Recently we talked about the increased discrepancy between the physical price of gold and silver bullion, and the exchange prices. Just a brief elaboration on this here today, since what’s transpiring is so unique.
In April when gold fell by $200 and silver by over $5 there was huge activity on the sell side in the exchange, or paper markets. The situation was much the same in the physical, bullion market, albeit with a crucial difference. All of the activity was on the buy side.
Below is a graph for spot gold prices, illustrating the significant price drop. The second graph illustrates the activity in the Shanghai Gold Exchange during the same period.
Source: CLSA Asia-Pacific Markets, CEIC Data
Parallel to the significant drop in spot market prices there was a spike in demand for physical 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.
This is not normal. Huge selling in the spot markets should not be seen together with huge buying activity in the physical market, in a world where everything is normal. Now we all know that we passed the “normal” mark a while ago. Unprecedented stimulus efforts have ensured that the markets are anything but normal.
There will most likely come a point where the physical and paper prices will diverge completely. This will be the zero hour for gold and silver bullion – a potential catalyst for significant price rises.
Until that happens though all you can do is ensure that you continuously add to your bullion holdings.
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