For buyers of gold and silver things have gotten a bit more complicated of late. In what was often already a confusing market, there’s an extra question to ask now.
It’s not just what will the spot price of gold and silver do, but also what will the premium above spot that the wholesalers charge do?
New to all this and wondering “What’s the spot price and what’s the premium?”
In simple terms the spot price is the cash price of a commodity like gold or silver, at a given time and place. It relates to large bars of metal stored in certified warehouses where usually just the receipt of ownership changes hands not the physical metal.
However, realize that when buying smaller bars and ingots, the spot price doesn’t include other costs that may be involved such as: manufacturing and minting costs for bars, ingots or coins; seller mark ups; storage costs; or delivery and insurance costs.
So this is why prices are quoted as “spot + 3.5%” for example.
(If you wanted the pedantic answer it would be that spot doesn’t actually exist. There is only “The Bid” – what someone is prepared to pay. And “The Ask” – what someone is prepared to sell for, and one has to meet the other. The spot price is just a theoretical price midway between the 2).
Also bear in mind that the spot price generally reported in the media is usually in US dollars. So when buying precious metals here in New Zealand the “spot price” is first converted to NZ dollars using the prevailing USD/NZD exchange rate and then the premium of say 3.5% for example is added to that.
At least as far as locally refined gold and silver go the premiums have not changed too markedly (well not yet anyway) from what they were prior to the price plunge. So for the moment it is still just the spot price to worry about as far as the locally refined products go.
The same can’t be said for the likes of Canadian Maple coins, American Eagls coins and PAMP gold bars, whose premiums have all risen quite markedly in the past 2 weeks or so. This seems to then have had a flow on effect for the likes of the Perth Mint whose Manager, Analysis and Strategy Bron Suchecki, recently said:
“With the [current production] issues at the RCM and US Mints, we are now starting to get hit with good orders from distributors, so we have prioritised manufacture of 1 oz. and kilo silver coins over our Lunar Snake coins so we can maximise the total amount of ounces we can supply. This is great news as that means more physical being taken off market.”
So as the North American Mint products have become more scarce, premiums on Perth Mint products have subsequently also increased as demand for them has gone up too. So if this demand carried on we could expect a flow on effect with premiums on locally refined products to eventually rise further too.
So the question to then ask is what will the premiums do in the near term? Will the disconnect between paper prices and physical prices continue or perhaps even get more significant?
One angle is that the premiums will fall as this current surge in buying due to a lower price will drop off. Then premiums will return back to normal. But of course this could happen as the price rises. Those (potentially) savvy buyers of physical metal that bought at the recent lows have already had their fill so to speak. So if you wait you could see lower premiums but higher spot prices.
The counter argument is that the rush will subside and so will the premiums.
From the Rude Awakening:
“The all-out rush to buy the “cheaper stuff” is disconcerting to me. The small investor is convinced that the sharp decline in precious metals is only temporary. This is clearly the consensus view outside of the smart money crowd. And you know how I feel about everyone leaning over the same side of the canoe…
I’m wary of what will happen when this initial mania begins to ebb – – especially to those who are paying 25% premiums or more.”
This argument is a pretty good one. We’d translate it as basically saying that a real bottom is where no one wants to buy. So this would point to the fact that we are yet to see the bottom in gold and silver as all this physical buying means there are still more buyers than sellers. Whereas when there are no buyers the bottom is likely then in. It does seem to us that maybe the rise following the plunge has been a bit too far too fast.
Of course there is a flipside to that argument. Which is, if prices fell further there is every possibility that buying will get even stronger for actual physical gold and silver. Obviously if this was the case and given how demand for many products is already outstripping supply then premiums would likely rise further. After all premiums currently are still not as high as they were in 2008 (where silver coin premiums were as much as 100% on some products in the US).
(See this article from earlier in the week for more on why this might happen.)
Speaking of 2008, this is a historical example as to how a bottom can arrive while there is plenty of demand for physical metal. We recall that delivery times for orders back in September 2008 were out to 2-3 months. Gold bottomed out around October/November before rising steadily higher in both US dollars and also in NZ dollar terms. So that was also a time when the physical price had disconnected from the paper price due to massive buying of physical metal.
But what if this current wave up after the plunge in price is short lived and the price was to fall further yet – that is we are currently experiencing the metaphorical “dead cat bounce” – how low could gold in NZ dollars go?
Looking at it from a technical point of view, in the long term chart there is some support around the $1500 mark. Then the next major support would be the 2009 lows around the $1380-$1400 level. This is where NZ dollar gold bottomed out in late 2009, as the kiwi dollar had strengthened steadily since coming off its lows of close to 50c against the US dollar.
But as we wrote back in September 2011 right near what ended up being the top in gold, (Just How Low Could Gold Fall) the 1970’s bull market in precious metals experienced a fall of 50% right in the middle of it before powering much higher. So a fall as big as this within the confines of a bull market is not without precedent.
In New Zealand dollar terms this would take the price back down to around $1150 to $1175 (50% down on the high of $2350). This is also around the level where the price bottomed out in late 2008 before the massive surge that occurred as the NZ dollar weakened sharply.
Do we think this will happen? Well, with holdings of gold and silver ourselves we’d prefer NOT to see this happen! But we are mentally prepared for the fact that it could and would not sell if it did (unless of course the fundamental reasons as to why to buy gold had changed). And given the recent weakness in the paper price of gold it is quite possible.
The question we can’t answer is what will buyers of physical metal do if it does drop further? Give up and start selling? (You may even be in this camp already yourself after watching gold go nowhere for a while now!) Or would the buying get even more furious and therefore the disconnect between the paper and physical markets grow even greater (i.e. premiums will rise more)?
So a bit of a conundrum really for those looking to buy. Recapping, in a nutshell…
2008 saw massive demand, rising premiums and was in fact a bottom, although the coverage of this buying was perhaps not so great as it is now. There has surprisingly been quite a bit of mainstream media coverage of this physical buying surge.
But a true bottom often comes when no one wants to buy and so the selling has been exhausted. So if this was the case we are not there yet for gold.
Well, we’re not sure how much of a help that’s been for you? There’s many variables to consider.
As always you have to make up your own mind and so take what we say with a grain of salt. We are the first to admit we make money from selling gold and silver, so you could say we are speaking from a position of bias. But we do believe in the fundamentals of holding gold and silver and will continue to do so ourselves until they change.
Gold remains but a sliver of global financial assets. Last we heard only 1%. A long way from the 5% peak it reached at the end of the last bull market in 1979. So with central banks continuing to create more currency every month, this will come home to roost, it may just take longer than many of us thought possible. We could grind lower from here yet to scare off anyone who has bought in the past couple of years.
But even if you think the bottom is in our line remains the same, consider “keeping some powder dry” just in case we see lower prices yet. Keep building cash just in case we do see lower prices from here. Then you get a chance to get a lower average price overall.
What do you think? What is likely to happen to the gold price in New Zealand dollars? Is the bottom in or will it go lower from here and if it does what will happen to the premiums charged? Show us you’re alive and leave a comment below!…