Skip to main content

Premiums up as metals drop

From Friday, April 28, to Friday, May 5, the COMEX closing gold and silver prices fell 3.3 percent and 5.6 percent, respectively.


Normally when you have such a dramatic price decline, that should indicate a significant increase in supplies or drop in physical demand. However, none of that is what happened last week for the gold and silver markets.

Prices for physical precious metals are now far enough below their recent highs that demand has picked up significantly in recent weeks. Official gold imports into India (which does not reflect quantities of imports of smuggled gold or dore gold bars) in April were double that of April 2016.

In fact, there is a comparative shortage of physical gold and silver available to industrial users and central banks at the moment. From 2003 to 2009, China’s central bank almost every month was spending from $800 million to $2 billion adding gold reserves, but this quantity of physical metal just is not on the market now. Many fabricators and central banks have been told that promised deliveries from prior orders will be delayed while the sellers try to find the product to ship to them.

Physical shortages turned so extreme toward the end of last week that the New York COMEX silver market went into backwardation, where the May 2017 contract price was higher than the June and July contract prices.

In normal futures markets, future month prices are higher than the current “spot” month price, generally by about the prevailing interest rate. That condition is called contango. If there is a supply squeeze in the over-the-counter markets, buyers then chase after contracts in the futures market for the spot month so that they can ask for physical delivery of the maturing contract. When a supply squeeze develops, the spot month price can rise above levels for near future month contracts, which is what happened late last week in the COMEX silver market.

Early this week, however, the COMEX silver market returned to a slight contango status.

If you only consider tight physical inventories of precious metals, last week’s price drops do not make sense.

However, you need to understand that the trading of paper contracts in precious metals far outweighs the volume of physical metal activity. In just the London Bullion Market Association, for example, trading volume of paper contracts that rarely will be settled by delivery of physical metal may run 200 million ounces per trading day. That is massive compared to the roughly 800-900 million ounces of newly mined silver worldwide over the course of a full year – and recycling supplies may only run 100-200 million ounces.

There was some major paper contract short selling in the gold and silver markets last week, which resulted in falling prices. On thinly traded markets on Monday, May 1, when almost all European and some Asian commodity markets were closed, “someone” sold more than 17 million ounces of gold contracts. That quantity is more than 15 percent of annual global mine output. This quantity was deliberately sold in a manner guaranteed to realize the lowest possible price. In other words, these sales were done in order to knock down the price of gold rather than the liquidation by a party seeking to generate the maximum cash flow.

On Thursday, May 4, more than 150 million ounces of silver contracts were sold short on the COMEX in just the first two hours of trading. Again, this trading activity is a blatant effort to depress the price rather than reflect real world physical market supply and demand.

One consequence of this divergence between physical market supply shortages and a surplus of paper contract short sales (where sellers do not have to have the physical metal available to fulfill those contracts) is that the prices of gold and silver on the Shanghai Gold Exchange jumped much higher relative to the London market prices than they were just a month earlier. You can go to to check the spread between the London paper contract market and the Shanghai physical market. As I type this mid-day on Tuesday, May 9, the Shanghai gold price is more than 1 percent higher than London, and the silver price is more than 8 percent over London.

In the past few days, with lower precious metals prices, there has been some resurgence in American market demand. Last week I wrote about the significant decline in U.S. physical demand. Yes, demand can rise or fall just that quickly. Where a couple weeks ago it might have been possible to press for paying very low premiums on some forms of bullion-priced gold and silver coins and ingots, those inventories have largely evaporated. As a result, some premium levels are higher than they were just one week ago.

While it is possible that precious metals prices may be held down in the doldrums and may go slightly lower than they are now, I think the overall trend will be for higher prices by the beginning of August.

Patrick A. Heller was the American Numismatic Association 2012 Harry Forman Numismatic Dealer of the Year Award winner. He was also honored by the Numismatic Literary Guild in 2016 for the Best Dealer-Published Magazine/Newspaper and for Best Radio Report. He is the communications officer of Liberty Coin Service in Lansing, Mich., and writes “Liberty’s Outlook,” a monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at Some of his radio commentaries titled “Things You ‘Know’ That Just Aren’t So, And Important News You Need To Know” can be heard at 8:45 a.m. Wednesday and Friday mornings on 1320-AM WILS in Lansing (which streams live and becomes part of the audio and text archives posted at

This article was originally printed in Numismatic News. >> Subscribe today.

More Collecting Resources

• Download The Metal Mania Seminar with David Harper to learn more about the metals market.

• With nearly 24,000 listings and over 14,000 illustrations, the Standard Catalog of World Paper Money, Modern Issues is your go-to guide for modern bank notes.