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Metals Strong on Geopolitics, Premiums Set to Rise

The rising violence in Iraq is making investors nervous. Stock prices experienced a rare down week while oil, gold, and silver were the beneficiaries.

Gold rose nearly 2% in last week's trading and silver gained 3.6%. Other traditional safe-haven assets, including the U.S. dollar and Treasuries have yet to see any significant bounce.

Platinum and palladium prices fell last week based on news of an accord to end the months-long strikes plaguing South African mines. Union bosses had ordered more than 70,000 mine workers to stop work in January, bringing mine output to a halt and driving prices for platinum group metals, especially palladium, higher for most of this year.

Meanwhile, strife lingers in Ukraine as well. Russia appears set to cut off natural gas supplies unless the Ukrainian government can make payment for nearly $2 billion currently in arrears. And pro-Russian forces shot down an army plane killing 49 over the weekend.

Watch for another Cycle of Rising Premiums

We often comment on just how little gold and silver we buy from our customers – they are simply not selling! (We agree with our customers -- now is NOT an opportune time to sell your position.) Therefore, mints, refiners, and wholesale partners furnish the vast majority of our inventory.

Customers are not selling their precious metals The most recent move downward in gold and silver prices exacerbated this dynamic. Money Metals currently has only 7 open purchase orders with clients valued at approximately $15,000. The tiny amount of customer selling represents the lowest level since we launched Money Metals over 4 years ago and began publishing live buy prices. It is extraordinary considering Money Metals is a national dealer doing hundreds of sell transactions daily with near record volume.

Clearly our customers (more than 30,000 of them) are very committed to higher prices. This data highlights a dramatic and ongoing contrast with the futures markets, where short selling has overwhelmed and frustrated the bulls for more than 3 years. Traders leveraged long on futures contracts have been beaten unmercifully, while those long physical bullion remain indomitable.

Assuming other dealers are experiencing the same phenomenon of no retail customers selling, investors in physical precious metals may see another cycle of rising premiums.

In recent months, mints and refiners – who were overwhelmed by demand for silver coins, rounds, and bars during most of 2013 – have begun catching up. This month, the dysfunctional U.S. Mint finally stopped its pathetic rationing of silver American Eagles.

A spike in demand from the current levels is liable to move premiums higher quickly. Mints and refiners could wind up falling behind once again. Coupled with the dearth in customer selling, dealers will be forced to raise their bids significantly for inventory, which will lead to higher premiums across the market.

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