Shortages of physical gold now a global phenomenon

Physical metal is now seemingly becoming key in investors' minds. They are no longer putting any faith in paper gold and hefty premiums are being applied on sales of gold bullion. There is particularly strong demand from Asia as well as India.

Author: Lawrence Williams
Posted: Thursday , 25 Apr 2013
Mineweb

Those who precipitated the recent fall in the gold price may have unleashed a beast that will put future efforts at market manipulation way out of their control. Physical metal is now seemingly becoming key in investors’ minds.

They are no longer putting any faith in paper gold and this is being seen in all quarters with reports from virtually all continents of demand exceeding supply of physical metal, and some hefty premiums being applied on sales of gold bullion.

Add to this particularly strong demand from Asia - reports have put the volume of deliveries into the Shanghai exchange so far this year of over 1,000 tonnes as actually exceeding estimated new mine production over the period.

Now whether this is indicative of actual Chinese demand, or perhaps a liquidation of gold held in the Western ETFs and it being moved into what might be deemed as safer depositories elsewhere is uncertain for the moment – although anecdotal evidence does suggest huge demand re-occurring at Chinese and Hong Kong retail outlets.

That other hotbed of gold demand, India, has also seen a huge upturn in demand for physical metal over the last two weeks, while Middle Eastern souks are reportedly raising premiums on bullion to almost unprecedented levels.

In terms of pure physical demand – as Ross Norman notes on www.sharpspixley.com there have already been reports of “Dubai running short of physical, US Mint selling out of smaller denomination bars, coins and bars flying off the shelves in India and China and queues outside leading gold sellers such as Degussa in Germany. The effect has been a massive drawdown in physical metal which has, by and large, caught the gold refineries and some stockists by surprise.”

Add to this that South Africa’s popular Krugerrand and Canada’s gold Maple Leaf coins finding difficulty in meeting current demand and you have the recipe for a big squeeze on physical gold supplies developing with ever higher premiums being applied - and as a result the gold price has already taken back around $100 of its losses over the period from April 10th to 16th, Indeed at the time of writing the price had recovered to a level last seen during the initial major collapse on April 12th

Thus immediate delivery of physical metal is hard to obtain, seemingly anywhere, premiums are rising rapidly and Goldman Sachs, perhaps cynically, is warning of a short squeeze developing on the gold markets. Indeed reports also suggest that long held short positions in gold are being unwound rapidly against just such a scenario developing. How many more indicators are there out there that we could be in for a strong and rapid bounce back in the gold price.

While the stimulus in the East for the sharp rise in demand may well have been price driven, at least initially, in the West this has been exacerbated over doubts about the formerly-seen-as-safe banking system.

The bail-in that the IMF/EU/ECB troika is trying to impose as an integral part of the Cyprus rescue plan has promulgated uncertainty among bank depositors in all the financially challenged economies in the Eurozone – and further afield – in case similar remedies are being considered elsewhere with major bank depositors being forced to unwillingly participate in any economic rescue plans. Some of this money is surely part of the flood into what investors are again increasingly believe to be safer assets – like gold.

Jeff Nichols from the U.S. also comments on major global mints struggling to keep up with demand, and his premise is that physical gold being purchased in the latest run on gold bullion is largely going into strong hands and unlikely to come back rapidly on to the market again. In his latest note on www.nicholsongold.com he says “Importantly, the “stickiness” of demand is creating a shortage of available physical gold — what I call “free float”, the result of which may very well be greater-than-expected future price increases once the market turns convincingly higher. More simply, available supply will be insufficient to satisfy demand except at much higher price levels.”

With weak economic statistics coming out again in the U.S. and the Eurozone, and as news of shortages of bullion continues, the purchasing momentum will likely continue to build in the short term at least and we could well see gold prices surge back to levels seen at the beginning of the year. If, as Goldman Sachs is suggesting, a true short squeeze in the gold market develops, then some of the positive market predictions prevailing at the beginning of the year could yet well actually come about.

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