Notes From The Field By Simon Black
March 17, 2017 Sovereign Valley Farm, Chile
Demand For Physical Gold Is Collapsing
I serve on the Board of Directors of a large Singapore-based company that’s in the gold and silver business.
And, last night during our quarterly conference call, the management team gave me a lot of intriguing information.
Sales of physical gold and silver are collapsing across the entire industry.
At the US Mint, for example, sales of US Eagle gold coins fell by 67% between February 2016 versus February 2017.
And sales of US Eagle silver coins are down 75% over the same period.
The World Gold Council’s data also shows a substantial decline in physical precious metal demand in 2016, particularly with bars, coins, and jewelry.
Suppliers and refiners in the precious metals business are echoing these numbers, lamenting that sales are extremely slow and margins are falling.
For our Singapore company, this decline is irrelevant.
They have their own proprietary, state-of-the-art storage facility and a number of cutting-edge service like bullion-backed peer-to-peer loans, so business is great.
But I would expect that a number of other bullion dealers will probably go bust if this downturn lasts much longer.
The one conundrum is that this trend does NOT correlate with the price of gold.
In US dollar terms, the gold price is up 16% since the beginning of 2016.
So it would be reasonable to conclude that sales of physical bars and coins are up as well.
But they’re not.
The reason is because there’s a HUGE difference between physical gold and “paper” gold.
When people talk about the gold price, they’re really quoting the price of goldcontracts at exchanges around the world in London, Shanghai, Chicago, etc.
Traders aren’t actually buying and selling physical gold.
These gold contracts are merely paper financial instruments, like stocks and bonds, that traders use for speculation.
When some conflict breaks out in Africa, the knee-jerk reaction is for traders to buy gold contracts.
And when central bankers announce that the economy is totally awesome, traders dutifully dump their gold contracts.
But they’re really just buying and selling highly leveraged paper assets. Nothing physical changes hands.
It’s the same with gold ETFs; these are merely financial instruments to gamble on the paper price of gold.
Investors who truly understand the benefits of owning gold, and don’t simply want to speculate on the price, buy physical bars and coins from a dealer.
And quite often there’s a massive difference in fundamentals between the demand for physical coins and the paper price.
During the 2008 financial meltdown, the paper price of gold and silver plunged.
Speculators and traders were hit by margin calls and forced to sell their contracts.
But demand for physical coins was incredibly strong; savvy investors were looking for a safe haven.
There was a total disconnect between the paper price and physical demand.
That’s now happening again, but in reverse. The paper price is rising, but physical demand is falling.
Management told me last night that they’ve been invited to speak at several investment conferences attended by family offices and high net worth individuals.
But they told me that there’s very little interest in owning physical precious metals among these wealthy investors.
Everyone seems to want to dump all of their money in US stocks or real estate, expecting that they’ll easily make 20% despite both markets being at all-time highs.
This strikes me as total madness. Few people ever prospered buying what was popular and expensive.
There seems to be no fear in the market… no regard for sense or safety.
And my contrarian instincts tell me that this complacency is a great reason to own physical gold and silver right now.
Remember that gold is primarily a form of savings.
You could hold your savings in a bank account, denominated in paper currency like dollars or euros or renminbi.
Or you could hold savings in physical cash. You could even own government bonds.
Each of these is a form of savings.
But so is gold and silver. (And cryptocurrency, for that matter.)
The difference is that gold and silver cannot be conjured out of thin air by a central bank.
And unlike cash, or money in a bank, precious metals actually keep pace with inflation over time.
I remember having a conversation once with a famous investor who told me that he didn’t know what was going to happen in the future…
… and THAT’S why he owned gold-- for the “I don’t knows.”
Will there be a trade war with China in the next few years? A shooting war? A major debt crisis? Another terrorist attack? “I don’t know.”
Gold and silver are fantastic insurance policies against the “I don’t knows” due to the metals’ 5,000 year history of value and marketability.
There’s no need to go overboard and keep 100% of your net worth in precious metals.
But given the obvious risks on the horizon that we discuss regularly, and these bizarre demand trends, it’s a great time to consider adding to your physical precious metals savings.
Have a good weekend, Simon Black Founder, SovereignMan.com
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