The disconnect between the price of gold as determined by futures trading and ETF selling versus the demand for physical gold and silver continues to grow. Demand is now near all-time highs after a historic sell-off last week. The most popular ETFs that track gold and silver, the SPDR Gold Trust (NYSEARCA:GLD) and the iShares Silver Trust (NYSEARCA:SLV), are now at $138.69 and $22.42, respectively. With the sell-off in the metals, GLD has been forced to liquidate about $12 billion worth of gold in order to meet shareholder redemption demand as a result of the selling. This pressure on the GLD may continue due to the redemption need, however the price of gold has a tailwind in the form of near record physical bullion buying. The buying is so great that national Mints are having difficulty keeping pace with buyer demand.
The US Mint Can't Keep Up With Demand
For those who are unaware, the US Mint sells a one-tenth, one-quarter ounce, one half ounce, and a one ounce American Gold Eagle. Due to unprecedented demand as a result of the sell-off, the US Mint has halted sales of the one-tenth ounce American Gold Eagle. In a note to investors and members of interest (sign up for product information, production notifications etc. here), the US Mint stated that "demand for the one-tenth ounce coins has remained strong with year-to-date demand for these coins up over 118 percent compared to the same period last year. Accordingly, the United States Mint has temporarily suspended sales of its one-tenth ounce gold bullion coins while inventories can be replenished." The US Mint has not stopped selling a gold product since November 2009, making this the first sales stoppage in over three years. So far in April, it has sold 188,000 ounces of gold product, more than February and March combined. Last year, the Mint only sold 20,000 ounces of gold product in April. The all-time record for a single month is 231,500 ounces sold in December 2009, following a period of suspended gold sales (see this link for obtaining information on sales figures).
Silver in High Demand, Other Mints Under Pressure
Year to date, approximately 17.6 million American Silver Eagles have been sold, far outpacing the 11 million sold in the first four months of 2012. Recall that earlier this year the US Mint received more than 3.9 million orders for the 2013 American Silver Eagle on its first day of availability, the highest one-day sales total in the history of the program. A few days later, the US Mint had to suspend American Silver Eagle sales to replenish supply. The US mint is not the only one facing heavy pressure to keep up production to meet buyer demand. Britain's Royal Mint as well as the Canadian Royal Mint are both seeing a massive increase in precious metal demand. The former sold more than three times as many gold coins this month than the same period last year. Month-over-month, sales are up more than 150 percent. The Canadian Mint is struggling to meet demand for its popular gold and silver Maples.
Take Home Message
Despite the huge sell-off in gold and silver, demand for physical assets is near all-time highs. The US Mint has suspended one-tenth ounce Gold Eagle sales due to demand. The Royal Canadian and Britain Mints are also having trouble keeping up with demand. Silver and gold are being bought in record amounts. This demand has led to the price of gold and silver starting to rebound off their lows from last week following the historic two-day sell off. I see this demand as driving gold prices higher, despite the action in paper trading instruments and futures contracts that were responsible for driving the price lower. It appears a bottom may be in for gold, especially if it holds over $1,400 and silver above $23. Investors should avoid the GLD and SLV until any further redemption is complete to avoid losses. Instead, if you can get some I recommend picking up physical assets.
Disclosure: I am short GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I Own Physical Bullion and Coins