Physical Gold Shortages Yet Price Still Dropping...

[gregb]

So,

I don't think anyone really understands the dynamic that happened in the gold market yesterday, but one thing is for sure, demand for physical metal is off the chart. I contacted my usual supplier today to pick up another 10 baht. This is someone I've been doing business with for a long time. She didn't have it, and couldn't get it! She finally managed to track down 1 10 baht bar for me, but I had to pay a 500 baht corruption fee to actually get it.

Now, normally I would pass this off as, "OK, not enough physical metal in Thailand for an unexpected surge. Things will get resolved tomorrow or the next day." But that isn't what I'm hearing. Instead, I'm hearing even the major wholesalers are having difficulty getting supply to meet demand. And it isn't just Thailand. The boards over at Kitco are full of people saying there just isn't any physical metal available.

So what gives? Demand is skyrocketing, but prices are still dropping (definitely not rising)? There seems to be a disconnect happening here. Demand is soaring for people who want physical metal, with the effective price being higher than spot, and the guys buying paper are still worried about slackening support levels.

What's going on here? The gold price is too low! Economics 101 says it should be moving higher to dampen demand, and yet we aren't seeing that. Instead we're seeing shortages, and widespread shortages in every country at that.

Is this the first example of a derivatives crisis in progress? Is there simply too much paper out there not backed by physical metal, and people are starting to default? Can we soon expect to see a permanent disconnect, with one price for paper gold, and another price for the real thing? This is obviously an area where a real investment banker's input might be useful.

What is happening? I like physical, but since I can't find it, I'm tempted to buy paper. The problem is, the markets for the two seem to be heading in opposite directions right now. Any ideas what's going on?

[samran]

The price should approach the marginal cost for mining the stuff. What is the marginal cost for mining an ounce of gold? Probably about $50 would be a wild guess.

The marginal cost, IS the supply curve. If you are assuming a fairly competitive markets, Long Run prices should be based around the supply curve. The rest (ie $900) is sentiment.

[Naam]

Demand is skyrocketing

it sure is skyrocketing... but only in the wet dreams of the goldbugs (especially those who post in "goldboards" like Kitco)

[gregb]

Not to be rude, but can we please try and stay on topic rather than degenerating into the standard flaming which is so prevalent on this board. I really want to know what is happening here.

If the price is dropping, that means somebody, somewhere must have a whole pile of the yellow metal that nobody wants taking up space.

So where is it? I don't care if anyone has a personal agenda against "goldbugs". That's their choice. I believe they are wrong, but I'm glad to have someone take the other side of the bet. Will make me more money when I'm right.

The point is, I tried to buy gold, and couldn't. If this was an isolated geographical incident, I could understand. It's not. The problem is widespread. There are serious shortages going on everywhere. Lots of people all over the world are reporting the same thing. Obviously, those who believe in gold would be the ones having trouble buying it, so it's not fair to engage in personal attacks. Right or wrong, people want it right now and can't get it. There are 2 possibilities that I see:

1) There is a disconnect between physical metal and paper derivatives, with one increasing and the other decreasing in value.

2) The gold is stuck in a vault somewhere with no possibility to get out to the community who demands it.

Are there other possibilities? If it was option #2, I would expect to hear the wholesalers saying that the gold will be delivered shortly. They'll take the contract now and just wait a few days for delivery. That is not what I am hearing. What I am hearing is that they can't find enough to meet demand and don't want to book orders at the current price because they aren't yet sure about fulfillment.

Is this just bad information? Is someone else hearing differently? Are the gold distribution channels really so bad today that nobody knows how much is in stock and where?

Does anyone have a constructive and useful comment to add? (I realize that is asking alot from this board, but one can always hope.)

[Naam]

The point is, I tried to buy gold, and couldn't.

your point is taken Greg, however you mentioned you tried to buy gold in a particular form (i understand a 10 Baht bar) from one particular dealer in Thailand who could only fill your order with problems. does that mean there is a worldwide shortage of gold? my answer is is a clear "no". does the price drop of more than USD 100/ounce within a few days point to a shortage of gold? i leave it "up to you" to answer that question.

