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Banks Crumble, Wait for Physical Bullion Gets Longer
 | By Patrick A. Heller, Market Update
September 16, 2008 |
What has happened to the U.S. dollar, stocks and precious metals markets in the past week has followed almost exactly the script I wrote seven days ago. There has been so much media coverage that I won't repeat all the details here.
However, there are two significant negative effects of the U.S. Treasury's takeover of Fannie Mae and Freddie Mac. First, the takeover constituted an act of default on the trillions of dollars of outstanding derivative contracts with Fannie Mae and Freddie Mac, which now need to be promptly unwound without regard to losses. Second, the wiping out the equity of Fannie Mae and Freddie Mac shareholders affected shares held by many investment and hedge funds, which put several of them into horrible financial straits. The effect of these two factors have added to the other financial pressures that have been reported elsewhere.
On Sept. 15, Lehman Brothers Holdings, Inc. announced that it was filing for Chapter 11 bankruptcy. Bank of America announced that it was purchasing Merrill Lynch for a 60 percent premium above that company's Sept. 12 closing stock price. Insurer AIG revealed that it is was seeking an emergency $40 billion loan from the federal government.
In addition, 10 large banks and brokerages announced that they would each contribute $7 billion to create a $70 billion fund to provide emergency liquidity to the U.S. financial industry. Although this is being reported as a source of private funds, don't be fooled. This money is ultimately going to come out of the taxpayers' pockets. The sponsors - Bank of America, Barclays Bank, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, and UBS - are all facing billions of dollars of losses (or worse) in the coming months.
With all this bad news developing over the weekend, the price of gold soared $25 in Asian markets early Monday, Sept. 15. As soon as the U.S. government's trader showed up on the London exchange, almost all of this price gain disappeared. It would take until late in the U.S. markets to return to about $25 over Friday's close.
For the day, the U.S. dollar index fell about 0.4 percent, the Dow Jones Industrial Average dropped 4.4 percent and the prices of gold and silver were up 3 percent each.
You might be curious about trading activity in physical gold and silver. On Monday, Sept. 15, my firm enjoyed its highest single-day sales since March. Virtually everyone was a buyer. The buyers were in an urgent mood, eager to write a check to get whatever they could acquire. I wouldn't say they were panicked, but it was leaning in that direction.
For the past two months, demand for physical gold and silver has been so strong that many coin and bullion dealers and wholesalers have had difficulty having any merchandise in stock for live delivery. Premiums are up sharply. Today, you can expect to have to pay $5-$20 per ounce above the gold spot price for coins compared to their premiums in early July. For silver, premiums have climbed $1-$3 per ounce relative to spot compared to early July premium levels.
If you want to purchase physical gold or silver, do not expect to find any in stock for immediate delivery, though you might be lucky enough to be in the right spot at the right time. As best as I can determine as of late Monday, Sept. 15, here is what delivery times customers are facing for obtaining physical gold or silver:
Gold coins that can be purchased for delivery within two weeks: Mexico 50 pesos, U.S. Buffaloes, all four sizes of U.S. American Eagles, and limited quantities of U.S. American Arts gold medallions.
Gold coins and bars that can be purchased for delivery in two to eight weeks: Austria 100 coronas, Australia Kangaroos, Austria Philharmonics, 1-ounce gold ingots, and China Pandas.
Gold coins that are virtually unobtainable: most dealers and wholesalers will not accept new orders (but you might get lucky once in a while) are British sovereigns and South Africa Krugerrands.
Silver coins available for delivery within two weeks: U.S. 90 percent and 40 percent silver coins.
Silver coins available within a few weeks if you find the right dealer: Canada silver Maple Leaves and U.S. silver Eagles.
Silver bars available within two months: 100-ounce and rectangular 1- ounce ingots other than Engelhard and Johnson Matthey brands.
Silver coins and bars that are virtually unobtainable so most dealers and wholesalers will not accept new orders: all Engelhard and Johnson Matthey silver ingots, 1-ounce silver rounds (most fabricators are quoting 4-6 months for delivery), 10-ounce silver ingots, and any coins and ingots fabricated by the Perth Mint (currently quoting 6-8 months for delivery). I saw multiple reports Monday that even the 1,000-ounce silver ingots that could be delivered against COMEX contracts are virtually unobtainable.
A quantity buyer of gold or silver might have the idea of simply buying a COMEX commodity contract and asking for delivery. In theory, you can purchase a spot month contract and get delivery within a few weeks. However, one Dubai bullion dealer stated emphatically this past weekend that it is now taking months to obtain delivery of physical metal on a COMEX gold or silver contract.
This may sound strange, but I do not recommend purchasing gold or silver as an investment. Don't buy either with the thought that you will buy it low and sell it high. Instead, buy precious metals as a form of insurance that you will hold until you die and pass it along to your heirs. Then, if circumstances develop where you need to sell your gold and silver, think of it as collecting on your insurance policy. For insurance purposes, buy only physical gold and silver and take personal delivery. There are several vendors of gold and silver certificate programs that look mighty shaky right now. You won't be able to trade a silver certificate for gasoline or bread, if things get really bad.
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