Is Europe running out of investment gold bars?

There an oddity about gold at the moment with phenomenal physical demand in Asia, U.S. and Europe, while the actual spot prices languishes. We have written before about the strange disconnect between paper and physical demand — with the former bearish yet the latter bullish — but rarely has there been such a clear divergence.

Over the last few days on we have run many stories about this ... Dubai running short of physical, U.S. Mint selling out of smaller denomination bars, coins and bars flying off the shelves in India and China and queues outside leading gold sellers such as Degussa in Germany. The effect has been a massive drawdown in physical metal which has, by and large, caught the gold refineries and some stockists by surprise. It seems that the current buying in Europe is a delayed response to the Cyprus crisis, prompted by the price correction.

Quite evidently it has been the sharp sell off on the gold futures (COMEX) a week ago that precipitated the price decline and drew out the physical buyers. While there remains stock of the traded inter-market London 'good delivery' bars weighing in at 400 ounces each (with a purity of 99.5%+), these would set an investor back about $570,000 each. However, for investment sized bars the market is drying up rapidly. Amongst the coins, the maples and Krugerrand are moving fast with premiums having just doubled and now typically trading at about 8% over the spot price. Meanwhile the wait for new 9999 kilobars from the refineries (cost about $48,000 each) would entail a wait of more than one month — there are however some modest stocks of second-hand kilobars.

While much of the buying in Europe has centered on Germany and Switzerland, there are also encouraging signs of good interest from U.K. retail investors who seem to be awakening to the notion of having gold in their savings. Google searches for the keyword "gold price" is rising to near record levels confirming what we are seeing in the markets (see below).

GOOGLE SEARCHES FOR TERM "GOLD PRICE"

 

So, what does this tell us about gold ? To us, this is firstly a clear signal that the price correction has sparked latent interest for those who have wanted to enter the market — the current price represents an excellent entry point. Secondly, the fact that investors are going for physical over paper gold extends the argument that investors are increasingly wary of financial institutions, just as they are of the debasement of currencies.

In 2008 and 2010 the physical markets dried up and deliveries were extended out to about two or three months at the retail level — if the current buying persists there is every reason to expect a recurrence... or worse.

About the Author
Ross Norman

Ross Norman is owner and chief executive officer of the London-based gold broker Sharps Pixley Ltd.

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