Sunday, May 24, 2020

Signals from the Gold and Silver Markets?

One of the sign posts we keep an eye on here is the precious metals markets. These markets historically can provide signals that something unusual is going on in the financial system. There are a couple of things that come to mind in this regard.  

One is that sharp rises in gold (and sometimes silver prices) often indicate sagging public confidence in the status quo of either the present financial system or at times anxiety that the some kind of disturbance in the normal social order is a concern. For example. a feeling that some kind of major geo political event may rattle the existing status quo. Gold is often viewed as a kind of refuge of last resort insurance policy in times like that. 

Secondly, whenever public confidence in an existing national currency diminishes, people often move into gold (and also silver in some cases) as a kind of currency hedge. Again, as an example, if there is a public perception that all the massive liquidity creation by the government and the central banks in response to the virus related financial crisis might weaken their national currency, some will move at least a portion of their savings into gold (and silver). This is true for the US dollar as well as any national currency. The more public confidence falters, the more demand for gold (and silver) resulting in strong bull markets for those metals. 

This year, we have already seen gold perform very well in response to the unfolding crisis and lately silver is starting to show signs of life as well. Since these markets can offer important signals as discussed above, we should watch them closely in the coming months. Below is a bullet point list for some of the things we can observe going on right now in these markets that may be worth your time to review.


- in 2020, gold is at or near all time highs in many currencies and may be targeting an all time high is the US dollar price of gold later this year. If gold makes a new all time high in the US dollar price in 2020, we need to pay attention to that signal

- many technical analysts are saying that long term historical charts for gold and silver are indicating the potential for much higher prices ahead in the coming months and years. Here is one example of that kind of technical analysis.

- both gold and silver have had unusual price variations between the prices as set in the futures exchanges (such as the Comex exchange) and the actual prices to purchase real physical metal rather than a paper futures contract. In late March (on the 24th) I watched a real time example of weird gold price variation take place. That day, I checked the gold price as shown by Kitco, a leading precious metals web site that shows the gold price continuously as the market trades. At the exact same time I looked at the gold price showing on CNBC on TV. The gold price on CNBC was nearly $100 per ounce higher than the Kitco price. This is extremely unusual behavior. Normally, any variations are fairly minor. In fact, I have never seen this happen before in over 20 years of watching this market. (see this Reuters article related to this activity)

- as I write this article, Kitco shows the closing gold price for 5-22-2020 as $1732.70 while CNBC shows a gold price at close on 5-22-2020 of $1,734.70. This is more like normal. The same kind of wide variance I watched in late March has popped up several times over the past few weeks since then. This kind of unusual pricing variance can be an indicator that there is more demand for physical gold than supply and that gold futures contracts may be under unusual duress. If the situation persists, it can also indicate there is a stress in the futures paper markets that is a systemic risk to futures contract trading. So, it bears watching in the months ahead.

- this same unusual pricing activity is also happening with silver. Below I will illustrate this by pulling some silver prices from various sources at the market close for 5-22-2020. The retail market for actual physical silver is really acting in an unusual way. All you have to do is search the internet and see if you can buy a one ounce silver eagle coin anywhere for less than $25 (@ 5-23-2020) while the paper futures markets say silver is $17.29 per Kitco. It is normal for silver eagles to carry a premium to the price of silver ($2.75 to $3 per ounce), but the premiums out there right now of anywhere from $7 to $9 per ounce above the $17.29 price shown on Kitco indicates a very tight retail market for actual physical silver. Below I am pasting in an example from one typical dealer to illustrate this situation. Notice that this dealer will actually buy silver eagles from you for $4 per ounce ($21.37) over the futures market price of silver and wants $8 per ounce ($26.76) from you if you want to buy one from them. This is very typical of what is gong on right now in this market. Just search the internet if you want to observe it for yourself.

Also, as of market close on 5-22-2020, CNBC is showing a silver price of $17.69 (recall Kitco shows $17.29)Looking at all this, a couple of questions come to mind. What is the true price of silver? What is going in this market to create these kinds of price variances? In coming weeks we should keep an eye on this market for any signals it may send us.

Silver American Eagle - RANDOM Year, BU (Dates our Choice) - (Money Metals Exchange)

Total Price Each
1 - 39$9.39$26.76
40 - 499$8.79$26.16
500 - 2500$8.29$25.66
Call for discount
Silver Price:$17.37

Sell to Us Price: $21.37 each.

Concluding Comments: Anyone who follows the gold and silver markets knows there is unusual activity going on right now. Some attribute this to short term disruptions in supply and demand due to the virus pandemic impact on the supply chains. Others say this unusual activity is sending us important signals that major changes in these markets are coming (leading to much higher gold and silver prices) and if those changes are very large it could indicate the entire current financial system is under stress. It's always important to monitor these markets, but even more so under the present conditions.

Keep in mind, we have had unusual activity in the repo markets from the US Fed since last fall following years of very easy monetary policies. On top of that we have now had a global pandemic leading to a shut down of the global economy. This has created millions of job losses, high volatility in many markets, and very high levels of uncertainty for what happens over the next year. No one really knows for sure what is coming towards us. Given all this, gold and silver could be trying to send us signals for the future and we need to be alert to anything they may have to say.

Added notes: 

Other current retail prices for silver eagles around the internet as of 5-23-2020:

JM Bullion - $26.64

Apmex - $28.36

SD Bullion -$26.82

Pinehurst Coins - $26.35

Provident Metals - $26.64

US Gold Bureau - $25.90

Gainesville Coins - Out of Stock

In normal times, silver eagles retail for anywhere from $2.75 to $3 per ounce over the price of silver and dealers will only pay the spot price of silver to buy them or at most a slight premium to spot price. A shortage of silver eagles may be partially due to the US Mint having to close due to the virus pandemic for a period of time. But it's back open now so everyone is watching to see if this abnormal pricing activity persists. Before closing, the Mint was experiencing a huge surge in demand.

Added note 5-27-2020: Above we illustrate that there is clearly a tight supply situation in the retail market for silver eagles that anyone can easily see. In this new interview, London metals trader Andrew Maquire confirms that the wholesale market for large silver bars is also very tight at this time. Mr. Maguire is in a position to see the supply and demand in the wholesale silver market that is pretty opaque to the general public. All this suggests we should watch and see what silver does over the next few weeks.

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