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Gold Investments Market Update − Unprecedented Investment Demand Leads to Supply Issues in Physical Bullion Market

Mon, Aug 18 2008, 12:57 GMT
by Mark O'Byrne

Gold and Silver Investments Limited

Gold

Gold finished trading in New York on Friday at $786.00, down $22.30 and silver was down $1.42 cents to $12.81. Both rallied strongly on the open in Asia but have given up some of their gains in European trading. Gold is trading at $793.00/793.40 per ounce (1230 GMT).

Gold (and silver) remains extremely oversold and a significant bounce is likely from these levels. Especially if the macroeconomic and geopolitical picture continues to deteriorate. Markets continue to be oblivious of the real and present danger posed by the increasing tensions between Russia and the US and western countries.



Unprecedented Investment Demand Leads to Supply Issues in Physical Bullion Market

The massive disconnect between the physical market and the paper futures market continues. There is now an unprecedented situation where large wholesalers and retailers of physical bullion in the US and internationally are having difficulty keeping up with investment demand. Some are completely out of stock of some of the most popular bullion products such as gold Krugerrands (1 ozt) and gold American Eagles (1 ozt) and silver American Eagles (1 ozt) and silver bars (1 ozt, 10 ozt and 100 ozt).

There are similar issues internationally and The Times of India reports: "There is a shortage of the yellow metal in the bullion banks and traders."

There are now also significant delays in delivering bullion (usual deliveries of 5 to 10 days are now taking some dealers 4 to 8 weeks to make).

Gold Investments is a bullion broker and due to relationships with many of the major wholesalers in the US and EU has not been affected by these supply and delivery issues and can currently offer all bullion products in quantity for delivery internationally within 10 working days.

Large government mints and refiners are having difficulty meeting the demand and some are rationing supply to large dealers.

Large wholesalers, retailers and institutions such as the Perth Mint are experiencing huge demand and even as spot prices have been falling sharply, there are little or no sellers and buyers are continuing to vastly outnumber sellers.

Another indication of the sharp tightness in the bullion market is seen in the fact that premiums are rising very significantly on nearly all bullion coins and bars. Wholesale prices for some bullion coins have risen 2% to 3% in a matter of weeks.

This huge demand is not being reflected in the futures market where the speculative hot money of large hedge funds and institutions with short term horizons is leading to materially lower prices. Leveraged margin players who were long have had their heads handed to them on a plate as the shorts are pushing prices as low as possible in order to maximise profits.

Clearly, this situation is not sustainable as ultimately the laws of supply and demand of the physical metal will dictate prices and not the speculative and manipulative antics of black box, momentum following traders.

Large, smart money is accumulating physical bullion away from the more risky leveraged casino that is the futures market. Thus, this latest of vicious sell offs is set to be another sharp correction in the gold bull market designed to as usual flush out the weak hands. The bounce when it comes will likely be just as dramatic as the shorts attempt to cover en masse. Should some large players decide to stand for delivery of near term futures contracts when they expire, then we could see some real fireworks and gold will be above $1,000/oz in very short order.

This Week's Data and Influences

Real and growing fears of a possible global recession may be added to by economic data due this week as further bad news is expected in US housing figures, inflation data and industrial activity.

Gold and Silver

Gold is trading at $792.80/793.40 per ounce (1230 GMT).
Silver is trading at $13.05/13.10 per ounce (1230 GMT).

PGMs

Platinum is trading at $1372/1380 per ounce (1230GMT).
Palladium is trading at $286/290 per ounce (1230 GMT).

Published on  Mon, Aug 18 2008, 13:01 GMT