Bullion Dealer: This Is Why There Are Shortages

Key Concepts

• Precious Metals Market Dynamics: Recent extraordinary moves in gold and silver, including sharp falls after reaching highs, and their overall strong performance year-to-date.
• Physical vs. Paper Markets: The distinction between the physical movement of metal and the abstract "paper ounces" traded on exchanges.
• Supply Chain Tightness: Shortages of specific products (e.g., 1000-ounce silver bars) in specific locations, not a general lack of metal.
• Refining Capacity Constraints: Refiners prioritizing gold processing due to high demand, leading to backlogs for silver and impacting smaller format product availability.
• Central Bank Buying: Significant purchases of large format gold bars by central banks, influencing the broader market.
• Investor Behavior: Shifting motivations for investing in gold and silver, moving from speculation to wealth preservation and a vote against fiat currency.
• Technological Demand for Silver: Increasing use of silver in solar panels, electric vehicles, and solid-state batteries.
• Sovereign Demand for Silver: Potential reintroduction of silver as an asset for central banks and sovereign wealth funds.
• Dollaization and Reserve Assets: Nations moving away from the US dollar, with gold becoming a more widely held reserve asset than US Treasury bills.
• Personal Sovereignty and Wealth Preservation: Investors seeking tangible assets that hold value and protect purchasing power against inflation and economic uncertainty.
• Final Settlement: Physical precious metals as the ultimate form of settlement, being tangible and not someone else's liability.
• Long-Term Investment Horizon: Contrasting short-term democratic election cycles with the long-term strategies of Eastern countries and central banks.
• Under-owned Asset: Precious metals, particularly gold, are still significantly under-owned by individuals globally.
• Morgan Stanley's Portfolio Shift: A significant recommendation to allocate 20% to gold, including selling half of bond holdings.
• Superior Form of Money: Gold's characteristics (finite, in demand, homogeneous, durable, portable, divisible) making it a superior form of money and a store of value.

Precious Metals Market Volatility and Underlying Physical Realities

The precious metals market has experienced significant volatility recently, with gold surpassing $4,000, hitting resistance around $4380, and then experiencing its sharpest one-day fall in over a decade. Silver also saw a substantial drop of 7.5% in a single session. Despite these sharp pullbacks, both metals remain significantly higher on the year. This volatility is attributed by some to healthy consolidation, while others perceive it as indicative of deeper market shifts.

A crucial underlying factor highlighted is the physical movement of these metals. For instance, approximately 29 million ounces of silver have recently left COMEX warehouses, underscoring that market movements are intrinsically linked to real metal transactions within the supply chain. The discussion emphasizes that gold and silver are not mere theoretical assets but tangible commodities that are stored, shipped, and actively traded by individuals making decisions about their wealth.

The Busy Landscape of Precious Metals Trading

Dave from Gold Core describes the past few months as "interesting times," marked by a particularly strong rally in gold that has had ripple effects across all metal markets. He emphasizes that these are physical products with long supply chains, from mining to refining, minting, and wholesale distribution. The current rally, driven significantly by central bank buying of large format gold bars (400-ounce and kilo bars), has created a knock-on effect throughout the supply chain, spilling over into other metals like silver.

Understanding "Shortages" in the Physical Market

The concept of "shortages" in the precious metals market is clarified. It's not that there is no metal available, but rather a tightness in the availability of specific products in specific locations. This is particularly evident in the silver market, where there's a shortage of 1000-ounce bars, not a shortage of silver itself. Dave recounts witnessing a vault in Switzerland containing $700 million worth of silver in 1000-ounce bars, with three such vaults at the facility. The "shortage" is therefore defined by the metal not being in the right place or readily available for sale at current prices.

Refining Capacity Bottlenecks and Retail Product Squeeze

A significant factor contributing to the current market tightness is the allocation of refining capacity. Refiners have disproportionately focused on processing gold this year due to immense demand for large format gold bars, particularly for eastward movement. This has led to a backlog in silver refining, including for industrial products like silver grain used in solar panels. Refiners have warehouses full of 1000-ounce silver bars awaiting processing, but their capacity is choked by gold.

This bottleneck has a cascading effect down the supply chain. Bullion dealers like Gold Core primarily deal with smaller format products (1-ounce coins and bars, kilo silver bars, 100-ounce bars). With reduced refining capacity for these products, there's a supply chain crunch on items like blanks for minting coins. Consequently, the availability of retail-focused precious metal products is diminishing as refining capacity is dedicated to larger format gold bars. This situation does not indicate a fundamental shortage of metal but a significant tightness in refining and minting processes.

Differentiating Physical Shortages from Supply Deficits

It's crucial to distinguish between a "physical shortage of metal" and a "supply deficit." While there might not be a shortage of physical bars waiting to be refined into retail products, there is an ongoing, increasing supply deficit in the long term, considering mining supply and raw material inputs. The current tightness refers to the silver ready for refining.

