I’ve written about the discrepancy between the physical price of gold (and silver) and the exchange /spot prices before.
When you buy gold and silver bullion you pay the spot price plus an additional premium. For gold the premiums typically are lower (5-15%) than for silver (15-40%). During periods of excess demand which typically coincides with stress in the market, premiums can shoot through the roof. This happened during the 2008 financial crisis where premiums for gold and silver actually closed in on tripple digits (80-90%).
During the recent $200 fall in gold prices in the paper markets – the demand for physical gold actually surged – and we saw a clear spike in demand for gold. This development was evident in significantly increased price premiums. This is clearly illustrated by the graph below from the Shanghai Gold Exchange.
Parallel to the significant drop in spot market prices there was a spike in demand for gold. For the last two years the daily traded volume has been below 10,000 kg, but during the tumultuous recent period the volume increased fourfold to over 40,000 kg.
Is there a time when the spot prices will diverge completely from the physical prices? That could very well be the case. Perhaps there will be a “zero hour” in the future where spot prices will collaps and bullion prices surge. This would most likely be triggered by som external event in the markets.
It’s of course impossible to plan for such events. What we as buyers of gold bullion and silver bullion can do is continuously add to our holdings whenever we have the opportunity. Today, we are seeing very attractive prices for all precious metals. Gold is down $500 from its highs. That doesn’t necessarily mean that the price drop is over for this time but it does mean that you seriously should consider adding to your holdings at these levels.
There is no telling if premiums will skyrocket if we see a new drop in prices. You may also see the same kind of supply shortages that we did a month back…or even worse.
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