Gold Up-Date: The Drop inGold Prices Has Sparked a Frenzy of Buyers for the Physical Metal

Gold prices have managed to recover more than $ 80 an ounce from its recent low as demand for the physical metal explodes. Bullion dealers, refineries and many gold retail outlets are reporting shortages of supplies as people scramble to take advantage of the current low prices.

With such robust demand for the physical metal, one could conclude that the recent smash down in prices is having the opposite effect of what was intended. Many market analysts suggest that the cause which was responsible for the decline in price was a combination of a few issues. These included a possible early end to the US bond purchasing program by the Fed, potential gold sales by other central banks in the Eurozone after Cyprus and increasing outflows from ETFs as well as weaker growth in China.

Frankly, while these are all credible reasons I doubt that this explains the massive volumes traded on Comex and a price drop of more than $200. But, no matter the reason, it has become abundantly clear that the price declined was engineered by speculative action on the futures market of Comex.

In a recent interview on Bloomberg TV, Commodity Futures Trading Commission (CFTC) Commissioner Bart Chilton stated that the drop in gold and silver which suffered an even more precipitous decline does raise "concerns" at the regulator, but it does not necessarily mean "anything nefarious" happened.

"When you see such sharp move that is obviously something that raises our concern and we look at the trades and see what is going on," he said.

However, market movements of this nature and magnitude have to be looked at by the regulator says Chilton. Preliminary investigation shows that volumes in both gold and silver were at their second highest levels in 30 years. Frankly, I doubt if any investigation by the CFTC will reveal anything.

This was followed by comments made by World Gold Council (WGC) CEO Aram Shishmanian who stated that the recent fall in gold prices was driven by speculative traders in the futures markets.

In his statement, Shishmanian, also mentioned that the lower prices have boosted demand for the precious metal from India and China to the US, Japan and Europe, while supply remains constrained as there is already shortages of bars and coins in Dubai.

"It has become increasingly clear over the course of the past week that the fall in the gold prices was triggered by speculative traders operating in the futures markets," UK-based WGC said in a statement.

Personally, as I have mentioned before, I believe the recent plunge in gold prices was orchestrated by a bullion bank or more than one bullion bank. "By suppressing the gold price, a government can beguile people into thinking that there is no inflation, and that the debasement of currencies is not an issue. And, as long as people have confidence in the current fiat currencies, in particular the US dollar and euro, the central banks can continue to print virtually an endless supply of paper money.

Meanwhile, the recent drop in gold prices has set off a buying frenzy for physical gold, almost all around the world. Shishmanian stated that speculators' short-term view of generating a trading profit is in stark contrast to the views of long-term investors in gold. He also said that gold purchases surged in markets like India, China, the US, Japan and Europe, the WGC chief said: "Buyers are viewing this as an opportunity to purchase gold at prices not seen in the past couple of years."

There has been a massive wave of physical gold buying since last weekend and demand was accelerated after the prices fell further on Monday, he added.

With demand rising in most markets, Shishmanian said, "We are already seeing shortages for bars and coins in Dubai, while premiums in Mumbai are at $26 per troy ounce and $6 in Shanghai, indicating that buyers are willing to pay more than current spot prices for the metal."

Gold sales from Australia’s Perth Mint, which refines nearly all of the nation’s bullion, surged after prices plunged, adding to signs that gold’s slump to a two-year low is spurring increased demand.

“The volume of business that we’re putting through is way in excess of double what we did last week,” Treasurer Nigel Moffatt said by phone, without giving precise figures. “There have been people running through the gate.”

The Perth Mint’s sales of gold coins climbed 49% to 97,541 ounces in the three months ended March 31 from a year earlier, according to data from the facility in Western Australia that was founded in 1899.

At the Sydney showroom of ABC Gold Bullion, Australia's largest independent bullion trader, the queue was around 30 deep early on Friday.

The US Mint reported a record 63,500 ounces, or a whopping 2 tons, sold on April 17th alone, bringing the total sales for the month to 167,500 ounces or more than the previous two months combined.

In addition, demand remained very strong for Gold Maple Leaf and Silver Maple Leaf coins even after the gold's drop, said Chris Carkner, Royal Canadian Mint's managing director in sales.

