What is the real price of Gold?
This seems like a ridiculously easy question to answer. On my computer screen right now it shows me gold;s price right now is $1,717.44 per ounce.
The price may change by the time you read this but give or take a bit and you will relatively see about the same price per ounce.
What about silver? Again, fairly simple. The silver price currently sits at $26.10 an ounce. This too is subject to change but if you’re reading this soon after it’s writing, you won’t find much different.
If ONLY things were this simple, our case would be closed.
However, they are not. In fact, establishing the true price of gold and silver is far more challenging than it seems.
Furthermore, the differing prices on offer and the reason for these discrepancies tells us a lot about what is currently happening in the precious metals market.
Paper, Not Metal
To be clear, the prices I quoted above are for physical gold and silver, not paper.
Those prices reflect the COMEX gold and silver futures contracts. A futures contract allows the holder to have price exposure but it does not give you physical gold or silver. It is a paper contract with rules governed by the exchange it’s being traded on.
So we’re talking about paper gold and silver, not the actual metals themselves.
The majority of these contracts are settled by cash and either rolled-over or paired-off without any delivery or exchange of physical gold and silver.
More over, if even a small number of these contract holders would ask for the physical delivery of the metals, the vaults would quickly run out of the billion, and would necessarily intervene offering cash-settled contracts or order that holders “trade for liquidation only.”
Physical delivery of the metals, would be denied.
Leverage, Leverage, Leverage
So why do traders prefer paper gold and silver? Gold and silver futures contracts offer leverage. A trader is required to put down an initial margin, generally about 5% of the amount of the metals subject to the contract.
This means $100,000 can control $2,000,000 worth of gold or silver. An increase of 5% would result in a 100% return on the cash invested.
This is why hedge funds prefer to trader on futures rather than the bullion itself. The opposite of the above is also trued. A 5% decline leads to a 100% loss.
So it’s a risky game for paper bullion traders but to keep it simple, there is no physical bullion involved.
This is the same for big banks who are member of the London Bullion Market Association (LBMA). The purchases are also paper contracts for bullion. There are no metals actually being exchanged.
Ultimately, if the holders felt they wanted or needed to covert this paper to physical delivery, there wouldn’t be enough gold or silver to go around. Especially, during a buying panic.
Yes and No
The London Gold fix is done through an auction-style procedure. With 15 banks participating in the gold fix including the likes of Goldman Sachs, Citi and JP Morgan Chase.
The issue arises here: The fix is not open to the public. It involves large quantities and most of the gold never physically moves.
It stays in the designated vaults and the owners change by means of paper receipt or ledger entry. The London Silver Fix is the same.
Fraud and Manipulation
In summary, all these means of trading and futures, require no physical bullion be involved, or trading limits for the big banks involved.
Even with paper silver and gold the temptation to rig markets is almost irresistible.
During a recent investigation into the paper gold and silver markets, there were various kinds of front-running, market manipulation and bid-rigging involved. While some fines were involved, the process remains.
So what if you want to buy physical gold and silver and request delivery in a safe non-bank vault?
This is where things get interesting and where the true price of gold and silver is revealed.
The first hurdle is to find a dealer: here is how to get in contact with our preferred dealer.
Finding the Right Dealer
There are dealers online, some being sleazy and others salt of the earth companies (find our guide to choosing the right dealer here).
Many charge a huge markup with commissions starting at 15%. This is not unusual and it is very rare to find anything under this. This wold make the same $26.11 ounce of silver, $30.85 or higher.
This of course assumes availability. The US Mint periodically announces it will no longer be taking new orders from dealers due to a shortage of bullion and minting capacity.
So again, what is the price of gold or silver?
That depends on whether you want paper money or physical bullion. It depends on whether you want to leverage or outright own.
Sales tax, shipping, insurance, etc. market the calculations even more complicated.
Three Key Takeaways:
- The cost of owning bullion coins or bars that you can hold in your hands is higher than the official “prices” you see listed on the exchanges. Which tells us actual bullion is more scarce than paper bullion.
- The scarcity of the physical bullion relative to paper gold and silver will emerge with vengeance in a buying panic. This results in a number of catalysts including war, another pandemic, bank failure or social disorder. The paper holders will try and be unable to convert to physical and find it’s too late. The vaults will be empty.
- Choose the right dealer. To get in touch with the one we’ve trusted for decades click here to receive their information packet by email. Get our metals buying & dealers guide here showing companies who do not charge the 15% mark up.
The lessons for investors is clear. Get your physical gold and silver while you still can. Find a company with small commissions (get the guide here). The rest is easy.
Ultimately, Jim Rickards and many have said they predict gold will go to $15,000 an ounce. Small commissions are nothing when you look at the big picture.
The buying panic is just a matter of time.