[jonniebkk]

Okay dude...here is a polite reply. Economics 101...supply and demand. See my other posts on this topic but as me and others have long argued, there is in fact NO shortage of gold...that was not the reason for the run-up the past year. It was driven by originally the financial market disruptions, fear of increased inflation, and finally, by rampant speculation. If you check authoritative sources, you will see that due to the run-up over the past couple years, real demand for physical gold of end use (as opposed to investment/speculative purposes) has actually declined almost 10% So real world demand for the metal is going down...not a very good price support for any commodity. Finally, with slowing economies in USA/Europe, the thread of inflation is reduced and overall demand will be down so all commodities will likely moderate their recent rises and even fall back to historical norms. Seeing the recent fall, lots of the speculative (leveraged) money in gold has to quickly unwind their positions so this will cause large fluctuations in the market...with a pronounced bias to the downside over the medium to long-term.

[Naam]

Okay dude...here is a polite reply. Economics 101...supply and demand. See my other posts on this topic but as me and others have long argued, there is in fact NO shortage of gold...that was not the reason for the run-up the past year. It was driven by originally the financial market disruptions, fear of increased inflation, and finally, by rampant speculation. If you check authoritative sources, you will see that due to the run-up over the past couple years, real demand for physical gold of end use (as opposed to investment/speculative purposes) has actually declined almost 10% So real world demand for the metal is going down...not a very good price support for any commodity. Finally, with slowing economies in USA/Europe, the thread of inflation is reduced and overall demand will be down so all commodities will likely moderate their recent rises and even fall back to historical norms. Seeing the recent fall, lots of the speculative (leveraged) money in gold has to quickly unwind their positions so this will cause large fluctuations in the market...with a pronounced bias to the downside over the medium to long-term.

BINGO!

[Meerkat]

Looks like your anecdotal evidence is an accurate reflection of the broader retail market, especially in Asia:

http://in.reuters.com/article/businessNews...lBrandChannel=0

[britmaveric]

Gold is over priced, speculators drove it up. Hence the price is correcting itself.

[backflip]

"Lots of people all over the world are reporting the same thing."

What people? Where are these reports?

[Meerkat]

"Lots of people all over the world are reporting the same thing."

What people? Where are these reports?

From the Reuters article I linked to above:

"Jewellers across Asia rushed to buy gold on Thursday after prices tumbled more than $100 an ounce since spiking to a record above $1,000 an ounce this week, pushing up premiums in key bullion trading centres."

"Physical buyers and bargain hunters are buying back at the low. Everybody is rushing to buy," said a dealer in Hong Kong."

I think what the OP was alluding to was that it seemed odd that whilst on the one hand the interbank market has dropped off steeply, there is currently a squeeze on physical gold - again indicated in the article as buyers (and the OP) having to pay a premium to the spot price which is unusual (or at least that the spread has widened).

[Naam]

...there is currently a squeeze on physical gold - again indicated in the article as buyers (and the OP) having to pay a premium to the spot price which is unusual (or at least that the spread has widened).

that premium fluctuates continously, that is nothing special. anyhow, one should take note that an additional "premium" of 10 or 20 US-cents per ounce is irrelevant for a private investor/speculator when one ounce is priced at 920 dollars. any transaction (buying or selling an asset) commands more "premium" (fees).

[churchill]

So,

I don't think anyone really understands the dynamic that happened in the gold market yesterday, but one thing is for sure, demand for physical metal is off the chart. I contacted my usual supplier today to pick up another 10 baht. This is someone I've been doing business with for a long time. She didn't have it, and couldn't get it! She finally managed to track down 1 10 baht bar for me, but I had to pay a 500 baht corruption fee to actually get it.

Now, normally I would pass this off as, "OK, not enough physical metal in Thailand for an unexpected surge. Things will get resolved tomorrow or the next day." But that isn't what I'm hearing. Instead, I'm hearing even the major wholesalers are having difficulty getting supply to meet demand. And it isn't just Thailand. The boards over at Kitco are full of people saying there just isn't any physical metal available.

So what gives? Demand is skyrocketing, but prices are still dropping (definitely not rising)? There seems to be a disconnect happening here. Demand is soaring for people who want physical metal, with the effective price being higher than spot, and the guys buying paper are still worried about slackening support levels.

What's going on here? The gold price is too low! Economics 101 says it should be moving higher to dampen demand, and yet we aren't seeing that. Instead we're seeing shortages, and widespread shortages in every country at that.

