Capital Gold Group Report: Decoupling Of Physical Gold And Paper Gold Prices

September 1, 2008

Seeking Alpha Commentary

Earlier this month I drove down to Brussels, Belgium, to buy some Krugerrands. I could have bought them in my home country, The Netherlands, but I found the premiums at local dealers to be outrageous.

In Brussels, I found a dealer that only asked a couple of Euros above the spot price, which came down to a 1.5% premium. At that time, it was already surprising that at every local dealer, premiums were over 5% for 1oz Krugerrands. And taking a day off from work, spending a full day traveling to Brussels, a distance of 220kms (about 135 miles), and EUR 60 on fuel was certainly worth the difference.

Now, with the spot price in Euros pretty much similar to the price at the time I bought the coins, the Krugerrands can only be bought at crazy premiums on top of the spot price. At my favorite dealer in Brussels, the bid price is now even higher than the spot price.

According to Bloomberg, the reason for that is that Rand Refinery, the producer of Krugerrands, just received a Swiss order for Krugerrands of an abnormal size. It now appears that no Krugerrands will be available at Rand Refinery until the 3rd of September.

I went to Rand Refinery's website and saw that the premiums charged for large amounts (50+) 1oz Krugerrands went up to 5%! And that will get a retail margin on top of it.

The trend we are now seeing is that there is a clear decoupling of physical gold prices and paper gold prices. While it is suspected that large financials are selling their gold, demand for physical gold remains high and is even increasing at current prices. This results in rising premiums and many times in dealers having to refuse coin sales.

A simple Google search will lead you to websites of many bullion dealers around the world, where you can check what the difference is between bid & ask. Spreads have become enormous and at many websites, you will see that stocks are depleted. The situation with silver is quite similar or possibly even worse.

So, if you read about the metals boom/bust-scenarios and about the gold price targets that most analysts have suddenly reduced to well-below $700, stop worrying. Don't take any risks and buy physical gold or silver, rather than paper. We're approaching times when almost anyone will want to buy your coins or bars. And let's not forget that mining companies do not produce paper gold. This means that that at some stage we will have to include the current premiums that are charged for physical gold into the valuations of the already undervalued mining sector.

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