By Al Doyle for CoinWeek….

Anyone with even a marginal interest in precious metals is aware of the brutal beatdown in gold and silver spot prices over the past four days. From its April 12 London close of $1535.50, gold fell off the cliff to $1395, with an even lower close of $1352.60 in New York.

Silver was a case of “second verse, same as the first.” The April 15 London close of $23.54 on April 15 represents a $3.86 decline from the April 12 figure of $27.40. It was worse in New York, with silver finishing the day below $23.

As anyone who tried to check web sites for bullion sellers will attest, the public caught on to falling spot prices in a big way. Six attempts to view the Silvertowne web site were completely unsuccessful. So what caused this one-day plunge? Were precious metals investors dumping their holdings by the boxful? Not a chance.

safe_lock_gold Yesterday’s fall in prices was at the spot level. What does that mean? Spot is merely a paper price based on futures contracts. Not one ounce of the real thing changes hands when traders play this game. Like other markets that are based on ever-shifting intangibles, it’s much closer to gambling than something of substance.

In this case, it was no secret that many big paper players (think J.P. Morgan and other firms in that league) were holding piles of expiring short contracts and stood to lose large sums if the metals remained at recent levels. Create a panic by changing the margin requirements or other manipulations, and guess what happens? Problem solved.

The public was both wise and foolish in charging to bullion dealers. They rightfully reacted to what was perceived as a buying opportunity, but not clued into reality when they expected to buy gold and silver at the same premiums over melt as a week ago.

What takes place at the retail level is an entirely different game than the make-believe world of paper contracts. The traders who swap “naked shorts” are betting on and trading gold and silver they don’t possess. Far more precious metals are gambled on in futures trading (which is basically a bet on spot prices somewhere down the road) than the actual supply. If you want the real thing in your hands, spot prices may not count for anything if dealers can’t obtain product at anywhere near the alleged prices quoted on business news programs.

It takes willing sellers to have bullion on hand. Gold and silver investors at every point of the economic spectrum view their holdings as the ultimate store of wealth and value. It’s a last-ditch possession and financial insurance. If they won’t sell when prices are strong, what is the likelihood of buying precious metals over the counter when spot is on a nosedive?

“There’s no physical product,” declared Steve Harrison of Kedzie Koins in Chicago. “Three of the major distributors are out of 2013 silver Eagles, and one major mint is four to five weeks out on delivery. We had 30 to 40 calls – all wanting to buy – in just two hours.”

silver_bullion_coins_2Harrison’s observations can be confirmed by checking dealer websites. The phrase “out of stock” is a common sight on anything but newly struck rounds from private mints and 2013-dated gold and silver bullion coins. Expect to wait a minimum of two weeks and usually longer for those orders to be filled.

Spot has usually been an indicator of what retail buyers might expect to pay, but those days could be coming to a close.

“The first telltale sign was two months ago when COMEX said they could pay you with a check instead of a 5000-ounce bar when a silver contract came up,” Harrison said. “Everything is done on paper.”

Using $23.50 as an average spot price on April 15, what would it have taken to buy some silver immediately?

“Two customers came in and asked if I had any silver,” Harrison said. “I offered them 10-ounce bars at $28.50 an ounce. They didn’t like that price and left. They went to three other stores within driving distance and came back here for the bars because they couldn’t find any silver.”

“We bought $1000 and sold $30,000,” reports Gary Rosencrans of Gary’s Coins & Stamps in Wisconsin Rapids, Wis. That’s an impressive sum for a local shop that emphasizes classic collector coins over bullion.

“The silver order that came in today is all gone,” Rosencrans said. “There are dealers who have no problem paying way over spot.”

Klaus Degler of Rocky Mountain Coin in Denver could use some gold and silver ASAP.

“There’s nothing available,” he lamented. “We have very little on hand. Everything is on delayed delivery. We’ve got some silver Eagles for delivery two to three weeks out. Our phones are ringing off the hook with people wanting to buy. Dealer to dealer business is dead because there’s nothing to sell.”

A veteran of the bullion trade, Degler advised buyers not to place excessive faith in spot prices.

“There are two markets – paper and physical,” he said. “”Guys pushing buttons are selling naked shorts, or or metal they don’t have. The chickens will come home to roost on paper trading. The bounce back will be big.”

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  1. Al,

    Thanks a lot for the discussion of specific instances of silver supply tightening. You and Louis Golino have done a great job reporting on events surrounding the price declines in the last two business days.

  2. Al,
    I enjoyed your piece. Any idea what will lead to the big day of reckoning when physical metal is priced correctly? Do you believe reports that the events of the past few days were related to an imminent collapse of the London metals exchange that was prevented by giving higher cash payments to those who wanted physical delivery of more metal than actually exists?

  3. Talked about a rigged, ginned -up set up. Silver prices have made NO SENSE WHATSOEVER for years now. Interest rates, inflation rates, serious threats to US reserve status, increasing industrial demand, known shortages at mints that cannot mint silver coins–AND NONE OF IT MAKES A GODDAMN BIT OF DIFFERENCE.
    Here’s my market analysis, and it’s a damned useful and prudent one, offered free of charge: You’re either inside or you’re outside. If you’re not an insider I would dis-recommend investing in ANYTHING except a damn good safe to keep your cash. And put your money into things you can use, not into “instruments” where YOU end up getting used instead, or into so-called “precious” metals that cannot possibly be tracked reliably with any known technicals or fundamentals. Be the ultimate contrarian and GET OUT OF THE MARKET ALTOGETHER says I.

  4. Al,

    On this statement, you’re absolutely correct: “It takes willing sellers to have bullion on hand.” And you’re also correct that while the new price levels seem “temporary” (In the long run, we’re all dead.), sellers of the physical stuff are rare. This is ALWAYS true in any sudden downturn. But as these levels gradually become seen as “normal” and “ordinary”, physical premiums will come down. They always do. So yes, for a while still, physical premiums will be up. But they will erode, as metal holders become resigned to the new reality, if they ever do before their estate sale.

  5. As I travel around to the coin dealers looking for coins I ask about the price of silver because I have some to sell. The price is going down but demand is so high they can’t get enough. The same thing happens in the stock market, the top 2% sell when the rest of us have supported the market to get the prices up there and we are the ones who lose the most so the 2% can show a great profit (at our expense) then they start buying again and get a better price for the same thing they had before. We are at their mercy. Same thing in the job market, fire or retire the experienced and hire the cheap novice. The solution is to be brave enough to set our own prices just like we were a capitalist business and let the gamblers/dictators go to hell. There should be no correlation between actual possession and the market. Who should we elect to lead the charge?

  6. The Sellers are not interested in selling at this price and buyers and grabbing everything we can! Gold & Silver is always a safe investment and right now the price is better than ever! Gotta get it while the getting’s good!


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