Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
The Truth About “6G” - 30th Nov 20
Ancient Aztec Secret Could Lead To A $6.9 Billion Biotech Breakthrough - 30th Nov 20
AMD Ryzen Zen 3 NO UK MSRP Stock - 5600x, 5800x, 5900x 5950x Selling at DOUBLE FAKE MSRP Prices - 29th Nov 20
Stock Market Short-term Decision Time - 29th Nov 20
Look at These 2 Big Warning Signs for the U.S. Economy - 29th Nov 20
Dow Stock Market Short-term and Long-term Trend Analysis - 28th Nov 20
How To Spot The End Of An Excess Market Trend Phase – Part II - 28th Nov 20
BLOCKCHAIN INVESTMENT PRIMER - 28th Nov 20
The Gold Stocks Correction is Maturing - 28th Nov 20
Biden and Yellen Pushed Gold Price Down to $1,800 - 28th Nov 20
Sheffield Christmas Lights 2020 - Peace Gardens vs 2019 and 2018 - 28th Nov 20
MUST WATCH Before You Waste Money on Buying A New PC Computer System - 27th Nov 20
Gold: Insurance for Prudent Investors, Precious Metals Reduce Risk & Preserve Wealth - 27th Nov 20
How To Spot The End Of An Excess Market Trend Phase - 27th Nov 20
Snow Falling Effect Christmas Lights Outdoor Projector Amazon Review - 27th Nov 20
4 Reasons Why You Shouldn't Put off Your Roof Repairs - 27th Nov 20
Further Clues Reveal Gold’s Weakness - 26th Nov 20
Fun Things to Do this Christmas - 26th Nov 20
Industries that Require Secure Messaging Apps - 26th Nov 20
Dow Stock Market Trend Analysis - 25th Nov 20
Amazon Black Friday Dell 32 Inch S3220DGF VA Curved Screen Gaming Monitor Bargain Deal! - 25th Nov 20
Biden the Silver Bull - 25th Nov 20
Inflation Warning to the Fed: Be Careful What You Wish For - 25th Nov 20
Financial Stocks Sector ETF Shows Unique Island Setup – What Next? - 25th Nov 20
Herd Immunity or Herd Insolvency: Which Will Affect Gold More? - 25th Nov 20
Stock Market SEASONAL TREND and ELECTION CYCLE - 24th Nov 20
Amazon Black Friday - Karcher K7 FC Pressure Washer Assembly and 1st Use - Is it Any Good? - 24th Nov 20
I Dislike Shallow People And Shallow Market Pullbacks - 24th Nov 20
Small Traders vs. Large Traders vs. Commercials: Who Is Right Most Often? - 24th Nov 20
10 Reasons You Should Trade With a Regulated Broker In UK - 24th Nov 20
Stock Market Elliott Wave Analysis - 23rd Nov 20
Evolution of the Fed - 23rd Nov 20
Gold and Silver Now and Then - A Comparison - 23rd Nov 20
Nasdaq NQ Has Stalled Above a 1.382 Fibonacci Expansion Range Three Times - 23rd Nov 20
Learn How To Trade Forex Successfully - 23rd Nov 20
Market 2020 vs 2016 and 2012 - 22nd Nov 20
Gold & Silver - Adapting Dynamic Learning Shows Possible Upside Price Rally - 22nd Nov 20
Stock Market Short-term Correction - 22nd Nov 20
Stock Market SPY/SPX Island Setups Warn Of A Potential Reversal In This Uptrend - 21st Nov 20
Why Budgies Make Great Pets for Kids - 21st Nov 20
How To Find The Best Dry Dog Food For Your Furry Best Friend?  - 21st Nov 20
The Key to a Successful LGBT Relationship is Matching by Preferences - 21st Nov 20
Stock Market Dow Long-term Trend Analysis - 20th Nov 20
Margin: How Stock Market Investors Are "Reaching for the Stars" - 20th Nov 20
World’s Largest Free-Trade Pact Inspiration for Global Economic Recovery - 20th Nov 20
Dating Sites Break all the Stereotypes About Distance - 20th Nov 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Will Coins and Bars Save Gold 2019?

Commodities / Gold and Silver 2018 Dec 30, 2018 - 04:02 PM GMT

By: Arkadiusz_Sieron

Commodities

There is a disconnection between paper and physical gold prices and the former has to catch up with the latter eventually. Myth or fact? We invite you to read our today’s article about demand for gold coins and bars and find out whether it will save the yellow metal.

