Further chasms between physical and paper gold and silver pricing?

Gold keeps breaching all time highs, with the spot price reaching USD 2,819 last February 3.

Traders on COMEX, such as banks like JP Morgan, Deutsche Bank and Morgan Stanley, have booked 3 million ounces of physical gold to be flown, out of London vaults, to New York.

The last time gold was being shipped to the United States from Europe in substantial amounts was during the initial lockdowns last March 2020 (Covid-19 period). Astute investors who understood the importance of minimizing counterparty risk opted to take physical delivery of the metals. The paper price of gold comparing to the physical price resulted in banks paying premiums as high as USD 90 per ounce during this time (gold was trading at USD 1,500 per ounce that time, resulting in a 5-6% differential).

With the lessons learned during Covid, because there is possibly as much as 100 times more paper silver and gold compared to the amount of physical bullion backing them, and due to the uncertainty on whether future gold imports into the US would be subject to tariffs, banks are pre-empting by taking physical delivery in case of client demand as well as potentially profiting by arbitraging between New York and London gold prices.

The London gold market is facing an unprecedented strain to cope with the demand for physical, with delays in physical gold deliveries from the Bank of England’s vaults surging to 4–8 weeks rather than the usual 2 or 3 days.

We also received a surprise notice from some of the largest gold refiners that physical gold premiums have doubled on Monday, pending further notices.

For the first time in a long time, massive amounts of silver are being airflown in the US instead of the slower and cheaper means to transport via seafreight. Please refer to this news link on The Edge for more information.

While gold continues to surge in value, it is worth paying attention to silver as well which, while positively correlated with gold, has not yet outperformed gold in the past couple of months. We at Silver Bullion continue to stockpile and augment our own long position on silver, which due to the gold silver ratio at 89 to 1 is still considered undervalued and may possibly outperform gold in the medium term.

Should banks continue to bring in gold into the US at such amounts, the relative physical scarcity of gold and silver will be more highlighted in mainstream media, which would further exacerbate the demand for physical metals.

For clients who are considering a long-term physical position in precious metals, we would recommend to start accumulating positions soon as prices and premiums could climb higher quickly over the following weeks.