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Prices Drop but Demand Goes Up
By Patrick A. Heller
July 02, 2013

Did gold and silver prices finally reach bottom after last week’s drop?

That is a great question to ask since, as I write this July 1, both prices are up more than 5 percent from their lowest intra-day prices reached late last week. Gold hit bottom in the upper $1,180s June 28 while silver got all the way down to $18.24 at one point June 27. When prices started to rise Friday, customer demand experienced another surge. This higher level of buyer interest continued on Saturday and into Monday.

Well, I looked into my crystal ball. The answer to the question I posed is (drum roll, please) – Maybe.

When gold and silver prices are generally rising or falling, they never move in a straight line. In an overall bull market, there will be sell-offs and profit-taking. In a bear market there will be temporary recoveries as prices reach down to certain triggering thresholds.

When market prices such as gold and silver are heavily suppressed, as I have tried to document over the years, you have to have a good understanding of which target spot prices would trigger traders and investors to bail out of the market and themselves contribute to falling prices.

For the gold market, the estimates I received from those who seem to be the most astute market watchers have either pegged $1,200, $1,155, or about $1,089 as the rock bottom point for a turnaround. Gold has now hit one of those targets, so that could be the bottom. However, most of these same savvy analysts also expected one more major market hits before things turned around. If the price of gold on this recovery can make it above $1,340 and sustain it for at least three consecutive trading days, that could indicate that last week’s bottom is it.

As for silver, there seems to be a general consensus among these knowledgeable observers that a price somewhere above $18 would be the very bottom. However, once again they did not expect silver to reach bottom for another four to eight weeks. Silver would have to rise above $24 on the current recover to demonstrate that last week’s low was the real bottom.

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It is not out of the question that there could be one more major pounding in gold and silver prices before they resume rising in earnest. The U.S. government and its trading partners and allies can make sizeable profits if investors believe that prices are on the way up and decide to buy physical metals. The feds can let prices run a little bit, then clobber them once more with massive short sales of paper contracts that they then buy back after prices fall. This tactic has scared several would be purchasers of precious metals away from the market.

By saying “maybe” I’m trying to be realistic that we are not necessarily at the final bottom price. If we are, obviously it is a good time to purchase gold and silver. If not, then we are close enough that it probably doesn’t matter much if you buy today and ride out another bout of weak spot prices.

Since last week, one major news development was announced. Russia is planning to expand its precious metals paper-contract trading precious metals exchange so that it will also trade physical gold and silver by the end of this year and in platinum and palladium by the end of 2014.

China is also to develop a gold and silver physical trading market in Shanghai, although this project will be severely hampered by China’s restrictions on capital flows into and out of the country and by the limited number of companies authorized to import physical gold.

To the extent that Russia manages to establish a commodity exchange that trades physical gold and silver, it is entirely possible that the COMEX and London Bullion Market Association exchanges for trading paper contracts could become obsolete. From that point onward, the prices of actual physical metals would likely dominate the pricing of gold and silver, with the paper contract markets falling by the wayside.

After gold and silver prices fell last Thursday, the premiums for many silver prices edged upward. In many instances, this was simply a matter of the lower silver price making the dollars and cents premium to spot to be a larger percentage. As an example, a $1 premium at $20 spot is 5 percent whereas it would only be 2.5 percent if the spot price were $40.

When prices started to recover Friday afternoon, with silver reaching its highest levels in about a week, premiums came back down. The one recent major shift in the market has been the declining demand for circulated Morgan and Peace silver dollars. As a result, the retail price to purchase a 1,000-coin bag of very good or better Peace dollars is down about $3 per ounce less than it was a week earlier. In my judgment, the premium is still too high to make them an attractive option right now. A little over three years ago, you could acquire bags of these coins for about 13 percent above silver value. With prices now 60-70 percent above the intrinsic silver value, their appreciation prospects are limited.

For some silver bullion-priced products, deliveries are now about a week slower than they were a mere seven days ago. But, at least you can still get product. At the end of June, the U.S. Mint had sold over 25 million silver American Eagles, a new record for the first six calendar months, beating 2011’s record pace by about 3.5 million coins.

As for gold bullion-priced coins and ingots, the premiums today are pretty much the same as they were a week ago, with most delivery time frames largely unchanged. British Sovereigns, which were not previously plentiful, have become even tougher to locate. If prices continue to rise in the coming week or two, delivery times could become more delayed.

 

Patrick A. Heller is the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He owns Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Other commentaries are available at Coin Week and CoinInfo.com. He also writes a bi-monthly column on collectibles for “The Greater Lansing Business Monthly.” His radio show “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing.


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