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Gold Coin, Bar Demand Remains Strong A Week After Price Rout

By Debbie Carlson of Kitco News
Tuesday April 23, 2013 12:26 PM

(Kitco News) - Demand for small-sized gold coins and investment grade bars continues unabated a week after prices plunged over $200 an ounce, with rising premiums over spot prices for prompt delivery reflecting the demand.

The strong demand in the physical market has helped prices rebound from the low of $1,321.50 an ounce, basis the June Comex gold futures contract, set on April 16. As of 12:09 p.m. EDT, June gold prices are $1,412.50, down $8.70.

“There’s been very, very aggressive interest in the physical market for gold for prompt delivery,” said Afshin Nabavi, head of trading at trading house MKS (Switzerland) SA in Geneva.

There are many news reports of demand for gold out of Asia, but there is also very strong demand from the Middle East, Nabavi said, particularly out of Dubai, Saudi Arabia and from Turkey.

Several other gold market watchers with close ties to the physical side have also noted the strong demand out of Asia, sparked by the drop in gold.

Joni Teves, analyst at UBS, said the physical flows to India are close to the highest levels UBS has seen since 2008. She said the drop in gold prices comes at a particularly helpful time in India as the Akshaya Tritiya holiday is coming up in about three weeks, which is an auspicious day for gold buying. She said last year when Akshaya Tritiya occurred on April 24, buying three weeks into the holiday was strong.

She said Chinese demand is also strong, although Teves said some Chinese consumers waited until the prices stabilized before stepping in.

Demand was also seen in North America. Data on the U.S. Mint’s Web site shows gold bullion coin sales of 175,000 ounces so far in April. This already is the most for any month since 190,000 in May 2010. Mint sales are 467,500 ounces so far in 2013, which is 62.1% of the full-year total for 2012 of 753,000, even though this year is not quite one-third over yet.

Nabavi said the initial hesitancy to buy was seen elsewhere as consumers were unsure early last week whether the prices in gold were going to go much further than they did. Once prices held in the low $1,300s, he said people felt that the low was in for the time being and started shopping.

Much of the buying was likely pent-up demand from earlier. “A lot of people had been holding back,” he said.
Because of the strong demand, premiums over spot prices for prompt delivery have shot up, Nabavi said, with most premiums as high as $12 over spot and some closer to $15 to $16. “A lot of dealers can’t keep up with demand, which is why the premiums are up,” he said.

Some dealers have run out of on-hand supplies because they, like most others in the gold industry, were caught off-guard when prices fell and buyers came calling. Nabavi said the dearth of supplies on hand is a temporary issue.

Teves said the Shanghai Gold Exchange saw record volume, with 57.6 metric tons traded Monday with premiums up as much as $33.

Alex Thorndike, senior trader, precious metals and foreign exchange for MKS Capital in Sydney, also noted the strong physical demand has helped prices rise.

“The demand has taken many by surprise as bullion dealers struggle to keep up with demand. Reports of jewelry/bullion/coin dealers having queues backed up out the door in China, India and Dubai have been commonplace over the last week, and after visiting a PAMP distributor here in Sydney late last week the reports are not exaggerating! These physical flows are dictating the market at present and are providing a solid floor by which to assault upside tech levels and rattle weak spec shorts,” he said.

Robin Bhar, metals analyst at Societe Generale, said it is “gratifying” to see this widespread physical demand supporting prices, which is concentrated in small coins and bars. Bhar said considering the Indian wedding festival is coming up soon, it’s possible that the retail physical demand could last for a few weeks or at least another month.

However, he questioned the sustainability of this surge in retail demand. Once the calendar turns to end of May and into June, Bhar said he expects prices to fall back as demand is likely to slow. He also pointed to the continued selling in the physically backed exchange-traded funds. That’s likely capping further gains.

Thorndike said the selling by ETF holders is something that needs to be taken into consideration despite the physical demand. “ETF outflows still flood the market with holdings in the largest fund (the SPDR Gold Trust) toppling to their lowest levels since 2010. Total ETF holdings now sitting under 75 (million ounces) after being 84.62 (million ounces) at the start of the year,” Thorndike said.

Bhar said the ETF selling is likely by retail investors, too, rather than the large institutional traders that hold the ETFs. He said many retail investors who bought the gold ETFs in the past few years were interested in its strong performance. “It was eye-catching,” he said.

He said the institutional traders, with hedge fund manager John Paulson being the best known, are still holding for the long term, based on the idea of possible inflation in the future and central-bank buying.

Bhar said it would likely take another rout like last week’s sell off to spur selling by institutions, and if there was another big market break, it might also shake the confidence of the people who have newly purchased gold. “We could see some liquidation if that occurred,” he said.

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By Debbie Carlson of Kitco News dcarlson@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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