I have long advocated that owning physical gold is the cornerstone of a prudent portfolio. How much is up to you, but in my estimation it should be somewhere north of 10% of your total holdings.
I have recently had difficulty trying to help a few individuals obtain the gold and/or silver they desired. In my 6 years of being a very active gold/silver investor, I have never seen anything like this. Product is hard to find, and getting harder.
The "official price," as set by the paper traders in the NY Comex pits, is miles away from the actual price you’d have to pay to actually get real physical gold, and growing wider by the week.
This "spread" between the "official" spot price and the real price you’d have to pay has doubled for gold in the past month and is now a whopping 40% for quality silver product.
And that’s if you can find any.
Today the US mint announced that "due to high demand" they are ceasing production of a wide range of gold products.
[quote]US Mint halts some American Eagle coin production
NEW YORK, Oct 7 (Reuters) – Unprecedented demand for precious metals and volatile markets forced the U.S. Mint to cease production for the half-ounce and quarter-ounce popular American Eagle gold coins for the rest of this year and to supply other bullion coins on an allocation basis.[/quote]
The ‘explanation’ given is that with demand so high the mint has decided to cease production so that it can "catch up". I am no production expert, but halting production seems like an odd way to go about "catching up".
What makes more sense to me is that the US Mint is running out of stock material with which to work. That fits the decision like a t-shirt that’s three sizes too small.
At Colorado Gold, a very reliable gold dealing website, these messages now grace the front page:
[quote]Gold: No Credit Suisse, Buffalos, Maple Leafs, or tenth ounce or half ounce Gold Eagles till you see it here
Silver: SORRY. NO SILVER ORDERS ACCEPTED TILL ALL EXISTING ORDERS ARE FILLED. THE MINTS WILL NEVER CATCH UP, IF ORDERS KEEP PILING UP. IT COULD BE SEVERAL WEEKS BEFORE SILVER ORDERS ARE ONCE AGAIN TAKEN.[/quote]
These speak to a broad shortage, because the proprietor of this site has access to all sorts of mints, both official and private. They are all cleaned out.
What happens in a free market when supply is short? Prices rise.
Only this has not been happening, at least not when the US paper markets are open. Between yesterday and today, when it was announced that the Fed was going to buy Corporate Paper in unlimited amounts, possibly drop the interest rate, and double the size of its TAF auctions, gold *should* have gone up a LOT.
But here’s the mysterious behavior of gold, with green arrows marking its price behavior when the US markets are closed, and red arrows denoting the times when the US gold markets are open.
The pattern seems pretty clear to me. Gold rises, unless the US markets are open, and then it is subject to very strange ‘capping’ behavior.
Remarking on this very odd behavior, Jurg Kiener, CEO of Swiss Asia Capital, told CNBC that there’s a huge disconnect between the physical market for gold, which he described as being "on fire," and the official "price", and that if (when?) the paper market collapses, gold prices may double very quickly.
Watch the stunned CNBC hosts as he tells them this in this video.
Last week we heard about unprecedented demand for gold overseas in this Financial Times article:
[quote]Investors in gold are demanding "unprecedented" physical levels of bullion bars and coins and moving them into their own vaults as fears deepen about the health of the global financial system.[/quote]
Here’s my bottom line. The enormous and growing disconnect between the physical gold market and the US dominated "paper gold" markets will resolve in the same way that these battles always do. Reality will win.
I am expecting a very rapid doubling or even tripling of gold’s price at some point over the next couple of months. When this happens, it will be remarkably sudden, and your position will be easy to characterize. Either you already had physical gold in your possession, or you didn’t. If you think physical gold is tricky to find now, you haven’t seen anything yet.
The only wild card for me here will be the extent to which the US government will seek to modify or change the rules, if/when it turns out that the entity(ies) responsible for capping the gold price with aggressive shorting strategies turn out to be "favored" banks that are integral to the bailout implementation. JPM comes to mind.
This is a very real possibility, and it would not surprise me at all to hear that the government allows the JPM short positions to be simply nullified in their favor, stiffing all the people who thought they had invested in gold, when they had actually invested in a paper contract.
Fortunately, you can avoid all this unpleasantness by taking delivery.
by xflies