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Gold sees "unusual division" as paper goes south while physical heads north

Gold’s recent rout on the futures market is emerging as a buying opportunity for savvy customers, as bargain hunters across the globe snap up newly-reduced physical gold even as paper gold remains below-$US1,400 per ounce on the Comex.
Gold sees "unusual division" as paper goes south while physical heads north

Gold’s recent rout on the futures market is emerging as a buying opportunity for savvy customers, as bargain hunters across the globe snap up newly-reduced physical gold even as paper gold remains below-$US1,400 per ounce on the Comex.

The short-selling on the Comex that dominated Friday of last week and Monday of this week - precipitated by an unprecedented offering of 400 tonnes, or US$20 billion, of paper gold - took out key technical levels and tripped various sell triggers, culminating in a two-day frenzy of panic-selling that seems to have met its match in a sudden renewed interest in physical gold across the world.

The Indian market was among the first to respond to the record-setting two-day drop, which saw gold fall as low as $1,355 -- a plunge of more than US$400 per ounce since the commodity’s 52 week high of US$1,803 -- with an upsurge of interest in physical gold, followed by Dubai, Japan, Europe and China. Since then, the gold fever has spread far and wide with points from Macau to Auckland reporting long lines of would-be gold buyers as customers scramble to take advantage of the opportunity represented by the two-year low.

Chief economist of the Australian Bullion Company in Sydney, Jordan Eliseo, is reported in the Sydney Morning Herald newspaper as saying he hasn’t seen anything like it since the onset of the global financial crisis. Queues up to 80 people long formed outside the company’s salesrooms, as bargain hunters emerged to make the most of the plunge in the price of the yellow metal.

CEO of London-based bullion brokers Sharps Pixley, Ross Norman, finds the dichotomy remarkable.  “You’re seeing a really unusual division between physical and paper gold. There’s fantastically strong demand for physical gold but at the same time strong selling on the futures market.”

Norman points out that the “extremely robust” demand for physical gold across the world is resulting in severely depleted stocks, lengthy waiting times for would-be buyers chasing rapidly-evaporating product, and a rising premium on bars as purchasers rush to take advantage of the drop in prices.

Nonetheless, Norman sees the futures market as having a fundamental advantage over that of physical gold in the form of the futures’ market ratio of 20:1 gearing over the physical traders. 

“Futures have the edge in the sense that they have leverage on their side. The big guns lined up against gold, the banks and hedge funds, have leverage on their side -- they can apply pressure to gold.”

Certainly, analysts at Credit Suisse, Societe General, Bank of America Merrill Lynch and Goldman Sachs have all warned customers away from gold this year, while Goldman Sachs’ decision last week to cut its target on gold and advise clients to short bullion was regarded as a contributing factor to the run on paper gold, along with disappointing economic data from China and rumours of central bank sell-offs in Europe.

With such a polarised split between paper traders maintaining gold’s post-drubbing depths and a gold rush on physical gold, it will be interesting to see how it all pans out.

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April 16 2013

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