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BIG QUESTION: Why Are Gold/Silver Prices Falling Despite Demand?

Why Are Prices Falling While Demand Is Rising?

Gold and silver bullion investors might reasonably assume prices have a lot to do with physical supply and demand. On a day-to-day basis, they don't. If they did, prices would be much higher.

Chinese Gold and Silver Demand

Chinese gold and silver demand
is through the roof.

Consider the extraordinary demand for physical silver. It is setting another record in China where silver imports, which account for a fifth of world consumption, are up 36% through October. The story is similar in India, another of the largest markets in the world. And government mints are struggling mightily to keep up with record demand for gold and silver bullion coins.

Meanwhile, lower and lower prices continue to devastate the mining industry tasked with providing supply. Inventories are dwindling because crippled mining companies aren't keeping up. COMEX gold inventories sit at record lows, with just a few tons of registered bars available for delivery. And this year, COMEX silver vaults witnessed the biggest net outflow of stocks since 2009.

However, none of these fundamentals show up in the spot prices for gold and silver, which have fallen relentlessly and hover near 5-year lows. These low prices would seem to indicate a glut of supply and falling demand.

So why do prices reflect the opposite of reality? The answer is that prices aren't set in the markets for physical metals. Instead, prices are set in the futures markets.

Contracts for gold and silver “paper ounces” are tied to physical stocks by the thinnest of threads. Lately these threads are getting thinner. In recent months, the number of paper ounces traded relative to the quantity of actual bars available for delivery exploded. Recent reports showed 325 ounces of gold futures trading for every ounce of physical gold registered in COMEX vaults.

Theoretically, as long as contract holders ignore the exploding leverage in the futures markets and almost no one cares about getting their hands on actual metal, spot prices can continue to fall.

defaultUltimately, however, the futures markets run on confidence – traders' certainty they can stand for delivery of the actual metal their contract is supposed to represent. Someday many of them may find themselves standing outside an empty COMEX vault holding a contract but wishing they held the bars instead. Physical supply and demand fundamentals won't matter, until, suddenly, they do.

Meanwhile, in the real world, demand for gold and silver coins, rounds, and bars just continues to grow. Lower prices don't diminish the fundamental reasons for owning precious metals.

Additionally, bullion buyers are getting many more ounces for a like-dollar purchase. Consider that a purchase of $3,000 in early 2013 yielded only about 100 ounces of silver bullion. Today, that same $3,000 purchase brings a silver stacker nearly 200 ounces. That dynamic explains a big portion of the increased number of ounces being sold worldwide.

Governments around the world continue to borrow in excess. Central bankers everywhere are working to devalue their currencies and stimulate price inflation. The potential for war and violence is escalating. Physical gold and silver remain a go-to asset for investors seeking a safe-haven, even if the same cannot be said for precious metals futures. Bullion is private, it is portable, it is liquid, and it can never go bankrupt or default.

To secure those benefits, you must buy the real thing. A reputable bullion dealer such as Money Metals Exchange can take your order online or by phone in just a few minutes and deliver your metal securely, discreetly, and fully insured.

At least there is one advantage to the strange system of setting the price for physical gold and silver in the paper markets: investors can get bullion artificially cheap – and get more ounces today than they could in the recent past.


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