Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 47th year in the gold business
“We live in a technological golden age but in a monetary and fiscal dark age. While physicists discover the so-called God particle, governments print and borrow by the trillions. Science and technology may hurtle forward, but money and banking race backward.” – James Grant, Grant’s Interest Rate Observer
Investor gold demand running at red hot levels
So why isn’t the price running through the roof?
Though gold has struggled to regain the momentum so far in 2021, silver and platinum are off to solid starts. Silver was up almost 2% in January, and platinum, almost 4%. Gold, though, was down just over 1%. Demand for gold and silver coins for delivery is running red hot exacerbated by tightening supplies and delayed releases of new coinage from sovereign mints. As a result, premiums – the amount investors pay over a coin’s melt value – have begun to move higher.
Chart courtesy of TradingView.com • • • Click to enlarge
The Royal Canadian Mint is reporting a several week delay on shipping any of its 2021 product – with no concrete availability date yet announced – and the U.S. Mint has returned to allocation, reducing and limiting the number of coins being released to the dealer network on a weekly basis. The imbalance between supply and demand has already pushed wholesale premiums roughly .75% higher on gold bullion coins and approximately +2.5% on silver bullion coins since the start of the year.
At this juncture, the consensus in the industry is if gold prices remain at the lower end of their range against a backdrop of continued fiscal and monetary support from both the government and Federal Reserve, demand is likely to continue at high levels, and premium pressure unlikely to abate anytime soon. All of which raises a question we get often at USAGOLD. If demand is running so high (as it is now), why aren’t gold and silver prices going through the roof?
Analyst Craig Hemke makes a compelling argument on the price discovery mechanism in an article published recently at Seeking Alpha. “The internationally-recognized price of gold (and silver),” he writes, “is NOT based upon any sort of physical metal transaction. That’s so 1960s. Instead, the price is determined through the trading of digital derivative futures contracts in New York and unallocated forwards in London. So the only way price rises is when demand for these derivatives outstrips the supply. The big rally last summer was a period of Bank reluctance to add derivative supply, and price soared. Since then, Banks have felt more comfortable adding supply and prices have been driven consistently lower.……”
Hemke goes on to say that most of the trading that governs the gold price is implemented through computer-based trading programs that do not recognize economic fundamentals. Instead, they concentrate on day-to-day movement in notional bond yields and foreign exchange trading. Though the fundamentals make a compelling case for gold, trading algorithms, he says, “have no concept of this. So, what we’ll await in 2021 is the moment when The Machine ‘fundamentals’ switch again to our favor. And what will be the driving factor? When The Fed begins to implement Yield Curve Control.” (Ed note: We see the implementation of yield curve control, though important, as just one of several factors that could jar gold loose from its trading range.)
With prices at artificially low levels, the public is taking the opportunity to load up. The new year, though, in many respects, is just an extension of the old in terms of gold investor behavior. The World Gold Council recently reported investment demand running at record levels in 2020 and 40% higher than 2019. Germany rose to number two in the rankings for global gold coin and bullion demand behind China (where fourth-quarter demand was up 33% over last year). The United States broke into the top five for retail coin and bullion demand globally in 2020. As for 2021, the Council reports the U.S. Mint posting its best January for bullion coin sales since 1999 – despite the return to allocation.