By Patrick A. Heller
Commentary on Precious Metals Prepared for CoinWeek.com

A number of so-called experts are proclaiming that gold’s price is in a bubble that has burst.  However, actual market activity signals that demand for physical gold is draining available supplies.

In the first five months of 2012, at least 315 tons (10.1 million ounces) of gold had been imported into China.  This quantity exceeds one-third of all global newly mined supplies during that time.  The actual quantity is almost certainly higher as the Chinese government has a habit of not reporting all of the gold it adds to its reserves until several years later.

china gold face Huge Physical Gold Shortage LoomsDemand in China is so strong that its government is trying to establish new venues through which people can acquire gold.  By the end of August, at least one new exchange is expected to open in that nation to allow citizens greater access.

To give you some idea of how massive Chinese gold demand is, there was a recent report of a nearly $60 billion fraud perpetrated on 5,000 Chinese investors who thought they were purchasing gold futures contracts in London.  The size of this fraud is on the scale of Bernie Madoff’s in 2008, which made headlines for years.  However, this Chinese scandal has been only lightly reported by the US media.

The Chinese scandal will no doubt spur more of that nation’s citizens to demand physical gold in the future.  At current prices the size of the fraud indicates a demand for about 37 million ounces of gold, which is more than a half year of global mining production.

Not only has there been strong daily demand for physical gold from China, but there is constant demand from the Middle East.  With some lulls, there is also strong demand from India.  Russia’s central bank is also a relatively constant buyer.

By the way, these buyers are having such difficulty procuring physical gold that they are aggressively buying physical silver as well.

The previous continuing demand I just noted does not include the higher demand for physical gold by other central banks around the world.  Although any particular central bank may not be buying gold on a regular basis, the effect of the combined demand from all of them is steady.

Not only has demand been growing, but available supplies of physical gold are obviously dwindling.  There are a growing number of reports that supposedly allocated physical metals in storage (which means theoretically that specific bars identified by serial number are set aside credited to the name of a specific owner) that have not been available for delivery to the owners upon request.

There are also claims that gold placed in unallocated storage (where an owner has a claim to some unspecified portion of a bulk quantity of the commodity) have been removed to fulfill obligations to make physical deliveries.  To the extent that customer property is being taken without their consent to deliver to other parties, that is a clear signal that it is time to consider selling off all investments in precious metals exchange traded funds and replacing them with physical metals.  Also, anyone who has precious metals in unallocated or allocated storage should consider taking delivery, and doing so sooner rather than later.

The US government is showing new cracks in the soundness of its finances and of the US dollar, which I will detail in another column.  As these problems deteriorate, that will only add to the demand for physical precious metals.

pat heller Huge Physical Gold Shortage LoomsPatrick A. Heller owns Liberty Coin Service and Premier Coins & Collectibles in Lansing, Michigan and writes Liberty’s Outlook, a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Numismaster (http://www.numismaster.com under “News & Articles). His award-winning radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 AM Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at http://www.1320wils.com.

 

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26 Comments

  1. Charlie says:

    The only problem with that China gold fraud story is that the numbers don’t sound right. It means that each investor, on average, lost $12 million. This seems unlikely. So either more investors were involved or the amount of the fraud was less.

  2. M SMITH says:

    The paper market was set up to keep PM’s prices low, soon the paper market will leave many investors holding a piece of paper while the physical will go into hiding. Those that sell physical when the prices spike will be making a huge mistake, you only sell if you have no choice, being prepared is a must & it is still not to late.

    • D says:

      Very true. There is a steady stream of deliverable metal it seems like all the time on Ebay and metal trading sites. I shop Ebay regularly and have to say that getting metals (silver or gold) at melt or even within 25% is getting very hard to do. The market (actual physical buyers/bidders) says one thing of the value and the “market” or charts say another. Hmmm, who am I going to trust … those at the top giving me a “market” chart or what’s going on in the real world without the false statistics and fluffy lies. Hmmmm, I’m going to really have to think about that one.

      • Scott says:

        I shop ebay as well, but have not problem getting it at melt or below.

      • V.Kurt Bellman says:

        I have absolutely NO problem getting especially silver at WELL BELOW current spot, IF I wanted it, which I do not! I see 90% silver coinage selling at auction locally (all I could afford) at 10%-20% UNDER melt. South central PA, if you care to know. The demand simply is not there. I won’t speak to gold other than to note that premiums over melt for even NGC and PCGS slabbed high grade pre-1933 gold has locally fallen to ZERO.

      • V.Kurt Bellman says:

        I also see “dealers” with American Silver Eagles in their cases trying to get $40-$45 even at these spot levels. It sits and gathers dust. I did pick up a flawless raw 2011 ASE at Baltimore for $13 less than some dealers try to get locally. Point is – it is a VERY BIFURCATED market. Numismatic quality sells, dreck doesn’t…. locally.

      • Chris says:

        I find this to be the case as well. It amazes me how much the truth can be glossed over by government statistics and some people just take it as fact.