Is this the first example of a derivatives crisis in progress? Is there simply too much paper out there not backed by physical metal, and people are starting to default? Can we soon expect to see a permanent disconnect, with one price for paper gold, and another price for the real thing? This is obviously an area where a real investment banker's input might be useful.

What is happening? I like physical, but since I can't find it, I'm tempted to buy paper. The problem is, the markets for the two seem to be heading in opposite directions right now. Any ideas what's going on?

Perhaps more Thais than you think are buying causing the shortage !

" Gold dips but at 1-months lows as Thai Buyers emerge "

http://www.iii.co.uk/news/?type=reutersnew...ticleid=SP90206

[LivinLOS]

The price should approach the marginal cost for mining the stuff. What is the marginal cost for mining an ounce of gold? Probably about $50 would be a wild guess.

The marginal cost, IS the supply curve. If you are assuming a fairly competitive markets, Long Run prices should be based around the supply curve. The rest (ie $900) is sentiment.

If demand exceeds supply then prices rise.. Does a bently cost its construction amount ?? Does a Rembrant cost its weight in oils ??

[LivinLOS]

The one that no one has mentioned is the GATA argument.. Basically that central bankers are continually short selling and manipulating the gold market down to take pressures off fiat currency problems.

I dont buy it in full but I do think the market is manipulated.. They have pretty much admitted it in fact.. Equities are kept up by the PTT etc..

Also the paranoid goldbug line is also about the ETF's and other paper gold products not actually having that gold.. Much can be purchased and then loaned out, that in turn is reloaned etc creating many layers which creates the basic counter party risk. If this does turn out to be the truth (and I think in the smoke theres no small amount of fire) then the short squeeze for those having sold out that gold to replace the loans could be nicely dramatic.

For all the hoo haa about the last week (when thankfully I was travelling so couldnt really worry about it) we are still only back to prices of less than 60 day ago.. I actually thought a break down below 910 would have gone to 850. Seeing 850 or even 780 wouldnt really phase me in this uptrend. Its never nice to loose a few 100k USD as the last week has done to me but its a small drop compared to the gains so far.

[Naam]

The price should approach the marginal cost for mining the stuff. What is the marginal cost for mining an ounce of gold? Probably about $50 would be a wild guess.

The marginal cost, IS the supply curve. If you are assuming a fairly competitive markets, Long Run prices should be based around the supply curve. The rest (ie $900) is sentiment.

If demand exceeds supply then prices rise.. Does a bently cost its construction amount ?? Does a Rembrant cost its weight in oils ??

you are feeding the anti-goldbugs with your arguments LivinLos. by admitting that gold does not possess the intrinsic value claimed by goldlovers but that a part of its price is deemed aficionado's or collector's value

[lannarebirth]

What's interesting to me about Gold and Goldbugs is, while a part of their spiel is the "derivatives crisis" (where I see their point), inc4reased "demand" for Gold has primarily come through derivative instruments. Ironic, huh?

[LivinLOS]

I partly agree LRB.. I think that the derivatives of gold into the paper trades have both fueled the upleg but also added vastly to the spot price volatility as people wiuth physical dont find it easy to liquidate on a downdraft..

However theres derivatives and theres derivatives.. Most gold derivatives that allow a paper spot gold trade are much more simple and far less geared / leveraged than the bulk of the 'derivatives' that are slated by goldbugs.. I think what most goldbugs really dont like is the leverage / gearing applied as really derivative is such a catch all term.

[misterman21]

"Lots of people all over the world are reporting the same thing."

What people? Where are these reports?

My experience from the Uk was that if i went into any large/established coin/bullion dealer and asked for i.e. 12 x 1 oz kruggerands, then invariably they wouldnt have them and would have to wait to buy them in from a private seller!

[lannarebirth]

I partly agree LRB.. I think that the derivatives of gold into the paper trades have both fueled the upleg but also added vastly to the spot price volatility as people wiuth physical dont find it easy to liquidate on a downdraft..

However theres derivatives and theres derivatives.. Most gold derivatives that allow a paper spot gold trade are much more simple and far less geared / leveraged than the bulk of the 'derivatives' that are slated by goldbugs.. I think what most goldbugs really dont like is the leverage / gearing applied as really derivative is such a catch all term.

