Demand for gold and silver coins is outstripping supply
October 14, 2008 4:00 AM
By Tim Grant Pittsburgh Post-Gazette
While precious metal prices have fallen from the record high levels set earlier this year, most, if not all dealers, are experiencing shortages, and retail buyers are finding it harder to obtain gold and silver coins.
The U.S. Mint, which never ran out of supply before, has sold out of its 1-ounce gold and silver coins, and the refining company that mints the South African Kruggerand gold coin announced it also had run out of supply.
"Gold and silver bullion is not coming in at a pace we need to satisfy customer demand," said Eddie Lowy, owner of Banner Coin Exchange, Downtown.
Even though he has raised his offering prices to the public for gold and silver coins above the spot price in recent months and cut his profit, Mr. Lowy said, "I'm still seeing very little bullion products being offered for sale."
Gold and silver are known as crisis commodities that tend to appreciate in value under the worse economic conditions. But at a time when many investors are unsure about the government bailout plan and more concerned about the financial system, the price of precious metals has dropped while demand appears to be rising.
The spot price for gold, which traded above $1,000 an ounce in March, has fallen to around $800. Silver, which reached about $21 an ounce earlier this year, now trades for about $10 on the futures market and through exchange-traded funds.
But there is a substantial disconnect between the paper and physical market for precious metals. Buyers who are able to find silver coins will pay more than $20 an ounce to obtain them and around $1,000 an ounce for gold.
"The paper market will eventually catch up with the physical market, or it will destroy itself," said David Morgan, a world renowned silver expert and founder of silver-investor.com in Spokane, Wash.
Mr. Morgan said buyers already have started taking delivery of precious metals from the futures market at the lower price in order to resell it on the physical market at a substantially higher price.
Much of the recent decline in the paper value of gold, silver, platinum and palladium can be traced to the collapse of investment banks and hedge funds on Wall Street, said Peter Schiff, president of Euro Pacific Capital in Darien, Conn., and author of "The Little Book of Bull Moves in Bear Markets."
He said many of the Wall Street firms devastated by the credit crunch were forced to sell their precious metals assets to shore up their balance sheets or meet leverage calls. The avalanche of sales in the paper market for precious metals triggered a drop in price.
"Ultimately, people who are buying gold now are doing the right thing," Mr. Schiff said. "The dollar is at risk and a lot of inflation is being created. Gold will retain its value even if they bought it at $950 or $1,000. The drop is only temporary."
Investors who bet on precious metals even at their peak prices are still better off than many who banked on real estate or the stock market at their highest points, said James Turk, founder of GoldMoney.com, based in the British Channel Islands, and author of "The Collapse of the Dollar."
"The paper market has driven the price of gold and silver down to a level that is not sustainable, and you'll see a snap back," Mr. Turk said. "I remain bullish."
Some of the largest wholesalers in the world are out of gold and silver bullion.
A representative at Monex, a gold dealer in Newport Beach, Calif., said the company was out of three-quarters of the bullion products they normally carry. Kitco Bullion Dealers in Canada recently posted a notice on the company's Web site apologizing for its inability to fulfill all existing client orders.
"It feels like the eye of the hurricane," said Blaine Shiff, co-owner of Cybercoins.net in Dormont. "Something is up. But I don't know what."
He said a Pittsburgh customer recently ordered $50,000 in gold bullion, but despite his best efforts to fill the order, he could not find any nationwide.
"I'm not saying there's nobody who has gold," Mr. Shiff said. "But of the places we have a working relationship with for over 30 years, none of them has any."
In volatile times such as these in which there is a credit crisis and growing doubt about the stability of the financial system, gold is unique in that it has no counterparty risks. It is a tangible asset that is not dependent on someone else's promise.
While it's uncertain how much the federal bailout plan will do to help calm the financial markets, Addison Wiggin, executive producer of the movie "I.O.U.S.A." and founder of Agora Financial in Baltimore, is convinced that it will lead to higher inflation and higher prices for precious metals, which are a hedge against inflation.
The bailout tab so far, he says, will add about $1.8 trillion in government debt along with massive amounts of lost equity for stock market investors.
"A huge amount of institutional money is in three-month Treasury bills on the sidelines," Mr. Wiggin said. "My guess is things will start shaking loose after the election. As these three-month T-bills mature, they will either roll back into Treasuries or into precious metals."
Kevin DeMeritt, president of Lear Capital, a precious metals dealer in Los Angeles, said he expected to see the spot price for precious metals begin rising to meet the unofficial physical prices within a month to a month and a half.
"The cost of getting an ounce of gold out of the ground now is $800 an ounce," he said.
"I think you have a great floor being built in the $800 range, and then we'll see gold make its move over the $1,000 an ounce range as the market takes a look at what the supply really is and the cost of it."