By David Ceresne
Saturday, February 2, 2013
Shortages and volatile markets are forcing the precious metal industry
into turbulent times.
How is the precious metal industry adapting? Global mints and refiners
have increased premiums on all products.
How are investors reacting? Buying is at an all-time high and premiums
are no longer the primary concern. In fact, delivery time on products now is
the most important factor for buyers. This shift demonstrates the demand for
precious metals, whatever the premium may be.
It's simple. Relentless demand and shrinking supply are changing the
precious metal landscape. We are witnessing a deviance from paper price to
physical price. But why?
To understand the changing landscape, we need to analyze the precious
metal supply chain. Looking to global mints can let us know what changes must
be made.
To start, where are mints getting their metal? It boils down to three
sources.
1) Mining companies. Above-ground and easily mineable metals are a
thing of the past. Mining companies must dig deeper than ever to extract
precious metals. Changing mining conditions and high input costs are
affecting the precious metal supply. As mining conditions change and
inflation continues to rise, the extraction of metal through mining appears
to become less feasible. Political factors also play a role. Laws, politics,
and tax rules can slow down or even stop the extraction of precious metals in
key markets.
2) Recycled products. It is estimated that 85-95 per cent of world
silver output is now disposed of, primarily through industrial applications.
Middle-class people all over Europe are trading in their gold and silver for
cash, disposing of everything from jewelry to silverware. In North America
the story is the same. But much of that supply has already been depleted as people
sell personal items to help pay the bills. This causes a big strain on the
physical gold and silver markets. People are also liquidating their
retirement accounts and selling assets to buy precious metals. Supply is
depleting as demand increases.
3) Global trading floors. Mints and refiners will purchase silver and
gold from global trading floors. If you have purchased precious metals
before, many of your products may have been melted down from large bars into
smaller-denominated coins and bars.
But the next time mints ask for metal to melt, will it be there? With
current demand for metals, the answer is no. Then what? If there is no silver
or gold to procure, we will head toward a "force majeure" (http://en.wikipedia.org/wiki/Force_majeure).
At this point the paper price will have no relevance to the physical
price. As people rush for the door, dealers will undoubtedly sell. But at
what price? This will be for the true markets to decide.
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David Ceresne is president of Precious Metal
House (http://www.preciousmetalhouse.com/), a
coin and bullion dealer in Toronto.
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