by Torgny Persson, BullionStar:
More and more refineries, mints and fellow bullion dealers are suspending their operations indefinitely. At BullionStar, we are facing significant operational and stock inventory challenges. There’s an acute shortage for particularly Gold Coins, Silver Bars and Silver Coins. For Gold Bars, some of the private refineries are still open and take orders but have long backlogs.
COMEX and London OTC Spot Price Discovery Failing
What does this mean for price premiums?
Due to the paper spot and futures precious metals markets not reflecting the demand and supply for physical precious metals, premiums are high and are fluctuating a lot.
The precious metals price premium mechanism is there to balance physical demand and physical supply of precious metals.
Despite higher than normal premiums, demand for physical precious metals continues to be overwhelming. We receive several hundred orders each day. We’ve had two hour waiting times in the shop even though we just expanded the shop to 5 counters and even though we have an extremely efficient system for serving customers. At BullionStar, we currently have about 8 customer buy orders for every customer sell order which is the highest we have seen in years.
Extreme Demand – Scarce Supply
Precious metals have been hit by a double whammy. Demand is truly extreme and unprecedented, and at the same time due to the COVID-19 situation, the bullion supply chain is facing the same issues as other scarce good supply chains.
The underlying problem here is that price discovery for precious metals is a farce and is broken as we have warned about and pointed out so many times over the years such as here, here, here, here and here.
Disconnect between the Paper Price and Physical Price
There is a disconnect between on the one hand, the COMEX futures and London spot OTC market and on the other hand, the physical precious metals market.
Unless there is a very strong rally in the paper market that balances physical demand and supply, the disconnect between the paper market and physical market may widen until the paper pricing system (COMEX futures and LBMA unallocated system) implodes.
In a scenario where the paper spot market doesn’t rally to balance physical demand and supply, physical precious metals will no longer be priced based on the spot market. Bullion dealers will stop pricing metals. Many have already done so by suspending the accepting of orders.
When preferences in the derivatives paper spot and futures markets, which are unbacked or only partially backed by precious metals, differ from supply and demand in the physical market, prices disconnect.
The Window to Purchase Precious Metals with Fiat Currency is Closing
The window for purchasing physical precious metals with fiat currency is quickly closing. At this time, it is still possible to settle physical precious metals purchases in fiat currency with some bullion dealers. At BullionStar, we are still accepting orders for precious metals settled in fiat currencies, and priced based on spot with a premium, but that is subject to change.
I would strongly recommend everyone to value and count their physical precious metals in weight i.e. in grams or troy ounces, not in fiat currency.
If you don’t hold physical precious metals yet, the window for acquiring metal is closing in. At BullionStar, we still have inventory stock of some items but are running out quickly. By traditional means, our premiums are very high but still not high enough for physical demand and supply to balance.
If you as a saver or investor find actual bullion in stock with another bullion dealer that has better conditions than us, go for it. At this time, any fiat currency price quoted for physical metals is a good price.