members of the LBMA (London Bullion Market Association). Daily reported net trading in gold on the LBMA averaged $20 billion in the first 11 months of 2008, up 45% on the same period last year. Daily trading in silver on the LBMA increased 32% to $2bn."

The actual volume of London's physical gold turnover, however, probably stands "three to five times the reported turnover," the consultancy notes, because transactions between LBMA members are netted out from the final, published, official data.

Not all the gold dealt and delivered through London's professional brokers actually wound up sitting inside London vaults. Such deals – made over the phone, and just as unique in price as retail-sized deals at your local coin-dealer's counter – are what's known as "loco London" but may very well be settled with delivery in overseas vaults.

Private investors enjoying access to live prices on wholesale London gold through our service here at BullionVault, for instance, consistently choose Zurich, Switzerland for their secure storage. (The Swiss have a history of political neutrality and defending property rights, after all. Plus, they lack the huge trade and fiscal deficits which threaten "a run" on so many other Western economies. And secure storage in dedicated, professional Swiss vaults does only cost $4 per month, running down to 0.12% per year for larger investments...)

Of course, this huge wholesale gold market is most often the source of that gold which ends up minted as coins and sold by retail dealers across the world. It's also subject to the forward gold prices determined by futures and option trading. Because a sharp drop in, say, the 3-month gold future will necessarily dent the "spot" price of physical gold dealt today.

But the world's professional wholesale gold dealers – centered in London – really do form the daddy of gold bullion markets. London's gold dealers turned over something between $60 billion and $100 billion of gold in 2008...each and every day on average! Yes, that's peanuts next to stock, bond or forex markets. But any "analysis" of gold prices which jumps straight from coins to future surely misses the point.

The "truth" about gold prices today is that, whatever form it comes in – whether as coins, paper or digital contracts, or large wholesale bullion bars – the price it's worth is the price at which you and another willing party agree to deal.

So gold coin buyers on e-Bay no more represent the "true" price of gold anymore than a digital or paper contract traded for delivery 12 months from today – a contract that will most likely end with cash settlement, in fact, rather than delivery of any physical metal.

If you'd rather know the "real" price of gold as judged by the huge London gold market – a market worth upwards of $60bn per day – then check the price that London dealers are quoting for gold held as large 400-oz bars.

And if you want to deal at the very best prices, in the world's very deepest and most liquid gold market, then stop paying retail and start trading wholesale Gold Bullion instead.

Comments

[stargold:]

Adrian correctly says "the price is the price at which you and another willing party agree to deal".

I believe the run up in premiums on Gold (& silver) coins sold on eBay is more indicative of the level of distrust of other investment vehicles.

Even with the recent drop off in the "main market" price, bullionsupermarket.com, which tracks coin and bar premiums on eBay, is showing 25% + premiums on some bullion product.

Jan 15 12:47 PM

[Conan the B...:]

So, basically what you are saying is there is a frantic rush to buy gold coins by the public. And it is feeding on itself.

Tulip mania, unrecognized until its over, that is enough coins finally hit the street.

Fastgold: how often is bullion etc updated?

Jan 15 01:31 PM

[Conan the B...:]

Fastgold: have you visited them recently? like today?

the only big premiums are on collectibles.

There are many 1oz-3.22oz bars/ingots being offered at 2-3% premiums to discounts.


the tide may have turned, already.

Adrian: I read your article on the USD, printed almost exactly 4 months ago, is your position the same?

Jan 15 01:45 PM

[GMiki1:]

But wait! Gold and silver are heading up for the day--unusual at this time in the afternoon, too. Has schizophrenia hit the markets? Is it the rise of the pound? The fear of the Mayan 2012 date for the end of the world? A simple lack of conviction about anything? Or all the above?

