Where Did All the Gold and Silver Go?

  • author Mark Nestmann
  • calendar March 31, 2020

One of the most effective ways to sell anything is to claim scarcity. You’ve no doubt seen marketing claims that [insert name of product] is “flying off the shelves” and that “supplies are strictly limited.”

It’s no different selling precious metals. I worked for a coin dealer in the mid-1980s – after gold and silver hit their peak prices earlier in the decade. To say the least, customers were leery of any claims that our products were in short supply.

Yet, 35 years later, gold and silver bullion products really are flying off the shelves. There’s an 8% to 9% premium above spot if you want to buy gold coins from major dealers. For silver coins, you’ll pay a stunning 60% or more above the spot price.

That is, if you can find either of these precious metals. And even then, you might have to wait two or three weeks to get them shipped to you.

What’s more, the large bars used to satisfy “good delivery” contracts are mostly out of stock. At, for instance, one-kilogram gold good delivery bars are sold out, although 400-ounce bars are still available. Thirteen of the 15 types of gold bars Kitco normally carries are out of stock.

Have consumers merely progressed from panic buying toilet paper and canned beans to panic buying precious metals?

Perhaps, but I think it’s more likely something else is going on. That precious metals deemed good delivery are mostly sold out is an important clue. The largest investors in the precious metals market buy good delivery bars. A shortage means they’re loading up.

Another factor comes into play as well, as I already mentioned:  the price of physical precious metals – especially silver – is now far higher than the spot price. This is due to the uncomfortable truth that in a crisis, everything loses value: stocks, oil, cryptocurrencies, real estate – and yes, even precious metals.

When everything is losing value, anyone who’s borrowed money to finance their investments is on especially shaky ground. And there’s a lot of borrowed money chasing stocks, gold, and many other types of investments. When the values of these investments fall sharply, leveraged traders face margin calls and must raise cash any way they can.

In the case of precious metals, the value of "paper gold" and “paper silver” contracts traded (mainly) as ETFs is many times that of physical products actually delivered to buyers. It’s also a lot more convenient to sell a gold ETF than to sell, say, a one-ounce gold Eagle. Thus, mass selling of paper gold and silver masks the actual dynamic of shortages in the physical market.

And the mass selling has led to enormous volatility, with both spot gold and silver prices below their level a month ago. Indeed, in mid-March, spot gold prices fell the most in four decades. Here’s a chart of spot gold and silver prices over the last 30 days:

But here’s a chart you might not have seen. It tracks the value of the supposedly safest of all safe havens: US Treasuries, in this case 10-year Treasury bonds. Keep in mind that with bonds, prices fall as yields rise.

Starting March 9, the yield on 10-year Treasuries soared. One reason was that leveraged traders needed to raise cash as fast as possible to meet margin calls.

But keep in mind this was happening as the Federal Reserve was frantically creating hundreds of billions of dollars out of thin air in its latest iteration of quantitative easing to buy Treasuries, mortgage-backed securities, and other assets. Without the Fed’s intervention, the spike in Treasury yields – and losses to investors – would have undoubtedly been much worse.

Ten-year Treasury yields have fallen sharply in the last few days, no doubt in reaction to the $2 trillion bailout package President Trump signed into law last Friday. But here in the COVID-19 economy, it’s likely the Fed will need to continue purchasing Treasuries indefinitely, with some economists calling for “QE Infinity” to absorb the bottomless pool of newly created federal debt.

QE Infinity makes Treasury buyers nervous, especially now that Congress has enacted a $2 trillion bailout package. Every dollar of the bailout will be financed by additional borrowing. So will the additional trillions of dollars that will undoubtedly be necessary to prop up the economy in the months and perhaps even years to come.

With near-zero interest rates, the Fed will be buying nearly all this debt. Institutional investors – insurance companies, pension funds, etc. – will buy some of it as well, but if yields fall below zero, even they might shy away.

In contrast, during the most volatile period for precious metals prices in 40 years, no central bank came to the rescue. Congress didn’t pass a bailout package for owners of precious metals who were forced to sell to raise cash. In that context, amid unprecedented market volatility, it’s remarkable precious metals prices didn’t fall further.

I’ve long believed that it’s wrong to think of precious metals as an investment. They’re not. Gold and silver are alternative currencies that compete with the dollar. But unlike the dollar, they can’t be created out of thin air.

For that reason, I think precious metals belong in every portfolio. There will be volatility ahead. But as the Fed’s balance sheet balloons, along with Treasury securities boasting negative yields comprising most of its assets, gold (and possibly silver) will be the proverbial “last man standing. “

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