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Investors Go Crazy for Gold and Silver

20 March 2020

Precious Metals Commentary

What a week! US precious metal prices continued their fall. As we have noted in previous updates, one force is the rush to cash by traders to either make up margin calls or for safety reasons as is the lack of Asian demand where high domestic prices in local currencies has encouraged cash for gold selling.

Australian investors have not been as hard hit as American’s as our dollar has also been swamped as traders see our export business being affected by global economic contraction. This means that local prices have held up well, providing investors with wealth protection sorely needed these days.

Gold Spot  U.S Dollar Chart
As you can see in the chart above, the US gold price (in red) has fallen back to the range it traded in around the end of last year and it should find support at this level. In contrast, you can see that gold in Australian dollars has held up well.

Trading has been particularly harsh in silver, where traders have focused on the drop in silver’s industrial usage ignoring, in our view, the fact that the current strong investment demand for it is likely to continue (and we have seen reports that India is coming into the market in a big way).

Silver U.S Dollar Chart
This chart shows that while the US price has fallen well below its support levels the Australian silver price has dropped back to the levels it was mid-2019 as the falling Australian dollar softens the loss.
 

Shortages

This week saw unprecedented government action to get on top of the developing COVID-19 situation in Australia to avoid what we have seen in other countries.

Not surprisingly, the combination of continuing falls in financial markets across all asset classes, societal restrictions and talk of further controls has investors running to safety.

ABC Bullion has seen an acceleration in volumes and this has been the case across the whole physical bullion industry talking to our many contacts.

What has confused many is that they can see the massive demand for physical gold and silver while at the same time the price of the metals has fallen – at least in US dollars. The volatility in the spot price reflects a battle between the physical market and paper desk traders and trend following algorithms.

This week has seen articles that were similar to those back in the global financial crisis – stories about shortages and that the physical market and the paper market are, or have, disconnected.

The driver behind those stories has been the reality of physical products selling out and going on back order along with increases in premiums. This has been particularly the case in America, which has this week only really woken up to the threat of COVID-19 - resulting in increased demand for physical gold and silver.

For ABC Bullion, our refinery has no problem with supply as we have around 43% of the Australasian refining market, which equates to a “total combined refining throughput of 12,600,000 ounces of raw gold and silver from Australian mines” according to research firm Refinitiv.

So what gives? Well if everyone was willing or able to take gold or silver granules, or the wholesale market sized 400oz gold and 1000oz silver bars there wouldn’t be a problem. The issue is that it takes a lot more time to produce and cast the many various sizes of smaller bars. For example, one 400oz bar is a lot quicker to make than 400 x 1oz bars.

With the bullion industry getting caught out in 2008 by retail demand for precious metals, ABC Refinery invested heavily in the world's first fully automated cast base production line. You may have seen it in this video interview we did with Jim Rickards last year.

Video Interview
That machine handles granulating, weighing, melting, weight checking, stamping and packaging in a fully automated way. The big long orange box in the background is the melting tunnel and it is basically a pizza oven for cast bars – granules in a mould go in one end and a cooled cast bar comes out the other end.

We use the pizza oven analogy because it illustrates the bottleneck on the process – only so many bars can work their way through that oven per hour.

We just want to close with one final point. When demand exceeds production capacity as it has these past weeks, there are only two ways it can be dealt with:
  1. Put products on preorder and extend delivery times
  2. Increase premiums

A lot of the shortage and price disconnect talk we have seen comes out of America because in most case dealers there go with option two. We understand why they do it, because they either buy from a master distributor or from a refinery/mint. When their stocks run low, they put premiums up because they don’t know if they will be able to get enough (or any) replacement stock as they are down the supply chain.

For ABC Bullion, we prefer option one and are doing our best to avoid premium increases on ABC Bullion products because:
  • We have plenty of metal from our mining clients that is backed up waiting to get put into the automated bar machine.
  • We feel it is un-Australian to limit product to only those who can afford to pay more – we’d rather deliver metal sequentially to orders as they were received as we want everyone to be able to protect their financial wealth with precious metals.
Overwhelmingly you agree with us, as we have had very few clients complain about products going on preorder and our extended delivery times. That means a lot to us, as it is a real vote of confidence by you in our business but it also reflects, we think, the Aussie sense of community and egalitarianism.
 

Tips on Buying

To help us get gold and silver to everyone as quickly as possible:
  • If your want to collect your metal, our office remains open but consider ordering and paying online (you can deposit cash directly into our CBA bank account) as it will speed up your collection.
  • For deliveries look at buying online – it is a simple process.
  • There is a very limited range of products available for purchase in our offices – check online first to see what products have “pre order” on them to save yourself a trip into the city for something you won’t be able to pick up immediately.
  • If you have an account with us but have never traded online before, simply go to abcbullion.com and enter your email and 5-digit client code in then click the “forgot password” button. This will allow you to set a password and then login to your online account.
We appreciate your patience with us during these difficult times.

Until next time,
 
John Feeney and Bron Suchecki
ABC Bullion
 
If you have any questions or feedback about this week’s report, we would love to hear from you. You can contact John Feeney (@JohnFeeney10) and Bron Suchecki (@bronsuchecki) directly on Twitter, otherwise please feel free to send us an email at comms@abcbullion.com.au, or call us during trading hours on 1300 361 261.

Disclaimer
This article has been prepared by Australian Bullion Company (NSW) Pty Limited (ABN 82 002 858 602) (ABC). The information contained in this article or internet related link (collectively, Document) is of a general nature and is provided for information purposes only. It is not intended to constitute advice, nor to influence any person in making a decision in relation to any precious metal or related product. To the extent that any advice is provided in this Document, it is general advice only and has been prepared without taking into account your objectives, financial situation or needs (your Personal Circumstances). Before acting on any such general advice, we recommend that you obtain professional advice and consider the appropriateness of the advice having regard to your Personal Circumstances. If the advice relates to the acquisition, or possible acquisition of any precious metal or related product, you should obtain independent professional advice before making any decision about whether to acquire it.

Although the information and opinions contained in this document are based on sources we believe to be reliable, to the extent permitted by law, ABC and its associated entities do not warrant, represent or guarantee, expressly or impliedly, that the information contained in this document is accurate, complete, reliable or current. The information is subject to change without notice and we are under no obligation to update it. Past performance is not a reliable indicator of future performance. If you intend to rely on the information, you should independently verify and assess the accuracy and completeness and obtain professional advice regarding its suitability for your Personal Circumstances.

To the extent possible, ABC, its associated entities, and any of its or their officers, employees and agents accepts no liability for any loss or damage relating to any use or reliance on the information in this document.

This document may not be distributed or reproduced without consent. © Australian Bullion Company (NSW) Pty Limited 2020.