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Physical Demand Wreaks Havoc on Futures Exchanges

Last week, retail demand for physical bullion tapered slightly from the frenetic pace of the prior two weeks.

Money Metals’ major competitors appear to be facing big challenges getting inventory and fulfilling orders – with the vast majority of their products either unavailable or significantly delayed. To be fair to the struggling dealers, buyers have vastly outnumbered the sellers for weeks, despite the big jump in premiums.

At Money Metals, however, we have done a better job than our peers when it comes to securing stock and fulfilling orders quickly – nor have we refused to allow smaller customers to place orders like all the others have.

Part of our secret is that Money Metals runs its own fulfillment operation (rather than outsourcing), has many good inventory sources, and is well capitalized and managed.

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While the others have been jacking up premiums to astronomical levels, we have been able to roll premiums back somewhat on key items including gold and silver American Eagles and 90% (junk) silver.

Moreover, the availability of our new Vault Silver and Vault Gold storage offering has taken some of the pressure off of our other inventories.

With Vault Metals, Money Metals clients now have another good option for avoiding the delivery delays and high premiums currently associated with many products, particularly silver.

One reason we created our low-cost Vault Metals storage program – which is built upon a hoard of large commercial gold and silver bars – is to allow Money Metals customers to bypass the production bottlenecks in retail coins, rounds, and bars that emerge during times of high demand.

The supply situation in fabricated products still has the potential to get worse before it gets better. The Royal Canadian Mint and major Swiss refiners including PAMP remain closed. There are also some signs of serious stress in the market for larger gold and silver bars.

But supply troubles may not be limited to retail bullion products. There is an increase in the number of investors standing for delivery of large bars in the futures markets. Under normal circumstances, very few contract holders ever take delivery. All of a sudden, physical supply and demand is starting to matter in the paper markets.

Bullion banks which sold paper gold to investors are now being asked to deliver. However, they have a problem.

They are having to draw on 400 oz gold bars vaulted in London. Their contracts specify 100 oz bars so the larger bars have to be melted. And the Swiss refiners who can convert those bars have closed shop temporarily. Air cargo is also more difficult – disrupted by COVID-19.

The COMEX, as always, is working very hard to help the bullion banks out of their pickle. The exchange massively hiked margin requirements, which contributed to the recent waterfall decline in futures prices for both metals.

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Officials there also changed the delivery rules last week, providing banks with the option to deliver 400 oz and kilo sized gold bars – in London.

However, lower spot prices may now be contributing to the problem that the COMEX and bullion banks hoped to solve.

More people are asking for delivery, and physical bars now carry a significant premium.

Not everyone appears to be buying the story about the supply problems being temporary – the result of a lack of refining capacity and transport. Neither exchange officials, nor the bullion bankers, have explained why meeting delivery commitments in the U.S. is so dependent upon gold vaulted in London.

There is a COMEX vault network in the U.S. with bars which are supposed to be available to meet delivery requirements. So why isn’t that happening?

It appears that while bars may exist in the U.S., too few are categorized as “registered” and therefore can't be released for purposes of making delivery. Prices may have to go higher before the owners are willing to part with actual physical bars.


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