For example. Only yesterday, "GLD", an ETF that simply tracks the spot price of Gold had $USD 1.3 billion of turnover, yet not a single gram of gold changed hands between "buyers" and "sellers". It reminds me of the Chinese men I've met who would bet on which bowl of sugar a fly would land on next, or which raindrop would run down the windowpane fastest. GLD is but one of several global tracking ETF's for Gold. Additionally, hundreds of thousands of options, futures and options on futures occur each month, where none of the parties involved has any interest in physical delivery of the commodity.

If it makes you sleep well at night, by all means buy it, but let's not pretend it hasn't become a market in search of "greater fools".

All that aside, after a wicked correction, I wouldn't be surprised if it went higher still, but I'm not placing anything other than trading money on it.

Edited March 25, 2008 by lannarebirth

[ray08]

there is no shortage of gold in the world, the dealers got caught out with the big drop last week , but they will be selling very soon , at present a lot of people have gotten burnt in the last week by gold ,so market looking for direction, i beleive they will still try to push gold up, there are no fundamentals about price going up , but the experts will come out with some good reason ,

JUST REMEMBER ANY GOOD NEWS OUT OF THE USA AND GOLD WILL DROP ,

[churchill]

there is no shortage of gold in the world, the dealers got caught out with the big drop last week , but they will be selling very soon , at present a lot of people have gotten burnt in the last week by gold ,so market looking for direction, i beleive they will still try to push gold up, there are no fundamentals about price going up , but the experts will come out with some good reason ,

JUST REMEMBER ANY GOOD NEWS OUT OF THE USA AND GOLD WILL DROP ,

and there is certainly no shortage of dollars - and what good news ? Which dealers will be selling soon ?

[churchill]

So,

I don't think anyone really understands the dynamic that happened in the gold market yesterday, but one thing is for sure, demand for physical metal is off the chart. I contacted my usual supplier today to pick up another 10 baht. This is someone I've been doing business with for a long time. She didn't have it, and couldn't get it! She finally managed to track down 1 10 baht bar for me, but I had to pay a 500 baht corruption fee to actually get it.

Now, normally I would pass this off as, "OK, not enough physical metal in Thailand for an unexpected surge. Things will get resolved tomorrow or the next day." But that isn't what I'm hearing. Instead, I'm hearing even the major wholesalers are having difficulty getting supply to meet demand. And it isn't just Thailand. The boards over at Kitco are full of people saying there just isn't any physical metal available.

So what gives? Demand is skyrocketing, but prices are still dropping (definitely not rising)? There seems to be a disconnect happening here. Demand is soaring for people who want physical metal, with the effective price being higher than spot, and the guys buying paper are still worried about slackening support levels.

What's going on here? The gold price is too low! Economics 101 says it should be moving higher to dampen demand, and yet we aren't seeing that. Instead we're seeing shortages, and widespread shortages in every country at that.

Is this the first example of a derivatives crisis in progress? Is there simply too much paper out there not backed by physical metal, and people are starting to default? Can we soon expect to see a permanent disconnect, with one price for paper gold, and another price for the real thing? This is obviously an area where a real investment banker's input might be useful.

What is happening? I like physical, but since I can't find it, I'm tempted to buy paper. The problem is, the markets for the two seem to be heading in opposite directions right now. Any ideas what's going on?

Take a look

http://www.youtube.com/watch?v=cy-fD78zyvI

[ray08]

there is no shortage of gold in the world, the dealers got caught out with the big drop last week , but they will be selling very soon , at present a lot of people have gotten burnt in the last week by gold ,so market looking for direction, i beleive they will still try to push gold up, there are no fundamentals about price going up , but the experts will come out with some good reason ,

JUST REMEMBER ANY GOOD NEWS OUT OF THE USA AND GOLD WILL DROP ,

and there is certainly no shortage of dollars - and what good news ? Which dealers will be selling soon ?

, As you know market works on rumours and results put out by government ,i think you will see a small turnaround in the USA in the near future as it is close to the bottom at present , more upward room to go ,

Bangkok Assay , GEAB and will be checking tommorow who else ,

[pattayadave]

The price should approach the marginal cost for mining the stuff. What is the marginal cost for mining an ounce of gold? Probably about $50 would be a wild guess.

