Strong Physical Purchases of Gold and Silver
Overnight news was sparse and, as such, the precious metals continue to consolidate. Physical demand has lightened from the historically high levels it saw three weeks ago. This is exemplified by coin / bar premiums falling and the improvement of production delays from refiners and sovereign mints. Without the volatility that characterized the market when the precious metals collapsed three weeks ago, participants have become more accustomed to these prices and demand has waned. The frantic need for physical participants to jump in and buy precious metals isn’t quite there when gold spends two weeks trading in a $40 range. It certainly was there when gold dropped $220 in two days though! As long as equities remain strong and the precious metals trade in narrow ranges, physical premiums and delays on products should continue to come in.
While physical demand is not as intense as it was, overall it is still strong. This is best illustrated with the fact that gold lease rates have been moving higher. Since the beginning of the year, ETF gold holdings have dropped nearly 12 million ounces. This is metal that is coming into the market and should depress lease rates, not cause them to move higher. On the other side of the equation though are factors that are outweighing the gold ETF redemptions. Refiners needs for borrowing metal have greatly increased as they’ve tried to ramp up production to meet bar demand out of Asia. Also, weak longs have exited positions and new shorts have entered the market. As dealers hedge these trades from investors, they are forced to borrow London pool metal to cover their own positions. Lastly, central banks are still net buyers of metal and their desire for immediate allocated bars drives up lease rates.