Jan 15 02:40 PM

[Goldbug Phil:]

Hi Adrian,

I hear that the Comex Gold may default in 2009 sometime because they will not be able to deliver physical gold as promised when more and more investors lose confidence in paper. Also, if you buy bullion coins at a coin dealer, you lose 5% when you cash out, but if you buy from Comex, you get to pay a huge capital gains tax because the governement knows how much you bought and sold from the reporting. When you buy and sell coins, you deal in cash and as long as it is less than $10K at a time, there is no reporting required.

Jan 15 03:50 PM

[RJMoran:]

So I'm confused! Is the price of gold going UP or DOWN?! If gold can't go through the roof during a 'global fiat currency' freakout, or credit crunch, debt bubble burst, whatever, then when? I think the 'tulipmania' comment. is on the right track. My sense is that the deflation demon will finally take out gold ('goes up on an escalator and comes down in an elevator'!)
I also agree with whomever said gold was a good hedge against inflation NOT recession. The hysterical chatter about an inflation time bomb going off is exactly that... I'd say gold will hit $500 well before it hits $2K.

Jan 15 10:42 PM

[Conan the B...:]

RJMoran: Go Mustangs

An Inflation Bomb is in the process of being built.
The Deflation Bomb exploded last year, pieces are still in the air waiting to hit something.

When the dust settles, the inflationary fuse will have already been lit.

I'm waiting for the dust to settle.

Jan 15 11:22 PM

[ussmls7:]

If the goverment could no longer use its proxies to control the casino thats call comex,what would happen? Please read GATAs dispatch, titled" Clutching at Gold Straws,: by Lawrence Williams! It will get your brain spinning, to say it lightly. Next read" Is Obama Wearing a Giant Gold Mask?" you can find it at 321Gold.com/ under editorials."Thomson"! My Dad always believe in Silver & Gold as the only real Money. I still have some of the Old Gold & Silver certs,that are nothing but a broken promise by our goverment after the Federal Reserve took control of our Nations money supply. Not only have Trillions of toxic paper not yet come into the light of day,what has been done to date, is like putting a bandaid on a gun shot hole, direct to the heart of the worlds economy. I say close all of the remaining casinos & save time & money and let the free markets take thier place!

Jan 16 10:38 AM

[Jingle-Jangle:]

RJ,
I would like to take that bet of gold hitting 500 before 1k.
COMEX gold is being maniuplated by the Fed through a couple bullion banks.
They are doing a fine job of keeping gold down and everyone flooding into it.
But, eventually gold is up because even the Fed will eventually use it to cut the US debt in half or more by revaluing gold to the dollar. Only, they will do it when they feel it is time to do it.
Until then, gold will be stuck in the range of 750 to 900 dollars. Unless, Chinese or middle eastern folks take advantage of golds low price and start buying it on the COMEX with the intention of taking delivery.
Then the game will be over for manipulation by the Fed.
So, either the Fed will eventually cause the price of gold to go to four figures on their time table or some foreign entity will get into the game before that happens to keep from loosing dollars when the Fed does it.


On Jan 15 10:42 PM RJMoran wrote:

> So I'm confused! Is the price of gold going UP or DOWN?! If gold
> can't go through the roof during a 'global fiat currency' freakout,
> or credit crunch, debt bubble burst, whatever, then when? I think
> the 'tulipmania' comment. is on the right track. My sense is that
> the deflation demon will finally take out gold ('goes up on an escalator
> and comes down in an elevator'!)
> I also agree with whomever said gold was a good hedge against inflation
> NOT recession. The hysterical chatter about an inflation time bomb
> going off is exactly that... I'd say gold will hit $500 well before
> it hits $2K.

Jan 16 11:35 AM

[secmaven:]

Goldfinger must be alive and well for 60 to 100 billion in gold to be traded by the London dealers each day! One wonders what is behind all of these transactions. What percentage is day trading? What percentage is actual investing by folks who take the gold and store it away against the day when our fiat money system blows up? Given gold's performance over the last eight years compared to any other investment category bar none, and that includes stocks, bonds, real estate, commodities in general, and collectibles, it would seem like buying gold today at 1980's prices is a no brainer for folks with billions to protect.

