Gold is known for being a store of value in tumultuous times, and the global market meltdown that’s now underway is driving that point home.
Physical demand for the yellow metal has spiked in recent weeks as people who are both new and experienced at buying gold rush for protection from economic turmoil. Major shortages of physical gold have developed, and the price of physical gold has risen noticeably higher than the spot price.
To find out more about what’s going on, the Investing News Network reached out to a number of US-focused experts in the space. Here’s what they said about why the yellow metal is suddenly in such short supply and what to do if you want to buy gold right now.
The crisis is here — where’s the gold?
Explaining what’s going on in the gold market requires stepping back to mid-March. The spot price of the metal has been highly volatile in the last few weeks, with a wide spread of more than US$200.
“It started when the (spot price) sold off hard … At that time demand for physical went way up,” said Chris Blasi of precious metals dealer Neptune Global Holdings, located in Delaware. The gold spot price refers to the amount that the yellow metal could theoretically be sold for at a given time and is determined using a formula based on futures contracts.
“There was a spike in volume because a lot of people saw what was going on with the US stock market having such violent swings with the pressure to the downside.”
Andy Schectman, president of bullion dealer Miles Franklin in Minnesota, made a similar observation, saying what’s going on in the American stock market has led to a huge amount of panic buying.
“People are waking up dramatically — they’re waking up to the fact that they need to protect themselves, not just physically but also financially. Equity markets that are that volatile and that overvalued to begin with are pushing people into into precious metals,” he said.
Still, Blasi noted that the market could handle the initial surge in demand that came through. But it wasn’t long before flights between Europe and the US started being restricted.
“That obviously curtailed a lot of metal because the European refineries really dominate in volume for the bars,” Blasi explained. “So that was a real hit.” He added that Neptune Global deals frequently in palladium as well, which quickly became “completely unavailable.”
Everything was still relatively fine at that time because the expectation was that the Royal Canadian Mint could fill at least some demand that would normally be covered by Europe. But then news hit that Canada’s mint would be shutting down for a number of weeks due to concerns about the coronavirus.
“The way things seem to be unfolding, it’ll be beyond two to three weeks,” said Blasi.
Schectman also pointed out that the US Mint’s production facility in West Point, New York, shut down for 48 hours this week due to a coronavirus scare, highlighting the fragility of the gold supply chain.
“You’re beginning to see a systemic reaction where product is disappearing in a refined form, and I’m concerned about the ability to source product in this environment if things don’t free up,” he said.
Gold buyers facing delays, high premiums and more
The upshot is that for the average person it is difficult, though not impossible, to buy physical gold right now. And those who can manage to find a dealer that has metal available will still face obstacles.
For example, people looking for gold may face delays in getting what they’ve asked for.
“You may not be able to get immediate delivery, which is usually a bad thing,” said Michael Fuljenz, president of Texas-based Universal Coin & Bullion. “I typically recommend you shouldn’t wait more than 30 days to get a product.” However, even with a reputable dealer the wait could now be 60 days.
Prospective gold buyers may also not be able to get the exact products they have in mind. “I’ve got Buffalo 1 ounce gold coins from the US Mint I can deliver. I don’t have 1 ounce American Eagles,” he continued. “So you can get a US Mint bullion product — you just may not get the one you want.”
Blasi concurred, saying that the typical person will not be able to buy gold right now. He explained that although he has been able to make some bar purchases through his normal sources, it hasn’t been enough to meet demand; what’s more, smaller denominations have been coming in only from the few individuals who are selling right now instead of buying.
“When you’re looking for things like Eagles and Maple Leafs, it’s really spotty — it’s only if it becomes available in the secondary market. No new product is coming on,” he said.
Supply has been an issue for Schectman as well, but he said strong relationships and diverse sources of product have allowed him to keep selling.
“I work with between five and eight distributors. And over the years, we’ve built a network of people around the country and coin shops — anytime they get product, they sell it to us,” he said.
High premiums are another major issue for gold purchasers right now, Schectman pointed out. While the price of physical gold is generally higher than the spot price due to premiums put in place by sellers, premiums are much more elevated right now due to high demand.
“The people who are trying to buy precious metals now are paying the highest premiums I’ve seen in my entire career in 30 years,” he said.
Fuljenz said that over his lifetime he hasn’t seen premiums at this level either. “I can’t say a situation like this has happened before,” he said.
“A gold Eagle that I was selling at 4 percent over spot two months ago I have to sell at 7 percent over spot now because my cost rose 2 percent — so premiums have risen. Silver mint rounds from private mints that I used to buy at US$1 over spot are now costing me US$2.50 over spot.”
It’s worth noting that in addition to the disconnect between spot and physical gold prices, there has also been a dislocation between the spot price of gold in London and the gold futures price in New York, with the latter reportedly coming in as much as US$100 higher at one point last week. Discourse on the topic has been extensive, with market watchers tying the problem in part to high physical demand for gold.
Going back to issues for prospective buyers, Fuljenz pointed lastly to counterfeiting, something that inexperienced purchasers could run into if they do a transaction in a rush, without properly vetting the source they are buying from. “The biggest thing for the average buyer is if you don’t know gold, you better know your gold dealer.”
Solving an unprecedented situation for gold
All three experts agreed that the circumstances playing out right now are unprecedented.
“We’ve been around since 2002. So we were here in the 2008 crisis,” said Blasi. “There were one or two times a number of years back when demand went way up, and deliveries … got delayed for maybe a short period of time, like a day. Wholesalers weren’t really taking orders or had to turn them down. But that was strictly a spike in volume, which subsided quickly. There was no disruption to the supply chain.”
Schectman also spoke about the uniqueness of what’s happening with gold right now. “I’ve been buying (gold and silver) every two weeks for the past 30 years. Through all of that I have used precious metals as wealth, not as an investment. So I don’t sell it based on fear. I sell it based on wealth,” he explained.
“For the first time in my career, I’m afraid for the viability of this industry in the short term because of these supply chain issues. I think it’s getting to a point where the rubber is meeting the road.”
In terms of what it would take to resolve the situation, the consensus was that the coronavirus outbreak itself will need to die down on a global level.
“We’ve got to see a flattening of the curve and the coronavirus, and people getting back to work,” said Fuljenz. “The people working at the mints producing gold bullion and gold bars have to be able to go back to work, and the people receiving them from the mints have to be able to receive them and the banks have to be open.”
Schectman made a similar comment, noting that the crash that happened in 2008 was a crisis in confidence and liquidity, meaning it could be solved by easy money and low interest rates from the US Federal Reserve. But what’s happening currently is different.
“Now it is not a liquidity problem,” he said. “I don’t care how much money you throw at people, you’re not going to make them go out and risk health and harm. I think the only thing that fixes this is a resumption of normal business activity in the supply chain.”
For his part, Blasi emphasized the uncertainty of what will happen even when normality starts to resume.
“None of us know what the global economy is going to look like once this pandemic lifts — how much damage, what policies have been put in place that maybe really negatively impact the fiat currencies of the world, which in turn would drive demand for the physical metals,” he said.
“We could come out of this where the refineries get back online, things are moving, but the demand for physical metals is tremendous, because of the state of the global economy at that time, and then that could be the next hurdle. And that may impact availability. Or maybe the demand is equal to what the output is, but we don’t know what that will be.”
For now, gold is still available for those who are well-connected, resourceful or both. What the future brings remains to be seen.
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Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.