  3. May I say that Mr. Heller has a way of giving certain folks, “hell?” And some of them deserve it. Of course he means shortage of gold “at current price quotes.” Lower prices always make less of anything available. One way of considering gold at about $1600 the ounce is, what is the innate worth of 16 Federal Reserve Notes? They have a decorative value for wallpaper and less value for packaging material, and some value for combustion material. Considering how easy and almost cost free it is for presses at currency plants to whizz off sheets of $100 bills, and how hard it is to extract and refine an ounce of gold from the mines, to say that gold is worth $1600 the ounce is a vicious joke. An ounce of gold could literally be worth more than one ton of $100 notes on pallets. Paper currency has already been used for these purposes—packaging, decoration and combustion—see my offering “The Paper Hangers” at free access Silver Investor archives http://www.silver-investor.com/charlessavoie/cs_july06_paperhangers.htm The New York Times, July 17, 1929, page 2, reported that the Belgian National Bank at Brussels was preparing to burn (combust) German inflation bank notes from the 1923 hyperinflation episode. The physical volume of the paper notes, so the news item reported, was equal to the entire contents of 125 standard railroad boxcars! At one point, those notes were being turned out by 12 printing plants round the clock! Too bad economics professors seldom teach that money cannot be something which can be created to infinity out of extremely low value material! Just how likely is it that anyone will dispose of 125 boxcars full of gold? See? “The proper material for money is determined by the nature of things, a law higher than any government.”—“The Relations of Debt and Money,” North American Review, May 1877, pages 421-422, 431, article by hard money advocate Elizur Wright (1804-1885) who developed actuarial tables and is known as the “father of life insurance.” Silver is an even better case in point, as industry is far more dependent on silver than gold. And silver has facilitated countlessly more transactions across the pages of history than has gold.

    • D says:

      This all reminds me of a story I once read that basically classified money (currency) as an intermediary device to allow two people to trade their goods and services. So in essence, the currency has no value, it is just a gauge between things of value. So if I have 1 troy oz of gold and somebody else has 1000 gallons of fuel lets say and the person with the fuel doesn’t want the gold, how do I get fuel? Well, by temporarily trading my gold for these intermediary pieces of paper, I can give him the currency for some of his fuel and he can take that currency and make yet another trade to what he actually wants. This completes the cycle. So when you have non stop printing, you literally are watering down the overall trading power, not value, of the currency as the currency does not have any value … it only represents value from what it was traded for. So printing in essence DOESN’T EVER add any value to a system; the system is only as valuable as the goods and services in it. No new goods or services, but yet printing occurs, less value on the currency to make the trades. This fiasco is simply yet another way to steal the remainder of wealth that us citizens still have in the form of CASH. So, ONE MAIN REASON TO NEVER KEEP YOUR SAVINGS IN CASH!!! CASH IS NOT VALUABLE, IT HAS NO VALUE … IT ONLY REPRESENTS VALUE OF GOODS OR SERVICES IT WAS TRADED UPON!!

  4. Agent047 says:

    @Charles Savoie
    I agree with you 100%. This country is in for a rude awakening. If you are not investing in physical Gold, Silver, Nickel, Copper you will be in trouble. Don’t get left holding the paper when the Dollar poops the bed.

    • D says:

      Yes, and don’t forget that all commodities have value as well. After all, we all use oil, we all use grains, we want antiques, etc. It’s not just the precious metals, but any commodities a person should hold over cash. I believe ultimately that all commodities are on the same level and behave the same when the printing presses are going. You can see this in the grocery stores now over the last three years or so.
      I remember working at a small bank years ago. We had two customers (husband and wife) that held two CDs with us for $1,000,000 each. I always think about this when you start hearing things like this. Their ignorance will cost them one day soon. Could you imagine going to sleep with the ability to travel anywhere and buy anything and then waking up the next day and having nothing … just paper with no value.

      • Scott says:

        I disagree. If they had put their money in gold at its peak they would have lost 20% of its value at today’s price. They are most likely using the money from the interest to pay for everyday living expenses, which is paid for in dollars. At the end of the day the value of commodities is determined by demand and must be turned into cash at some point.

        • V.Kurt Bellman says:

          Hey Scott, haven’t you heard? The gold bugs have a secret plan to recreate the days when you’d walk into a bar and say, “Barkeep, give me two fingers a’ Red Eye”, and throw a disc of metal on the bar. Heck, they’re even hoarding the twin 45′s to complete the picture.

          What gold bugs forget is you can’t force 100% of the people to accept a metals currency when only 1-3% have any. The 97% will rise up, steal it, and end the days of those who have it. It’s a complete societal breakdown they’re preparing (wishing?) for, and it’s an illness.

        • Chris says:

          How much value has the dollar lost since its peak? Gold (or anything else) can just as quickly regain its “value.” Fortunately, the value of gold (or other commodities) is not really defined by “dollars” unless I have confidence in that dollar. An ounce is an ounce.

