Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Critical Price Level Could Soon Prompt A Big Move - 25th May 20
Will Powell Decouple Gold from the Stock Market? - 25th May 20
How Muslims Celebrated EID in Lockdown Britain 2020 - UK - 25th May 20
Stock Market Topping Behavior - 24th May 20
Fed Action Accelerates Boom-Bust Cycle; Not A Virus Crisis - 23rd May 20
Gold Silver Miners and Stocks (after a quick drop) Ready to Explode - 23rd May 20
3 Ways to Prepare Financially for Retirement - 23rd May 20
4 Essential Car Trade-In Tips To Get The Best Value - 23rd May 20
Budgie Heaven at Bird Land - 23rd May 20
China’s ‘Two Sessions’ herald Rebound of Economy - 22nd May 20
Signs Of Long Term Devaluation US Real Estate - 22nd May 20
Reading the Tea Leaves of Gold’s Upcoming Move - 22nd May 20
Gold, Silver, Mining Stocks Teeter On The Brink Of A Breakout - 21st May 20
Another Bank Bailout Under Cover of a Virus - 21st May 20
Do No Credit Check Loans Online Instant Approval Options Actually Exist? - 21st May 20
An Eye-Opening Perspective: Emerging Markets and Epidemics - 21st May 20
US Housing Market Covid-19 Crisis - 21st May 20
The Coronavirus Just Hit the “Fast-Forward” Button on These Three Industries - 21st May 20
AMD Zen 3 Ryzen 9 4950x Intel Destroying 24 core 48 thread Processor? - 21st May 20
Dow Stock Market Trend Analysis and Forecast - 20th May 20
The Credit Markets Gave Their Nod to the S&P 500 Upswing - 20th May 20
Where to get proper HGH treatment in USA - 20th May 20
Silver Is Ensured A Prosperous 2020 Thanks To The Fed - 20th May 20
It’s Not Only Palladium That You Better Listen To - 20th May 20
DJIA Stock Market Technical Trend Analysis - 19th May 20
US Real Estate Showing Signs Of Covid19 Collateral Damage - 19th May 20
Gold Stocks Fundamental Indicators - 19th May 20
Why This Wave is Usually a Market Downturn's Most Wicked - 19th May 20
Gold Mining Stocks Flip from Losses to 5x Leveraged Gains! - 19th May 20
Silver Price Begins To Accelerate Higher Faster Than Gold - 19th May 20
Gold Will Soar Soon; World Now Faces 'Monetary Armageddon' - 19th May 20
Gold Mining Stocks Fundamentals - 18th May 20
Why the Largest Cyberattack in History Will Happen Within Six Months - 18th May 20
New AMD Ryzen 4900x and 4950x Zen3 4th Gen Processors Clock Speed and Cores Specs - 18th May 20
Learn How to Play the Violin, Kids Activities and Learning During Lockdown - 18th May 20
The Great Economy Reopening Gamble - 17th May 20
Powell Sends a Message With Love for Gold - 17th May 20
An Economic Renaissance Emerges – Stock Market Look Out Below - 17th May 20
Learn more about the UK Casino Self-exclusion - 17th May 20
Will Stocks Lead the Way Lower for Gold Miners? - 15th May 20
Are Small-Cap Stocks (Russell 2k) Headed For A Double Dip? - 15th May 20
Coronavirus Will Wipe Out These Three Industries for Good - 15th May 20
Gold and Silver: As We Go from Deflation to Hyperinflation - 15th May 20

Market Oracle FREE Newsletter

Coronavirus-stocks-bear-market-2020-analysis

Chocolate for Cocoa, Or What's Gold Really Worth?

Commodities / Gold and Silver 2013 May 01, 2013 - 06:49 PM GMT

By: Adrian_Ash

Commodities

Spying direction is hard enough in precious metals right now without confusing form and location...

SO WHAT'S your gold or silver really worth today? Like everything else, it's worth the most that somebody else will pay you for it, right here and now. That's the simple truth, as last month's crash proved all too plainly.

There were no gold buyers in size on Friday 12th and Monday 15th April, not between $1550 and $1325 per ounce. But gold has found plenty of buyers since then, after finding a floor more than 30% below its peak of September 2011.


The surge in demand for gold and silver provoked by mid-April's crash – the sharpest drop in 30 years – is phenomenal. Internet traffic to Bullion Vault.com has doubled from recent levels, and new account openings rose more than 40% from the previous 3-month average to reach the strongest level since January 2012.

Traditional retail dealers in North America and Europe are also reporting strong demand, with some distributors hitting supply delays thanks to the real source of today's surge in global demand for small bar and coin – India and China, the world's top two markets gold consumers.