The best stories are about the conflict between good and evil, or light and dark. In the precious metals market, we also have such a narrative, or actually several variations on the theme. But one of the most popular thread is the ‘disconnection’ between paper and physical gold. The characters are clearly identified: paper market is the powerful Empire while the physical gold is Rebellion, which heroically fights a stronger and more vicious opponent.


The battle is about gold and silver. The paper market suppresses their prices by malicious use of derivatives, mainly futures, and other techniques of manipulation. Luckily for the Rebellion, these actions are doomed to failure. When the fraud is exposed and the paper gold market collapses under its own weight, ‘real’ market forces come to the fore, pushing the gold prices eventually back to the fundamental level which would be reflected in the pure physical price market. In other words, after being manipulated for years, the ‘true’ price of gold will surface.

According to this narrative, the declines in the gold prices are practically always seen as something suspicious or even fake. Hence, many investors do not react adequately to market changes, but wait for the “imminent” rebound, missing many opportunities to gain.

The fact that the prices of bullion coins or bars typically lag behind the spot price only reinforces the belief in the disconnection between paper and physical markets. It’s true that prices of gold bars and coins are above the spot price, but this is due to premium for refining or minting and selling to retail investors. Bullion dealers quote prices higher than London fix, since they bear higher costs than wholesale players and add some markup to make a profit.

Another thing is that there is a limited capacity to produce them, which lifts prices. For example, only the US Mint (surprise, surprise) can mint US Mint coins. When strong demand meets limited supply we have higher prices. However, it proves neither a shortage of gold, nor the disconnection between physical and paper market. It rather demonstrates the lack of enough equipment for coining.

Moreover, the fact that bullion dealers slowly cut the prices of coins and bars should not be very surprising. You should know the mechanism from the gas stations: the price of gas rises much faster than it falls in a response to changes in the crude oil prices. One reason for this is limited competitive pressure. But it’s also true that gas stations wait with cuts to cover the costs of the higher-priced gas still in their tanks. The same applies to bullion dealers. They reduce retail prices with some delay, as they wait to cover the costs of the higher-priced coins and bars still in their inventory.

The best example of the permabull mindset is the immediate reaction to the plunge in gold prices in 2013. After a decade-long bull market, the sudden dive was a bitter pill to swallow. Therefore, people deluded themselves that the decline was an anomaly. The quote from Doug Casey is very telling:

My first reaction is to suggest that this is only an aberration, and that the fundamentals of the depreciating value of paper currencies will eventually take the price of gold much higher, making it a buying opportunity.

He wrote these words in April, 2013, after the price of gold slid to $1,400 level. Five years later, it is lower, not higher, at the level of about $1,200, as one can see in the chart below. Of course, the price of gold may eventually go higher. But a term “eventually” is not very useful in trading and investments. If the price is going to decline and provide an ultimate buying opportunity at much lower price levels, it simply makes sense to close the positions and reopen them much lower (perhaps profiting from the decline). And you know: Didi and Gogo waited for Godot for a long time, but he never arrived.

Chart 1: Gold prices (London PM Fix) from January 2013 to November 2018.


To be clear, we are not admirers of our monetary system based on paper currencies. We acknowledge that it is more inflationary than the gold standard and may collapse one day. We like gold, but we like objectivity and truth much more. And we care about our clients’ portfolio’s returns much more than we do about the profits of gold sellers and producers that would prefer one to believe that gold is going to always go up and never decline. Still, we are sympathetic to part of gold bulls’ arguments. At first glance, it makes sense: the supply of money increases, the currencies systematically depreciate, so the price of gold should only rise.

However, such reasoning does not take into account market sentiment and investors’ psychology. People react differently to low and high inflation. If we have hyperinflation, or just high and accelerating inflation, gold will shine, without a doubt. But we have modest inflation. Moreover, the US dollar is not the only currency which depreciates – all currencies depreciate in a similar pace. Actually, thanks to strong demand for greenback (due to its status of international reserve), and contained inflation, the dollar looks quite attractive. Especially given that gold does not bear any yield.

The bottom line is that the gold price discovery might indeed not be perfectly honest. Perfect honesty is very rare on Earth, perhaps even rarer than gold. But it does not mean that there is a disconnection between paper and physical gold prices. It’s a perfect… nonsense, as any price differential would create enormous arbitrage opportunities. There might be a disconnection between the paper and physical prices in the future if there is a shortage of a given precious metal (it’s unlikely that we’ll see shortage of gold, but silver is a different story), which has already happened in the palladium markets about two decades ago, but this is unlikely to happen anytime soon and very unlikely without a powerful parabolic upswing in prices beforehand. We have definitely not seen one recently.

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

Arkadiusz Sieron

Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules