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In a recent
interview conducted by Jeff Clark of Casey Research and self-declared as The Best Gold
Interview of 2010, Andy Schectman of Miles Franklin discusses the
future supply situation in the retail bullion market. Unfortunately, most
people who have been around the block in the gold market will not find his
views to be particularly insightful or surprising so we’d like to spice
things up a bit by adding our own contrarian arguments and twisted
perspective.
Among Mr.
Schectman’s not-very-extraordinary claims is that the apparent shortage
of gold and silver bullion and the resulting premiums that arose during the
financial crisis in 2008 were caused by extremely strong demand from panicked
retail buyers. Mr. Schectman then warns us that we should expect more retail
shortages in the future. We can’t really argue with his logic but we
believe he is only telling half the story given that many dealers were in
fact rationing their existing inventories as a result of low bullion prices.
Simply put, the dealers were unwilling to sell the shelves bare at prices so
terribly low.
While it is true
that bullion dealers are running a business like everybody else, most of them
are also gold (and/or silver) bugs and consequently have much of their wealth
sunk into their business in the form of bullion inventory. That way when the
eventual and inevitable price spike to $5,000 gold and $500 silver comes,
they can sell it all and retire as billionaires. This might not be the case
for the large corporation-style dealers or the tiny numismatic coin shop
mom-ann-pops but there are a lot of dealers between those two extremes. Their
inventories are typically not hedged or only slightly so. More to the point,
these dealers are expecting the big score along the way and would only sell
out at a loss under desperate circumstances.
So, what’s
our point? That retail demand is only half the story: even without it,
we’d see dealer inventories disappear during severe price declines.
Consequently, we won’t share Mr. Schectman’s enthusiasm unless we
see widespread, sustained retail shortages while gold and silver trade at
record high
prices. Call us crazy if you must, but so far the shortages during high
prices have been regional or of very limited duration. And while logic
dictates this will not always be the case, logic is not the same thing as
reality.
One instance of
reality is that the bull market peak in late 1979 and early 1980 brought a
veritable flood of retail selling even while buying was at record levels as
well. The retail selling was significant enough at times that many bullion
products didn’t command a premium but rather sold at a discount. The
highest bidder was often the refinery. With the purported market price of
silver near $50 per ounce, for example, junk bags of 90% U.S. silver coins
exchanged hands at a price closer to $30. Not coincidentally, that $30 also
happened to be the melt price the refineries were paying dealers. Many a bag
of old U.S. silver coins, not to mention bona fide numismatics including rare
Morgan silver dollars, thus met their end in the Great Silver Melt of 1980.
In fact, the “best” form of bullion to have owned during that
bull market peak was actually COMEX deliverable bars since they could be sold
(by futures exchange for physicals) at the same price that COMEX futures
contracts were trading. Indeed, only people holding COMEX deliverable bars
had a reliable chance to cash in anywhere near $50 silver or $850 gold during
the 1980 peak.
This time around
the situation could prove to be radically different — sellers will
probably not be lining up in droves in front of dealer shops — but it
might be because of something that Mr. Schectman does not mention: the development of
“P2P” exchanges such as the auction site eBay that could
eventually cut dealers completely out of the secondary market. So far these
retail exchanges have been a mere annoyance to the dealers although sometimes
you can find dealers who will sell and even buy on eBay. Such retail
exchanges could, however, eventually dominate the secondary bullion market
especially if we are to believe the outrage from gold dealers about the
“hidden tax”
in the recently enacted health care legislation.
Indeed, we find
it difficult to reconcile dealer complaints about the new transaction
reporting requirements with Mr. Schectman’s suggestion that going
forward there will be little if any supply available from retail sellers. If
that were true, there should be little actual impact from a new “tax
law” that requires virtually all bullion purchases from the public to
be reported by dealers to the Internal Revenue Service. It appears to us that
either the complaining dealers are right or Andy Schectman is right.
Alternatively,
they could both be telling only half the story: the likely outcome is an
acceleration of the secondary bullion market’s transition to P2P
bullion exchanges that offer retail investors the most privacy, the widest
selection and the best prices. If so, generic auction services like eBay are
likely to be joined by several new offerings in the near future while recent
P2P applications dedicated to the bullion market such as SeekBullion and
the Nucleo Exchange at Bullion Direct are likely to
expand significantly. For this to happen, however, there is a need for
independent bullion escrowing and verification services that enable trusted
transactions to take place between individuals while avoiding new transaction
reporting requirements. Another option would be P2P exchanges being set up within
member-based organizations where escrow and verification could be handled
internally.
A credit union
can, for example, set up a private bullion exchange for its members and even Metal Augmentor can set up a private bullion exchange for our subscribers. All it
would take is a very simple software platform (even a user forum or mailing
list would suffice), a basic template for the business process and some
training in bullion authentication. In fact, we’ve already drafted a
conceptual business plan on the back of a napkin and would be willing to work
with anyone interested in developing it into a viable business
opportunity. There’s probably not much money to be made initially but
it is exceedingly simple and would help ensure a healthy secondary bullion
market in the U.S. (or any other country for that matter). After all, gold
and silver need to be more widely owned and must also be exchanged from time
to time instead of merely accumulated and hoarded as a prerequisite to their
acceptance in future monetary regimes.
It’s a pipe
dream to think that any kind of gold standard could reappear without the
public first becoming reacclimated to gold and silver and the best way to do
that is often to just let people simply hold a gold coin or silver bar. We
don’t see bullion dealers, many of whom are “out there” in
terms of political thought, conspiracy mongering or ethics (we’re
thinking of Goldline
International in particular since they specifically
target their aggressive upsell to people who are unfamiliar with bullion), as
being effective tour guides to introduce the public to the marvels of gold
and silver. Grassroots P2P exchanges potentially can, however, be an
excellent introductory mechanism, especially as long as GATA and other
agenda-driven organizations can manage to keep their paws off.
The other thing
we think will start happening more and more is gold and silver bullion being
used in private transactions. This actually became fairly common in the late
1970s and early 1980s so there is some precedent for it. We suspect it is
only a matter of time before something like this is no longer uncommon in the
classifieds or Craigslist: “Boat for Sale. 1998 Sea Ray 17 footer,
perfect condition with trailer. Price: 3 Gold Eagles, firm.”
In conclusion, we
see a bit of a silver lining in the new transaction reporting regulations
“hidden” in the new health care law and we welcome the
possibility that dealer involvement in the secondary bullion market could
evaporate soon.
Tom Szabo
Silveraxis.com
Tom Szabo
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