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Friday, September 30, 2011

Paper vs. Physical

There's an interesting phenomenon going on right now with physical gold and silver bullion.  Not much is being sold locally right now.  This has nothing to do with demand - we've got folks calling and showing up in our shop, fairly begging to buy bullion.  It also has nothing to do with actual supply - we've got plenty of bullion in stock.

We're just not selling.  And we're not alone.

For those of you who don't track this sort of thing, gold and silver have had huge drops over the past week or so.  Going back to September 5th, gold is down about 15% - or around $300 an ounce.  Silver is down about 30% in this same period.

It's been ugly, but it's almost been expected.  And let me say this loudly:  It's likely to happen again, yet my partners and I are still buying as much gold and silver as we can get our hands on.  I believe you should be doing the same (assuming you have cash available, and your food, equipment and self-defense preps are up to snuff.).

Why dat?  Because these recent drops have been caused by the "paper" world of finance.  Stocks, bonds and precious metals contracts.  Every one of these things are leveraged to the hilt.  Just like during the first Great Depression, when the paper world crashes, it can take a lot of other parts of the economy down with it.

But, at the end of the day, if you have physical PMs, you'll have something.

So, why aren't we selling our PM bullion in our store?  Well, we are, but just not at standard premiums.  For instance, one ounce gold usually sells for 3-5% over spot.  We're selling ours, but for a minimum of 10% over spot, usually a bit higher.  Our 1/10th ounce American Gold Eagles are going for around 20% over spot.

If we thought that this recent PM price decline was real - that the economic fundamentals of America were getting better - lower real inflation, lower real unemployment, lower federal deficits - we'd be selling every piece of gold and silver we owned.

But the fundamentals haven't changed.  We've been witnessing a "domino effect" in the paper wealth markets.

As previously noted, Uncle Ben Bernanke introduced Operation Twist.  It caused the stock market to plummet.  This caused the brokerage houses to increase their margin requirements (people that buy stock with only a partial cash payment had to increase the amount of cash in their accounts).  This caused people to sell assets - such as gold and silver - to cover their accounts.  This made PM prices plummet.  This PM price drop caused the COMEX (the market for commodities) to increase THEIR margin requirements, which resulted in further PM price drops.

Individuals are now flocking to physical PMs to take advantage of these drops, and finding them much more difficult to locate.  Virtually every local PM shop I've spoken with is holding firm.  Even our primary regional wholesaler is holding tough.  About the only place you can get gold at "normal" margins is if you buy online., and  They're selling 1 ounce American Gold Eagles for around 5% over spot.  All of them are getting hammered right now, and are posting notices that delivery will be slow.

As we've been telling our customers, if their primary goal right now is to get gold cheap, this is their best option.  The downside is that you have to include shipping and insurance costs, PLUS you lose the biggee - your anonymity.  Still, unless you're making a VERY large purchase, making a purchase or two online shouldn't put you on too many government lists.

For our business, this is obviously a risky strategy - sending customers to competitors.  I can say that every single customer I've spoken with understands what we're doing.  They've all checked other local shops and are seeing we're actually at or below their prices, even with our high margins.  They've all said that even if they do make online purchases, they will be back because they love our customer service, immediate possession and anonymity.

Time will tell....

A related aside:

Speaking of anonymity,  please tell me that you don't use any of the "social media" - Facebook, Twitter, LinkedIn - in your real name.

I get a lot of requests from friends and former customers of my gun business to be a LinkedIn friend (or whatever they call it).  I send them an email letting them know that I don't participate in those sorts of media.  Most are OK with it.

I don't see the benefit to me for doing this.  It seems like all of these social media gigs are little more than popularity contests.  The more "friends" you have, the better of a person or business you must be.  Pretty shallow.

All I can see is risk.  If I get a hair up my butt and say something bad, it's there online forever.  Yeah, yeah, yeah, they say you can delete your stuff, but I know this to be untrue.  Once it's digitized, it's there forever.  It might be there on some back-up tape or in some directory that's not public, but it's there.  And it will raise its ugly head at the least opportune time.
Copyright 2011 Bison Risk Management Associates. All rights reserved. Please note that in addition to owning Bison Risk Management, Chief Instructor is also a partner in a precious metals business. You are encouraged to repost this information so long as it is credited to Bison Risk Management Associates.

1 comment:

Joseph said...

One other item related to the recent price drop is Hedge Funds. They're having some major problems right now and were probably involved in the recent price drop as well to cover their rears since they usually margin themselves significantly.

25% Of Hedge Funds Industry To Follow Into That Good Night