In the meantime, Swiss refiners are having difficulty keeping up with demand and are working almost around the clock including the weekend. They have reported increased demand from everywhere, especially from the Middle-East and the Far-East.

"We are completely sold out for the next few weeks and if you want to buy now the earliest delivery would be in two weeks' time," said Bernard Sin, senior vice president at MKS Capital, a Swiss-based precious metals company which runs one of the biggest gold refineries in Switzerland and supplies Asia.

"Demand is incredibly high in Thailand, Malaysia, and Singapore."

The massive wave of physical gold buying that began during last weekend and accelerated following Monday's further drop in the price of gold, saw a surge in gold purchases in the US, Japan, Europe and especially India and China. At the same time, retail and institutional investors have fled gold exchange-traded funds and futures contracts.

There has been a buying frenzy in parts of China and India as shoppers have filled jewellery shops. Volumes of gold products sold surged 150% in Hong Kong and Macau during the April 13 weekend compared with the previous weekend. Customer traffic increased by as much as 40% on April 16 when compared to the previous week, with gold bracelets popular with shoppers, said Kent Wong, managing director at Chow Tai Fook. Tokuriki Honten,

There was a buying frenzy in Shanghai last weekend as shoppers stormed into gold jewellery shops. Evidently, most of the shops had run out of stock of 10 gram, 20 gram and the 50 gram and 100 gram bars were becoming very low in stocks. A dealer in the Shanghai based jewellery retailer Lao Feng Xiang reported that the number of customers had doubled.

In Hong Kong and Beijing customers lined up outside banks and jewellery shops to make purchases and in some instances there was not enough physical metal to meet the demand.

The Shanghai Gold Exchange’s cash contract hit a new record high on Monday (43 metric tons, up from 30.4 on April 19th)

The largest dealer in Beijing, Caishikou Department store reported that they have sold out of gold bars, and that stocks of gold accessories are diminishing rapidly.

Haywood Cheung, the president of the Chinese Gold & Silver Exchange Society, said gold sales in Hong Kong got a big boost over the past week.

"We were doing about HK$80 billion in sales but on Friday it moved to HK$100 billion, and by Monday, it was tremendous - it went up to HK$150 billion. On the bullion side, we sold out on the weekend - one ton of gold bars. It's quite rare for weekend sales," said Cheung.

Japan’s second-largest gold retailer, said purchases doubled on April 16 as prices slumped.

The vice president of Blanchard & Co, David Beahm, said that sales were enormous. "We haven't had two back-to-back days like this since 2008 after the collapse of Lehman Brothers," said Beahm,

Monday's trading volume at Bullionvault, an online precious metals exchange, was six times higher than usual with a 50% increases in new account openings.

Gold dealers in Dubai have reported a shortage of gold coins and bars. On Sunday, many shops at the Deira Gold Souk remained opened beyond the 10.30pm store hours to accommodate customers.  On Monday the gold outlets such as Sky Jewellery, Damas and Joyalukkas said they ran out of gold coins and bars.

There are also reports of shortages of bullion coins and bars in Thailand and in Singapore where premiums on certain bullion coins have risen due to tightness in the market and delays of three to four weeks for delivery.

Retail demand in Europe and the United States has also picked up. Britain's Royal Mint has boosted output for gold coins.

"Since the dip in the price of gold we have seen increased demand for our gold bullion coins from the major coin markets," said Shane Bissett, the Royal Mint's director of bullion and commemorative coins. "The Royal Mint ... is increasing production to accommodate the higher demand."

So while, certain market participants continue to try to suppress and manipulate the price of gold by using their leveraged gold futures positions the physical market for gold is telling another story. It also goes to show that this artificial manipulation of paper gold has nothing to do with the physical market.  Eventually, this will lead to a major dislocation in the price of the physical and the price of the paper market. And, when the issuers of paper gold cannot deliver the real shortage will cause prices to sky rocket.

TECHNICAL ANALYSIS

The price of gold remains technically oversold. I expect some consolidation at current levels before a rebound.

ABOUT THE AUTHOR

David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients. 

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.