The Commodity Investor: Physical Gold Market Feeding Off Paper Market Selling

May 21, 2013

The new dichotomy of the physical investor buying while the paper investor is liquidating is a healthy sign for the gold market.


The gold market is a complicated global entity. As prices have nose-dived this year as a result of investor sell-off, certain corners of the market have showed surprising resilience. In particular, the retail physical market primarily focused in Asia has been extremely robust.

It is not news that gold prices have suffered a painful drop this year, especially in April. This is to be expected since gold has not had a single down year in more than a decade. In particular, we haven’t seen a sharp correction of this magnitude throughout this time period (2008 being an exception). So this sell-off is not only to be expected, it is actually healthy for the long-term secular bull market thesis. This is not the time to panic.

Gold Prices Down, Bullion Demand Up

One of the peculiarities of the gold market is its fragmentation. As investors in London, New York and Berlin sell off massive holdings of gold through ETFs and other derivative products, we’ve seen quite the opposite occur in places such as Dubai, Mumbai and Shanghai. There is no question that investors around the world have sold off gold holdings, which is one of the reasons for the price drop. However, in the midst of this sell-off, we see that a countertrend has developed in the physical market.

Dealers in Mumbai, Dubai and Shanghai are witnessing record demand from local physical buyers. Encouraged by the lower prices, these retail clients have flocked to dealers trying to get their hands on gold while it is trading at these levels. This dichotomy is reflective of the market and how complex it is. While the price in international exchanges has been dropping, it has only served to increase demand for physical bullion.

In Dubai, which is sometimes known as “The City of Gold,” merchants in gold souks (markets) have seen such a sharp increase in demand for physical bullion that their premium (the spread between cost and purchase price) is off the charts. Usually, the premium that dealers charge above the current market price ranges between $0.50 and $1.00 above the quoted price (usually the London PM fix price).

In the month of April, that spread rose to $10 in Dubai as customers were willing to pay that huge premium in order to secure their physical gold bullion. In markets such as Istanbul, that premium reached $25 in some cases. Buyers calculated that it made more sense to buy gold at $1,380 per ounce with a $10 premium, rather than pay $1,750 per ounce with a $1 premium.

The demand for physical gold has increased so much that gold dealers in Dubai and Mumbai have reported shortages of bullion.



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