A Precious Metals Market Perspective

There are three ways to own precious metals, take physical possession of the metal, or let a proxy hold the gold for you in a storage vault, or trade the metal with your broker using ETF’s (Exchange Traded Funds).

In the first process, taking physical possession, you have the metal to hold in your greedy little hands. In the second process someone else holds your gold in their greedy hands and there is a good possibility if every depositor wanted delivery, it just wouldn’t happen. And in the third method of “owing” the metal is through ETF trading. This last method is kind of paper trading of the metal. A person can buy and sell and never really deal with the physical metal.

There is one problem though. Physical gold, silver and platinum are real. A lot of these markets are hypothetical. They trade on the price of the commodity, with the buyer and seller not the least bit interested in taking possession of the precious metal. A buyer sells 1000 ounces of gold for September delivery and buys them back before the due date to avoid having to make delivery.

I’ve made several trips to a gold and bullion wholesaler. I was converting my junk silver and gold. People are buying, not selling. And I must admit when I first went there, I thought I was telling the owner something new about Obama printing dollars and how I wanted to preserve my buying power. The last time I was there, an elderly couple was telling him the same thing. And Chuck patiently listened to them.

So there are really two markets, one that deals in physical delivery of the metal to the buyer and one that deals with the change in price for the holder of the contract.

The precious metals have dropped in price considerably in the last two days. The thing to look at is the physical delivery. People on the street think that now is a good time to buy gold, since the price is down about $400 from its highs.

It appears the ETF’s and futures markets are where the battle over price of precious metals is being fought. A lot of those contracts can be bought with only 6% down. So Monday there had to have been some pretty heavy margin calls and if you didn’t make the margin call, you got sold out.

On a local level, I only have my own observations to report, but some bullion dealers around here are running short of gold and platinum maple leafs. It now takes a couple of days to fill an order. And it’s been that way since January. What we are looking at is not a real shortage, but it suggests more people are buying than those selling physical precious metals. Remember there is a $48 dollar premium on the purchase of gold and platinum per ounce; so you’re not going to change your mind on a whim.

I think that Joe Sixpack has figured it out. The banks pay zip for interest. Costs are going up and paychecks are going down. Silver rounds can be purchased for about a buck above spot. Physical ownership has a real feeling to it; you’re in control. It’s rather strange to see someone come in to this precious metal wholesalers shop with a stack of 100 20 dollar bills and leave with 60 ounces of silver. That buyer just made a statement; the banking system sucks. GOT SILVER?