Overwhelming the physical supply chain for kilobars and other "retail investor" products, dealers in Asia haven't been able to charge this much above international prices since late 2008. Yes, America's biggest retailers are starting to plug their gaps at home, with some "Hot Items" now "Back in Stock" at 10% over the wholesale price. Silver buyers in the UK are meantime being asked up to 40% more than wholesale prices for a 1 kilo bar (that includes 20% VAT – a charge you don't pay on BullionVault unless you opt to take possession). German dealers also report tight supply in gold coins, although they don't yet seem to be capitalizing on any shortage.

Does this gap between small bar and big bar prices represent some kind of paradigm shift? Large premiums for retail units are in fact a common but unpredictable feature of the bullion industry. They typically hit when prices slump, inviting eager buying by private investors but leaving their retail suppliers with a sharp loss if they follow the wholesale price all the way down. Surging demand for coin and small bars emptied gold retailers across Europe and North America during the price crash of late 2008, for instance, when spot gold fell from $900 to $670 inside 3 weeks. Premiums leapt. They did the same in New Year 2011, when spot prices fell from $1410 to $1320 inside a month, catching the refiners with holiday staffing levels and hitting supply-chain bottlenecks in secure logistics. The shortages were then most acute in silver, which fell from $30.60 to $26.68 in the wholesale 'spot' market but couldn't be found at less than 10% mark-ups in the retail market (and even before UK and other European investors had to account for VAT sales tax of up to 20%). That wiped out any saving which new investors might have hoped to enjoy.

But how does such tight supply come about? Like a chocolate bar starting life as cocoa beans, small gold bars and coins typically start life in the form of large Good Delivery bars, whose quality and provenance is warranted by the wholesale market, and whose production and logistics costs are lowest. So before a new coin or small bar can reach the investing public, armoured trucks first need to be booked, together with air freight if the metal is taking the #1 route – out of London, into Swiss refiners, and onto Asia in the form of kilobars.

Vault staff then need to pack the large wholesale bars, ready for shipping. Once delivered to the refinery or mint, those big bars need to be melted down and recast or struck as small bars or coin. Those retail-sized products then need to be shipped back out to retail distributors, who will add a fourth layer of limits on order processing (office hours, staff levels, financial resources and so on).

Make no mistake: this is not an "arbitrage" which holders of gold in one form can exploit simply by spotting it. The reason the kilobar premium in Singapore for instance has surged in the last two weeks (and it's fading as demand eases off) is the tight supply of production capacity, relative to dealer demand. Swiss refiners are booked solid until end-May for kilobars, we are told. So getting your metal into retail form would be hard. It is also something to which professional distributors already devote their operations.

The answer then to "What is gold worth?" is more complex, but only a little. Like silver or any other physical good, it depends both on where it is and what form it takes. Coins and small bars are currently at a premium. So is metal in Hong Kong and Mumbai. Those mark-ups are highly variable however, and accessing them as a private investor is hard. First you need to have paid all those extra fabrication and logistics costs. Then you need to find a buyer willing to pay you the premium, rather than shopping around amongst retail dealers.

Would that be the "real" price anyway? Only if you could achieve it. Yet the gap between retail-product and wholesale prices is feeding an idea popular with bloggers right now that professional "spot" prices are somehow divorced from "real gold" values. Such frustration is understandable perhaps. Last month's price-drop has cost a lot of long-term precious metal owners a lot of missed profit, and more recent buyers are out of pocket still worse.

But as professionals in the physical market, we can assure you that the spot price is the price of physical gold and silver in large-bar form right now, just as always. We go on settling physical gold and silver bars daily, picking up real physical bullion and moving it to accredited storage outside the banking world. The quality of the bars, fully allocated to BullionVault clients at all times as the Daily Audit shows, is warranted by the Good Delivery standards. We also have inspection reports from independent experts which make clear that what belongs to BullionVault users is indeed warranted, high-quality gold.

So the real price of physical gold right now? Go to BullionVault's Order Board, and you'll see firm bids and offers for Good Delivery metal, already delivered inside accredited vaults. In each location – London, New York, Zurich and Singapore – you'll enter a live peer-to-peer market, where buyers and sellers are meeting to agree their price in free competition, with instantaneous settlement inside the vault.

One side wants to pay as little as possible. The other wants to get as much as they can. So whether you think the price is too high – or too low – depends on which side you're on. BullionVault lets you set your own bid or offer. Whether you get the price that you want depends on what the other side does. But that is how markets work. And different markets for different things shouldn't be confused. There's enough trouble trying to spy gold and silver's underlying direction right now without mistaking chocolate in your local store for cocoa on the other side of the world.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash 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