Jan 16 02:22 PM

[Clavis:]

Seven pure play gold producers (miners) were heavily shorted today.
The writing is on the wall, expect gold value increase.

Jan 16 03:21 PM

[auto44:]

The dollar was worth a whole lot more in 1980. We are way below 1980 prices in real terms. That alone is no reason to speculate on gold prices. In these very uncertain times you want to ease into things carefully. Dollar value usually erodes slowly over time, of course when the presses are whiring it usually erodes faster. Long term it is hard to believe that the value of money will not suffer as natrual resources are demanded by the huge populations of the emerging countries. This devaluation that everyone is so concerned with is a current happening, due to the slowing of world economies caused by the debts that can't be repaid and there being no money to by junk with, but as helicopter Ben works his magic there will again be dollars to spend and demand shall again rise and drive prices up. In the mean time be patient and try to invest wisely, not just in gold, there are other things of value that will be as good or better.


On Jan 16 02:22 PM secmaven
> Goldfinger must be alive and well for 60 to 100 billion in gold to
> be traded by the London dealers each day! One wonders what is behind
> all of these transactions. What percentage is day trading? What percentage
> is actual investing by folks who take the gold and store it away
> against the day when our fiat money system blows up? Given gold's
> performance over the last eight years compared to any other investment
> category bar none, and that includes stocks, bonds, real estate,
> commodities in general, and collectibles, it would seem like buying
> gold today at 1980's prices is a no brainer for folks with billions
> to protect.

Jan 16 09:09 PM

[Gedankonomist:]

Fastgold wrote:
"Even with the recent drop off in the "main market" price, bullionsupermarket.com... which tracks coin and bar premiums on eBay, is showing 25% + premiums on some bullion product."

Be careful with their listings. I caught one saying that the lot was 25 oz (an a good deal) when in fact when you go to ebay, the lot is for 10 oz (and hence not so good).

Jan 16 10:43 PM

[Chickenpookie:]

I'm told by a very reliable source (insider) that Barrick Gold (ABX) is assisting the FED in the COMEX gold scam.


On Jan 16 11:35 AM Jingle-Jangle wrote:

> RJ,
> I would like to take that bet of gold hitting 500 before 1k.
> COMEX gold is being maniuplated by the Fed through a couple bullion
> banks.
> They are doing a fine job of keeping gold down and everyone flooding
> into it.
> But, eventually gold is up because even the Fed will eventually use
> it to cut the US debt in half or more by revaluing gold to the dollar.
> Only, they will do it when they feel it is time to do it.
> Until then, gold will be stuck in the range of 750 to 900 dollars.
> Unless, Chinese or middle eastern folks take advantage of golds low
> price and start buying it on the COMEX with the intention of taking
> delivery.
> Then the game will be over for manipulation by the Fed.
> So, either the Fed will eventually cause the price of gold to go
> to four figures on their time table or some foreign entity will get
> into the game before that happens to keep from loosing dollars when
> the Fed does it.

Jan 17 09:21 PM

[Poppa Bear:]

What's interesting is that a very small percentage of US Citizens actually own physical gold. If the gold and silver ETF's didn't exist most people wouldn't even pay attention to the gold and silver markets.

Anyone that has ever held a gold coin in their hand understands the difference between the gold coin and paper fiat. It's hard to detach people from the paper structure they grew up with and unfortunately the majority of people that keep their money in paper will eventually become poor.

I don't really consider the higher price paid for gold coins to be a premium. The so called premium is the actual price of the metal. The spot price is a fictitious number made up by the criminal banking cabal. The difference in the price of coins and bars makes sense, as it costs more to mint coins than it does to produce these bars. You also may pay less for bars because of the quantity you're buying. If you buy things in quantity you can usually get them for less money. The following article shows just how much demand there is for gold coins..... www.goldnewswire.net/g...

Feb 25 10:32 PM