Investors turn to hard assets, particularly gold and silver, when they start to question or lose faith in paper assets such as stocks and bonds. This has been the case in the past, and it is so once again today.
Physical gold is not subject to the same market influences that are seen for paper assets. On a very basic level, the physical gold market is unchanged throughout the course of human history. The relative scarcity of gold ensures a “cap on supply,” and this is one of the reasons why gold has always been thought of as “a store of value.”
In troubled times, the world turns to gold to store value until the danger has passed.
The danger has had many forms in various jurisdictions over the ages. It could be war, irresponsible monetary policy, or it could be an unforeseen event with sudden negative consequences. Economists like to call these events “Black Swans.” I am sure that we can all agree that the current global pandemic would qualify as such an event.
Physical gold has continuously had a convertibility feature that has stood the test of time. In the modern world, we can easily board a plane, and within days, travel to a far off location. But what do we do when we get there?
Sure we have cash, credit cards, and perhaps access to Bitcoin or some other form of “e-money.” We don’t realize it, but our access to a means of conducting exchange for goods and services is not in our control.
What do I mean by this?
Years ago, my friend was living in Cypress when the government instituted strict monetary and banking controls. The “trusty bank machine” only gave out 80 Euros each day, no matter how much you asked it to dispense. This was not a good situation when food prices had risen over 300% overnight – literally. Of course, the food vendors were not interested in any form of payment that involved credit. Cash was the only way to buy food and water.
This is where you have to stop and think.
If I had a gold coin in my pocket, would there always be someone who would exchange their cash for your gold? One such person, the food vendor, immediately comes to mind.
The same coin, a week or two, or perhaps many months later would still retain value, no matter how the fiat currency behaved in the interim.
Unlike fiat currency that can be debased by overprinting, physical gold remains unchanged.
Physical gold has always had worldwide acceptance and value over many, many centuries. Fiat currencies, other the other hand, have a long and interrupted history of becoming virtually worthless.
World Economies on Pause – Now What?
The world has never seen major economies push the “pause button.”
Not to sound too dramatic, but what is happening today is analogous to an emergency room situation where the patient’s heart has stopped beating; ER doctors slap on the cardiac paddles, shout “Clear!” and hope for the best. Most of the time, it works. But sometimes it does not.
We have not gotten to that critical moment…but it is coming.
Is that why investors want something to hold in their hands? Something golden?
Bullion Dealers No Longer Sellers But Middlemen
People all around the world want gold. They want it so badly that some coin and bullion dealers have no way to fill demand except to poll previous buyers to see if they would part with their gold. Here is a quote from one such dealer based in Ireland:
“People want to buy, not to sell gold,” said Mark O’Byrne, the founder of GoldCore, a dealer based in Dublin. “We have a buyers’ waiting list, and we emailed our clients seeing who wished to sell their gold. At this time, there are roughly only one or two sellers for every 99 buyers.”
Bloomberg – Gold Dealers Report Big Shortages of Small Bars and Coins – by Elena Mazneva – April 1, 2020)
And this from the same article:
“Those smaller items (one-ounce bars or coins) are getting hard to find for several reasons. First, of course, demand has exploded. But there’s also been pressure on supply, as global travel shuts down and some refineries and mints have stopped operating or capped production because of local lockdowns.”
Physical Gold Market Premiums Create Wider Gap Between Spot Gold Price and Physical Gold Price
Since the start of 2020, the price of physical gold tracked the spot price. Now, this is no longer the case. Physical gold is sporting a substantial premium over spot gold. Massive customer demand is driving this price differential. Lack of physical supply makes physical buyers willing to pay a premium.
The “gold cupboard” is getting pretty close to being empty.
Spot prices are starting to rise once again. A re-test of the $1700 level seems likely in the near term.
Some gold mines have stopped operating, and others can be ordered closed by governments. The interruption of the supply of reagents necessary to continue operations is another real concern of gold miners.
It looks like another “perfect golden storm” is just around the corner….