The marginal cost, IS the supply curve. If you are assuming a fairly competitive markets, Long Run prices should be based around the supply curve. The rest (ie $900) is sentiment.

that would be a wild guess

all depends on the extraction process heap leach / ball mill / slag reduction / cost of fuel /cost of labour local / cost of ex pats / flights food accomodation etc etc

last mine i worked in ghana mining and prossesing cost's were $ 199.00 per troy ounce while gold took a dip to $249.00 but that was in 1999.

today i'm on a new mine just setting up so wouldnt know the cost for troy ounce production, but behind assembly by 3 months and already $200,000,000 investment to date. would guess at around $ 400.00 + per troy ounce production

as for buying gold at todays rates pure madness

[ArtfulD]

Personally I see the drop as just a blow off from increased speculation and frenzied buying of the past several months and completely healthy/necessary...Gold needs to take a break IMHO before heading higher and I would not be comfortable buying any extra until it forms some sort of support level over the next several weeks/months (im not someone who will risk a large % drop in price by buying after/during a big run up just because "everyone knows its going higher, just keep holding and buying" thats .Bomb mentality).

[LivinLOS]

I tend to agree.. I actually thought that a breakdown like that would have headed to 850ish.. The fact that its seeming to come back to the 940ish support is pretty solid, more than I expected.

[samran]

The price should approach the marginal cost for mining the stuff. What is the marginal cost for mining an ounce of gold? Probably about $50 would be a wild guess.

The marginal cost, IS the supply curve. If you are assuming a fairly competitive markets, Long Run prices should be based around the supply curve. The rest (ie $900) is sentiment.

If demand exceeds supply then prices rise.. Does a bently cost its construction amount ?? Does a Rembrant cost its weight in oils ??

you are feeding the anti-goldbugs with your arguments LivinLos. by admitting that gold does not possess the intrinsic value claimed by goldlovers but that a part of its price is deemed aficionado's or collector's value

Dr Naam, took the words right out of my mouth

that would be a wild guess

all depends on the extraction process heap leach / ball mill / slag reduction / cost of fuel /cost of labour local / cost of ex pats / flights food accomodation etc etc

last mine i worked in ghana mining and prossesing cost's were $ 199.00 per troy ounce while gold took a dip to $249.00 but that was in 1999.

today i'm on a new mine just setting up so wouldnt know the cost for troy ounce production, but behind assembly by 3 months and already $200,000,000 investment to date. would guess at around $ 400.00 + per troy ounce production

as for buying gold at todays rates pure madness

dave,

brilliant post and thanks for the numbers. You are right, it was a hugely wild guess based on my knowledge of cash costs in other forms of mining. WAAAAAAY off though as it turns out.

My point remains the same however

[Norrad]

Gold and Platinum prices are not only rising because of speculators and issues with the US economy. There really isn't enough being mined at the moment to keep up with demand. South Africa (one of the worlds leading gold suppliers) is in the middle of an energy crisis, they simply do not have enough power to supply mining companies with all of their power needs, as far as I know this has led to mines working at 25% capacity.

Plans are in place to correct these problems and I expect that by next year they would have brought some of the old, abandoned power stations back online and production will be back up to 100%. Within 3 years they should have loads of brand new stations online.

[VegasVic]

Gold and Platinum prices are not only rising because of speculators and issues with the US economy. There really isn't enough being mined at the moment to keep up with demand. South Africa (one of the worlds leading gold suppliers) is in the middle of an energy crisis, they simply do not have enough power to supply mining companies with all of their power needs, as far as I know this has led to mines working at 25% capacity.

Plans are in place to correct these problems and I expect that by next year they would have brought some of the old, abandoned power stations back online and production will be back up to 100%. Within 3 years they should have loads of brand new stations online.

Norrad, you need to get your facts straight. First of all the increase in demand for gold over the last 6 years is from the speculators, the actual industrial demand (which only accounts for about 11% ) for gold has actually been dropping and currently the demand for gold in the jewelry industry is dropping like a rock! The rise in price of gold over the last few years has been exacerbated by the continuing weakness of the U.S. dollar, not any "issues with the U.S. economy". Gold has no fundamental reason to be selling at anything over $350/ounce and it will gravitate back to that area in the coming years. Gold is currently a textbook example of a speculative bubble and when the bubble bursts there will bew a lot of very sad gold bugs