Gold is hard to find right now – so should you be buying?

With demand through the roof and the physical metal hard to find, it's not the best time to buy gold. But right now, says Dominic Frisby, you want to hold as much as you can.

An old friend got in touch on Monday wanting me to help him buy some gold. “Well, better late than never,” I thought, and set about phoning some of the dealers I know.

I soon discovered that there isn’t any. My simple requests – well, I thought they were simple – to buy some tubes of sovereigns and one-ounce coins were just met with laughter.

On the one hand, thanks to you know what, demand has gone through the roof. “This is a global phenomenon”, Mark O’Byrne of Goldcore in Dublin tells me. “The entire industry has experienced record demand in recent days.

There’s a huge demand for gold, but no supply

Jason Cozens, CEO of gold payments app Glint, who I spoke to yesterday, describes “a 718% increase in clients purchasing gold over the last five weeks. We are breaking records everyday.”

“The increase is not just in the number of people buying”, he adds, but in the amount they are buying. “The average buy per person has gone from £1,373 to £2,739.”

On the other hand, there is no supply. The refineries have all shut down. The main refineries in Switzerland – Valcambi, Argor-Heraeus and PAMP – between them process around 1,500 tonnes of gold – over a third of global demand – every year. But guess where they are? Close to the border with northern Italy, the European Covid-19 epicentre. The closure is at present for two weeks, but is likely to last longer.

Ross Norman, a precious metals analyst, tells me that the Rand refinery in South Africa has done the same. At the same time, many mining companies – Newmont, New Gold, Alamos and B2, for example, have suspended operations. South African mining has gone into lockdown.

“The global supply of one-ounce gold and silver bullion coins and bars has quickly evaporated,” says O’Byrne. “We continue to have gold bars (one kilo) for now.” A kilo bar costs something over $50,000. It’s not your everyday purchase.

Dealers just can’t get their hands on the metal

This supply chain breakdown has fed into the market. “It’s become very difficult for the market makers,” says Norman. “The normal bid-offer spread in the professional market is about 0.6% – about 30 basis points. Yesterday there were quotes of over $100. The spreads have got so wide because the market makers are worried about squaring that position away with counter-parties in the market.” The result is volatility. The gold volatility index is at its highest since 2008. Some dealers don’t see normality returning to the market for at least six months.

“If you want to buy physical gold,” says Norman, “you really can’t. Dealers are closed. Even kilo bars the spreads have gone to 6%. Physical premiums are up roughly a hundred-fold compared to three months ago.”

The next complication is in the futures market, Norman points out. “Normally, the premium over spot might be a few dollars. Yesterday there were premiums of over $100 to spot.”

Dealers are panicking because they can’t get the physical metal. The only way to cure it is to get the physical to the futures markets in the US. “But with most refineries and logistic routes closed,” says Cozens, “100-ounce bars cannot be supplied to be delivered into short futures positions.”

The LBMA has said it will help New York by shipping out 400-ounce bars. “Technically there are issues with that – size, purity etc,” says Norman, “but it can be managed.”

The last time the New York-London spread was as big as this was in the 1980s when gold futures went to that record high of $850/oz. That high remained for almost 30 years.

The result of the supply shortage was that gold rose some $80, or 5%, yesterday to record its biggest daily gain on record. “So the move in the spot market, on the spreads, on the physical premiums and on dislocation between spot and futures were all yesterday on a scale never seen before,” says Norman.

When should you be buying gold

I have to say, putting on my contrarian hat for a moment, this kind of market action is something you see towards the end of moves rather than at the beginning. I can remember these kinds of “unprecedented” panics in gold before, particularly between 2008 and 2011. Normally they are the types of things you want to be selling into, not buying into.

The moral of the story is, of course, buy when markets are quiet and boring and nobody cares. That’s always the time to buy gold – or indeed anything. When nobody cares are when prices are cheapest. In supply shortages you want to be a seller not a buyer.

My friend, meanwhile, bought an ETF via his broker. I rather fear he got hit on the spread. Still he’s got his gold.

This might be one of those “obvious in the rear view mirror” interim high moments for gold. But I look at all the coronavirus money-printing that’s going on and that makes me want to own all the gold I can.

I asked James Turk of Goldmoney for his comments last night. He emailed me saying, “The volatility in various markets is unprecedented. Nevertheless, throughout it all gold has been an exemplary safe haven. Because gold is a tangible asset, owners of physical gold have excellent liquidity whilst also avoiding counterparty risk. To top it off, gold is up 9% for the year so far, with I suspect more price rises to come as the recent rounds of central bank quantitative easing inevitably inflate consumer prices.”

That’s kind of what I think as well.

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