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For anyone who has not been paying attention, gold and silver are in the grasp of the bears now. Prices of gold are now down almost 24% since hitting an all-time high of $1,920.80 an ounce in September 2011. Silver is now down 52% from its April 2011 highs of $49.51. This price action has sparked fears that the bull market in metals, particularly gold and silver, is coming to an end. Investors have been bailing out of the SPDR Gold Trust (GLD) and the iShares Silver Trust (SLV). The GLD is trading at $141.60, whereas the SLV is trading at $23.50. They are now down 125% and 22.0% in 2013, respectively.

With the historic sell-off that took place last week, huge physical buyers stepped in. Much of the physical demand came from Asia and the U.S. On the silver front, physical demand is at record highs, leading to very large premiums being assessed and major wholesalers being sold out of merchandise. Britain's Royal Mint sold more than three times the amount of gold coins this month than a year earlier after prices dropped the most in three decades, and the U.S. Mint ran out of its smallest American Eagle bullion coin and suspended sales.

This action has led to a rebound in metals prices, particularly gold. The action last week suggests some of the fundamentals related to bargain hunting and those seeking long-term insurance are in play. Gold has gained each day from Tuesday (April 16) to Thursday (April 25), with only one down day. This has even led Goldman Sachs to cover its gold short, but they still remain bearish. While GS covered their short at gold $1400, many short sellers today covered their positions leading to a short squeeze as gold blew through $1450 and reached as high as $1468. Silver also has a great day, gaining 6% to $24.50.

Despite the bounce in gold prices, there remains record redemption levels in the GLD. The redemption is continuing despite the following the sharp decline, which is somewhat unexpected. Physical gold bullion holdings dropped nearly 2% on Monday to 35.5 million ounces. In fact, this is the lowest level of holdings in the GLD since November 2009. The continued redemption in the ETF adds to the selling in 2013, a year that has thus far resulted in the GLD facing outflows of $12.2 billion.

The paper vs. gold disconnect has grown. The paper gold market is seen in the futures exchanges, in addition to the many ETF products that can move the price of gold. The prices of futures contracts are what actually quote the price of gold on the ticker. The interesting thing is that the paper markets actually move very little physical commodity. Only small amounts of gold and silver are ever exchanged. Instead, most of the trading is between buyers taking long positions against sellers taking short positions, and a great majority of these contracts are liquidated before settlement and subsequent delivery. Trading in the paper market drove the price down last week. However, the demand for physical gold has hit new records. Premiums have risen because of record demand at coin dealers.

This physical demand has increased the price of gold over $140 an ounce off the lows in just a week, but the GLD paper trade could keep a lid on prices. GLD is likely to face more pressure in the near term despite the physical buying, according to Societe Generale, Goldman Sachs, and Morgan Stanley. The have opined that a reduced faith in gold means outflows from GLD are likely to continue in the near future. Further redemption could lead to selling from their reserve holdings pressuring metals prices. This sentiment is shared by Goldman Sachs and Morgan Stanley, who opined that investor interest in the GLD and similar ETFs is waning, and further selling is likely ahead.

Conclusion

On Thursday, April 25, the GLD was up once again nearly 2.5% at $141.70, after taking a breather Tuesday (April 23) following gains in the prior five trading sessions. Gold prices are above the $1,460 an ounce mark, a level of significant resistance. The disconnect between paper-traded gold and demand for physical gold as well as the redemption action in the GLD ETF holdings is an important consideration. Major institutions believe GLD will face further redemption, weighing on share prices and the price of gold as well.

Regardless, I always prefer investors to buy physical assets as opposed to the paper investments such as GLD or SLV. The question is: Can global physical buyers in the U.S. and Asia offset the redemption in the gold ETFs, as well as possible central bank selling? That remains to be seen. In the interim, I would completely avoid GLD (or SLV) in favor of physical assets.

Source: Despite Record Physical Demand And A Short-Covering Rally, GLD Still Bleeding Assets

Additional disclosure: I own physical gold and silver bullion.