The annual supply-demand fundamentals are composed of new supply from mining and recycling, and demand from industrial consumption and investment holdings. There is a deficit between these two sides, which is projected to widen. However, this deficit can be addressed at higher prices. While there's plenty of physical silver, it's increasingly held by investors. More investors are taking silver out of the supply chain for use in consumables like solar panels or electrification, or simply holding it as an investment. This silver will re-enter the supply chain when investors decide to sell, likely at higher prices. If the deficit persists, silver prices are expected to continue rising.

Investor Motivations Amidst Record Prices and Volatility

Client conversations reveal a mix of motivations. For some, gold is just now coming onto their radar due to inflationary pressures, low bank deposit yields, or general global uncertainty. They are seeking a better form of money for wealth preservation and purchasing power protection. For others, silver has a strong, growing investment case underpinned by the supply deficit. These investors are joining those taking silver out of the supply chain.

While gold has been making new all-time highs, silver has only recently broken through $50, reaching levels not seen in about 15 years. Some investors who bought silver back then, and saw its price decline and stagnate, are now seeing their investment return to break-even nominal terms. This leads to different motivations, with some happy to cash in after a long holding period.

The price of precious metals is expected to continue rising as long as new buyers enter the market with new motivations. These motivations are increasingly driven by technological advancements and a shift towards sound money.

Evolving Demand Drivers for Silver

The motivations for investing in silver today differ significantly from 15 years ago, largely due to technological advancements. Key drivers include:

• Solar Panels: Increased demand for solar panels, driven by the move away from fossil fuels, represents a new and significant demand-side fundamental for silver that was not present 15 years ago.
• Electrification and Greening Economies: This includes increased demand for electric vehicles and advancements in solid-state batteries.
• Potential Sovereign Demand: There is growing discussion about the reintroduction of silver as an asset for central banks and sovereign wealth funds, a new demand-side fundamental.
• Critical Minerals List: The potential inclusion of silver on critical minerals lists could have a substantial impact on the market.

Even if silver is not added to such lists, the narrative is shifting away from a Western-centric view. Demand from countries like China and India, along with ETF demand, indicates a broader global interest.

Speculative vs. Reserve Asset: A Shift in the Monetary System

The current market dynamics are moving beyond speculative interest towards an understanding of silver and gold as reserve assets. There is a noticeable trend of de-dollarization by nations, and gold is now a more widely held reserve asset than US Treasury bills. This reflects a broader understanding, both at an individual and sovereign level, that fiat currencies are losing value. Central banks are actively moving out of paper-based assets and into physical assets.

Investors are increasingly prioritizing personal sovereignty and seeking assets that will protect them against potential shifts in the monetary system. The question "What in my portfolio is actually mine?" is becoming paramount. Physical precious metals offer this tangible ownership and final settlement, unlike paper-based assets which represent someone else's liability.

The Tangible Value of Physical Precious Metals

The appeal of physical precious metals lies in their tangibility and proximity to one's wealth. Holding a coin or bar provides the closest connection to one's assets. While storage services exist, they represent a step away from direct possession. Paper-based assets, conversely, are distant liabilities.

Central banks' commitment to physical gold, involving the actual lifting of bars, signifies a tangible and meaningful commitment, unlike the mere movement of numbers in paper-based transactions. This physical commitment is expected to lead to a reduced demand for gold derivatives and an increased focus on holding the underlying asset.

Broadening Investor Base and Under-owned Status

While the current rally was initially led by central bank and sovereign demand, it is trickling down to institutional investors, high-net-worth individuals, and mass affluent segments. Despite this, precious metals remain incredibly under-owned globally, with individual ownership estimated at around half a percent.

The significance of announcements from major financial institutions like Morgan Stanley, recommending a shift in portfolio allocation to include gold (even at the expense of bonds), cannot be overstated. This signals a growing distrust in traditional paper assets and a recognition of gold's role in wealth preservation.

The Long Game vs. Short-Term Cycles

There's a stark contrast between the short-term investment horizons often dictated by democratic election cycles (3-5 years) and the long-term strategies employed by countries like China and Russia. Western money managers often look at a 3-5 year performance window for inclusion in portfolios. However, countries driving the gold rally have a much longer time horizon, recognizing gold's steady performance over decades and millennia.

This difference in perspective highlights how early we are in the current precious metals cycle. While money managers may only recently be considering gold due to its consistent positive returns over the last 3-5 years, major global players have been focused on its long-term value for much longer.

Gold as the Superior Form of Money

When asked why gold is so highly prized, the answer lies in its fundamental characteristics that have made it a preferred store of value and medium of exchange throughout history. Gold is:

• Finite: Its limited supply prevents devaluation through excessive printing.
• In Demand: Consistently desired by humans for millennia.
• Homogeneous: Uniform in quality.
• Durable: Resists degradation.
• Portable and Divisible: Can be easily transported and broken down into smaller units.

These attributes make gold the most superior form of money, capable of holding value through time and protecting purchasing power. Unlike fiat currencies or other investments that represent someone else's liability, physical gold is a tangible asset that is nobody else's liability. Its liquidity is also a key advantage; while a house might take months to sell, gold can be readily exchanged.

The appropriate allocation to gold in a portfolio is determined by an individual's perception of economic risk, ranging from 5% to potentially 100% in hyperinflationary scenarios. The consensus is that everyone should hold some amount of physical precious metals.