          • V.Kurt Bellman says:

            And prey tell, Chris, where do you spend these “ounces”? In my experience, outside of places where the relatively few honest dealers ply their trade (and Heller is one of the best, in that area – his prices and spreads are very public), the buy/sell spread to get into and then out of physical bullion products frequently exceeds 40%.

  5. PeaknikMicki says:

    Anecdotal testimonials (such as Egon von Greyetz) suggests not only un-allocated but also allocated gold has been leased out or sold. i.e. when investors have demanded delivery they have not received bars with the correct serial numbers.

  6. And yet, APMEX and the other online retailers have more gold than they know what to do with. It amazes me that no one else seems to be having problems buying gold yet the article implies that big nations with plenty of buying power can’t seem to find the gold they need. I’m not buying this BS.

    Don’t believe the hype folks. I’m sure the author’s sources are suspect. Just how the heck does he know that China is having trouble buying gold? Or did he just quote some random Internet source as well?

    • GoldLine says:

      I waited the longest I’d ever had to wait for the last roll of gold I ordered from APMEX. There was no reason since it was a cashier’s check. I think they had to wait on Canada.

  7. V.Kurt Bellman says:

    FWIW, I agree that you don’t want to be in cash when the currency collapses. Where I differ with the Chicken Littles hereabouts is on the timing. I’m 57, and I don’t expect to live to see it, not by any measure, even if I hit 100.

  8. Croesusss says:

    Mr. Heller. A coin dealer. How convenient. Sales must be dead in the water, seems to me. Every mint report much lower sales than last year, the ETFs are not adding gold, the premiums on coins and bars are low, dealers have PLENTY on hand, and we are supposed to buy this ‘hurry up and join the race’ rubbish?
    China has NO intention of massing a bunch of gold, it has NO intention of shooting itself in the foot by ‘abandoning’ the dollar, and so on. Mr. Heller, on the other hand, has EVERY intention to keep his sales up since the staff is flying paper airplanes – has been almost all of this year. Come on, where is the honesty we need?

    • CoinWeek says:

      Just FYI
      The World Gold Council (WGC) reported in May that central bank purchases totaled more than 80.8 tonnes in Q1 2012 or around 7% of all global gold demand. I do not have the Q2 numbers yet.

      Why do you think they might do that?

      • V. Kurt Bellman says:

        CoinWeek,

        “The Economist” is reporting recent large drops in both central bank and consumer buying of gold, especially in China and India, and especially the public consumer demand in crumbling. The world economy is facing deflation and recession, even in the BRICS countries that flourished during the 2007-08 collapse. I see all these gold bugs obsessing about inflation while professional economists are killing themselves trying to stave off a worldwide deflation.

        Somebody’s wrong here, and I’m fairly certain it’s the Savoie/Heller/Paul/Agent_047 camp.

    • Pat Heller says:

      Dear Croesusss,
      You have made some assumptions to cast aspersions on my motives on a basis that is contracicted by reality. The truth is that selling bullion-priced products is the lowest profit transaction I can do with the public. You may want to read my July 2 CoinWeek article at http://www.coinweek.com/coin-values/why-arent-there-hotel-sellers-of-gold-and-silver/ for a fuller explanation of which coin dealer activities are far more profitable. You can also read my June 25 Numismaster.com article titled “How Do Coin Dealers Earn Their Income?” at http://www.numismaster.com/ta/numis/Article.jsp?ad=article&ArticleId=25370.

      As for China, you need to understand that the Chinese are discrete about their plans and moves. By the time top Chinese officials make an open admission of their policy, they have already implemented it. For instance, the Chinese government started aggressively purchasing gold reserves in 2003, but did not admist doing so until 2009. Yet my source tipped me off back in 2003 that this was going on, even to the specific amounts being spent each time. It wasn’t until 2005 that I obtained enough corroboration to report this to my readers, which was still four years before it was officially admitted.

      It was this same source that clued me in to China’s central bank purchases starting in 2003 who has also been extremly accurate with other information in all the years since, including some of the information is this particular article. He is willing to share such market information only so long as he remains anonymous, so I will not identify him.

      As for China abandoning the dollar, apparently you have not been keeping track how the Chinese have been buying up commodities and companies around the worl–using Treasury debt as the collateral for the purchases. Effectively, for years, the Chinese have been abandoning the dollar.

      Until you realize exactly what is going on, no matter what you or I wish were true, you cannot take optimum actions to protect yourself.

  9. Dr Jerome says:

    Keep in mind that there are two markets for metals…the local coin shops, ebay, online dealers, local auctions, etc., all of whom sell the junk, rounds, bars and eagles that we little folk buy. The other market is for people like Eric Sprott, nations, and central banks. THAT’s where you will find the shortages of deliverable 5000 ounce bars. Keep in mind also that “shortage” means you have to wait for delivery while the seller leases it from some other source.
    I don’t plan to sell my metals… I will trade them for land or other commodities. whatever you like, be sure your savings is located in some sort of commodity. Things are going to get worse before they get better–much worse… and I hope I am wrong!

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