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Precious Metals Comment for Dealers and Investors

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posted on Apr, 21 2013 @ 07:47 AM
Over the last week we had an historic washout in Gold and Silver....but if you look at prices for Silver bullion coins (esp American Eagles) they are "offered" for about where they were pre-crash despite the market being several dollars lower. This is because of the premium which is a) reflecting the knee-jerk demand to buy at lower spot prices and b) both the concomitant lower supply available and the unwillingness of dealers and investors to sell physical metal (vis a vis derivative contracts) in the hole. Most dealers do not use these markets to hedge their inventory and are reluctant to sell at a loss there (preferring to hang on). Investors (of physical) are usually long term players and prefer to add to holdings on sharp drops (especially if they sold higher over the last two years). But there is another problem that is hurting the viability of the market place and that is not just the premiums but the SPREAD between the Bid and Ask. IF an investor wanted to sell silver at $25 on the way down with the intent of buying it back at $21 (a $20,000 move per 5000 oz futures contract) then he/she would be wasting their time because of sharp increase in premiums of a like amount. Prices would have to drop to levels that are unlikely for the investor to be able to rebuy at a net gain. Granted the large dealers are bidding over spot (up to $3 prem) to buy but they are offering at approx $6 over (if they have sizeable stock) and smaller dealers are even asking more.

In Asia the investors there actually buy pure gold jewelry (wearable) for investment and they often sell them back to dealers who maintain tight spreads of down to 4%. In this country precious metals dealers are maintaining bid (buy) / ask (sell) spreads of between approx 12 and 25%! This spread may be benefiting the dealer (and rationalized by the volatility) but it is hurting the market for physical and freezing up turnover. Dealers, in order to manage your risk I suggest learning about the futures and options market to hedge your inventory when prices are either high (2 years ago) or heavy (2 weeks ago). This will enable you to maintain tighter spreads and give viability to the marketplace - to the benefit of all participants. Investors, dont be afraid (fear and greed rule) to stand back if spreads get too crazy....afterall shouldnt you be able to buy for less after a crash than before?

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