"The" Gold Price
The recent US Mint coin production suspension has, unsurprisingly, resulted in a bit of a premium developing on small forms of gold and silver. A few people have interpreted this as an increase in the "real" price of gold compared to the "fake" price (ie COMEX) and proof of manipulation.
My view is that coin prices are not the real price of gold and should thus not be accorded too much weight in trying to analyse what is happening in the gold market, particularly as it is small compared to the overall market. There are various prices for gold:
1) Spot Price. This is the price for wholesale 400oz bars for immediate delivery (actually, the market works on 2 day settlement) usually ex-London as traded in the over the counter (OTC) market. This is the "real" physical price and is the basis on which all the other prices are set.
2) Futures Price (eg COMEX). This is the price for delivery in the future (ie whenever the next contract is). Americans love to quote this price like it is "the" price of physical gold. It is not, it is a future price. It is related to the spot price, with differences reflecting the relative costs of borrowing cash and gold. COMEX type prices are just an exchange traded version of the OTC forward price, which is a lot more flexible as you can set any date of maturity and amount.
3) Exchange Traded Fund Price (eg GLD). This is a proxy for the spot price, because it is based on physical gold in 400oz bar form. Because any significant dealer can deliver physical (or take delivery) in exchange for shares (or deliver shares) its price will never significantly diverge from the Spot Price except to reflect the costs associated with the share creation/redemption process.
4) Retail Price. The price for small, non-wholesale amounts of physical gold (coins and bars). It is usually priced based on the spot price plus an additional fee to reflect the cost of turning 400oz bars into smaller sizes. This is a physical price of sorts, but it is not the spot price and can diverge from it if manufacturers don't forecast demand correctly and run out of or get too much inventory. All that is occurring is that the premium to the underlying gold value (based on the spot price) is changing based on shortage or excess of small forms of gold. Until the manufacturers can get metal from the spot market and convert it into small forms, the retail price will continue to diverge from its normal price.
The first three prices, because they can be traded in large quantities for wholesale forms of gold, will always stay in alignment. Why can I be so confident? Because I am relying on one of the few certainties in life - people like to make money. As the first three prices are for forms of gold that can be interchanged with little cost and delay, they are easily arbitraged. You can be 100% sure that no bullion market dealer is going to forgo easy profit for any length of time. Therefore there is nothing "fake" about the COMEX or ETF price - they are intimately linked to the spot price.
In contrast, the retail market price will diverge from the other three prices because wholesale forms of gold are not quickly or cheaply convertible into small forms of gold that the price represents. Arbitrage will still occur as manufacturers are not going to sit by while large coin/bar premiums go begging, but the response will be sluggish due to the lead times in making retail products.
Also note that what we see happening in the retail physical market or GLD or COMEX is but a small part of the overall market. As discussed in this blog what we can see represents about 2% of the entire gold market. By far the majority of trading occurs in the OTC market. If you want to know what is really happening, you need a contact in the industry who deals in large volumes. For most commentators this is not possible, so all they have to work with is GLD or COMEX or the US Mint's little problems. Unfortunately, this lack of information means people are over emphasising or extrapolating what happens in the markets they can see, resulting, in a lot of cases, the wrong conclusions.
My view is that coin prices are not the real price of gold and should thus not be accorded too much weight in trying to analyse what is happening in the gold market, particularly as it is small compared to the overall market. There are various prices for gold:
1) Spot Price. This is the price for wholesale 400oz bars for immediate delivery (actually, the market works on 2 day settlement) usually ex-London as traded in the over the counter (OTC) market. This is the "real" physical price and is the basis on which all the other prices are set.
2) Futures Price (eg COMEX). This is the price for delivery in the future (ie whenever the next contract is). Americans love to quote this price like it is "the" price of physical gold. It is not, it is a future price. It is related to the spot price, with differences reflecting the relative costs of borrowing cash and gold. COMEX type prices are just an exchange traded version of the OTC forward price, which is a lot more flexible as you can set any date of maturity and amount.
3) Exchange Traded Fund Price (eg GLD). This is a proxy for the spot price, because it is based on physical gold in 400oz bar form. Because any significant dealer can deliver physical (or take delivery) in exchange for shares (or deliver shares) its price will never significantly diverge from the Spot Price except to reflect the costs associated with the share creation/redemption process.
4) Retail Price. The price for small, non-wholesale amounts of physical gold (coins and bars). It is usually priced based on the spot price plus an additional fee to reflect the cost of turning 400oz bars into smaller sizes. This is a physical price of sorts, but it is not the spot price and can diverge from it if manufacturers don't forecast demand correctly and run out of or get too much inventory. All that is occurring is that the premium to the underlying gold value (based on the spot price) is changing based on shortage or excess of small forms of gold. Until the manufacturers can get metal from the spot market and convert it into small forms, the retail price will continue to diverge from its normal price.
The first three prices, because they can be traded in large quantities for wholesale forms of gold, will always stay in alignment. Why can I be so confident? Because I am relying on one of the few certainties in life - people like to make money. As the first three prices are for forms of gold that can be interchanged with little cost and delay, they are easily arbitraged. You can be 100% sure that no bullion market dealer is going to forgo easy profit for any length of time. Therefore there is nothing "fake" about the COMEX or ETF price - they are intimately linked to the spot price.
In contrast, the retail market price will diverge from the other three prices because wholesale forms of gold are not quickly or cheaply convertible into small forms of gold that the price represents. Arbitrage will still occur as manufacturers are not going to sit by while large coin/bar premiums go begging, but the response will be sluggish due to the lead times in making retail products.
Also note that what we see happening in the retail physical market or GLD or COMEX is but a small part of the overall market. As discussed in this blog what we can see represents about 2% of the entire gold market. By far the majority of trading occurs in the OTC market. If you want to know what is really happening, you need a contact in the industry who deals in large volumes. For most commentators this is not possible, so all they have to work with is GLD or COMEX or the US Mint's little problems. Unfortunately, this lack of information means people are over emphasising or extrapolating what happens in the markets they can see, resulting, in a lot of cases, the wrong conclusions.
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