Investors are queuing up to buy gold – but what next for the price?

It seems we have a mini gold rush on our hands.

Gold’s capitulation has shaken many and resulted in record amounts of money leaving the ‘paper’ markets – the futures and exchange-traded funds. But the opposite has happened in the physical markets.

Buyers have been coming out of the woodwork – from Auntie Nora buying a quarter ounce sovereign for her grandson, to the better-heeled buying kilo-sized (about 35 ounces) investment bars in Dubai.

It’s like 2008 all over again.

But what does it mean for the price of gold?

Small investors are queuing up to buy physical gold

It’s important to stress that the wholesale gold markets – the LBMA (London Bullion Market Association) and the Comex – are not experiencing a severe shortage of physical gold, counter to some of the rumours that are doing the rounds on the internet.

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Activity has increased, yes, but there is still inventory of inter-market London ‘good delivery’ bars. The price for these – rather than the price quoted on eBay for a krugerrand – represents the true price of the physical market on any given day. They weigh about 400 ounces each, have a purity of 99.5% or better, and yesterday would set you back the small matter of $588,000. (That’s about $1,470 an ounce).

However, at the retail end of the physical markets, there is a shortage of supply – quite a severe shortage. Swiss refiners have run out of kilo gold bars (cost around $48,000). There is now a one-month wait for delivery. The US mint had to suspend sales of certain coins as buying increased: it sold an estimated 210,000 ounces of gold coins in April – almost three and half times more than the 62,000 it sold in March.

Images have been posted all over the web of huge queues at German, Chinese and Indian coin and bullion dealers. In China, people have been paying over the odds to buy: the premiums paid per ounce have risen by about 50% on the previous month, due to the shortage of the physical metal.

Both Istanbul and Dubai are out of investment bars, according to Bloomberg, with wholesale and bulk buyers paying a premium of between $6 and $9 an ounce for kilo bars – a premium one dealer described to me as “crazy”. On the Istanbul Gold Exchange, bullion traded at as much as $25 above the London spot price.

The Perth Mint ran extra shifts over the weekend to manufacture enough stock to meet orders, which are at levels last seen in the 2008 financial crisis, according to sales and marketing director, Ron Currie. Analysis and strategy manager Bron Sucheki told me: “the premiums the Perth Mint are getting for one-tonne lots of gold kilo bars into Asia moved up again this week on top of already higher-than-normal premiums”.

The online dealers Goldmoney, BullionVault and Goldcore have also all reported increased activity.

Even here in sleepy old Britain, activity has increased. I spoke to Alex Baird of Baird and co, Britain’s biggest refiner and one of the UK’s biggest coin dealers, just this morning. He said: “When the gold price dropped on that Monday we were absolutely swamped. Many of our competitors even switched off their websites. I’d say we’ve been seeing three to four times normal activity. We’ve been so busy we’ve fallen behind on our manufacturing. Bars are taking at least two weeks longer than usual to deliver and we’re getting delays on coins from overseas, particularly maple leafs.”

 

The rush for physical gold – what does it mean?

What can we read into all this?

Private investors around the world have taken advantage of this dip in the gold price to load up on physical gold. Perhaps it’s a mini-bubble. Perhaps the small investors have got it all wrong.

However, they didn’t in 2008. They presaged a big move.

People buying physical metal in the retail markets tend not to be short-term traders or ‘flippers’ – looking for a quick turn. The effort that goes into buying and selling physical metal and the commissions involved mean buyers tend to be thinking in the long term, often the very long term – planning to hold for life and pass on to their children, in some cases.

There is clearly a real and global appetite for the metal and that bodes well, at least in my mind, for its long-term future. It is not a meaningless and antiquated ‘relic’.

I enjoyed talking with Ross Norman of Sharps Pixley at the Mining Journal gold day last week. Describing the recent action in the gold markets, Ross used the analogy of a castle under siege. Gold investors are a growing, but disparate and disorganised rabble, a kind of peasants’ revolt. Several deep-pocketed institutions on the other side of the castle walls have control of the big guns.

Some well-orchestrated shots – requiring a lot of ammunition, as well as excellent timing – saw them dump breathtaking amounts of gold onto the market in single drops – amounts equivalent to the entire holdings of a medium-sized first world nation’s central bank. That was enough to put large holes in vulnerable areas of the rabble forces and send many of its number running.

But elsewhere more joined the rabble. Eventually the rabble will overwhelm the big guns, whose ammunition will become less and less effective, as more and more strong hands come into the market in the form of long-term physical holders who don’t care about short-term price fluctuations.

The ammo may eventually run out. Who knows? We may even see big guns on the buy side. Imagine if a deep-pocketed institution were to ‘dump’ a 300-tonne buy-order on the market – the reverse of what happened ten days ago – just as the market is sitting under key resistance. We’d get a pretty emphatic short squeeze.

Gold’s rally looks like a dead-cat bounce

But this is all for further down the road. Gold is going to take many months to get over this correction. The rally that we have seen in the last week as gold has bounced from $1,330 to $1,470 looks like a relief rally – the famed ‘dead cat bounce’.

There is a lot of resistance between $1,500 and $1,550. That is the obvious area for this move to peter out. And it’s customary in such circumstances to have a re-test of the lows.

We’ll see if that plays out or not. In short, you may get a chance in the near future to buy paper gold at lower prices than we see today. But I’d hang on to your physical.

• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .

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