By Patrick A. Heller December 01, 2009

Last week I discussed how South Africa Krugerrands dated before 2009 had pretty much disappeared from the wholesale market and that even supplies of 2009 Krugerrands were not necessarily available for quick delivery.

Pre-2009 Krugerrands continue to be unavailable from wholesalers, but the 2009-dated coins are now readily available from some wholesalers. A spokeswoman for the Rand Refinery in South Africa, the manufacturer of Krugerrands, told me that they currently have no backlog of orders and that any primary distributor who makes a purchase can get prompt shipment.

The dilemma for would-be gold buyers is that 2009-dated Krugerrands trade at a higher premium than did earlier-dated coins.

Last Wednesday, the U.S. Mint announced that it had to suspend sales of 2009-dated American Eagles as they had run out of product to deliver. The day before, the U.S. Mint announced that it had suspended sales of the 2009 silver Eagle dollars as their inventory was exhausted.

In reaction to these supply shortages, as you might suspect, premiums rose on just about all the lower premium forms of physical gold. The premiums on major gold coins, those at or close to an ounce of gold content, now sell for $5-12 per ounce more above the gold spot price than they did two weeks ago. I anticipate that premiums will rise further before the end of the year and that supply shortages will spread to other coins and ingots.

Higher gold and silver prices have brought out soaring numbers of customers selling gold jewelry and also a huge increase in the number of customers purchasing physical gold and silver to protect their financial health. This past Monday, my company served about five times the normal daily number of customers than we served a few years ago. Both the number of transactions and the average size of transaction are much higher than they used to be.

My company staffed a booth at the Michigan State Numismatic Society (MSNS) Fall Convention this past weekend. Show attendance was extremely heavy on Friday and Saturday and heavier than normal on Sunday. So many people came to the show that several visitors complained about having difficulty even finding parking places, a problem I have never heard since I first worked this show in 1981. My company enjoyed the highest sales at any coin show since the 1979-1980 bullion boom, topping the previous best show by almost 25 percent!

Customer demand was strongest for bullion-priced gold coins, followed by unusually strong demand for collector U.S. gold coins. Surprisingly, virtually all of the collector U.S. gold coins we purchased at the show resold quickly and never made it back to our store.

Last week the spot price of gold set new record highs by Wednesday. Almost every news development indicated growing demand or tighter supplies of physical precious metals. India’s central bank revealed that it was now negotiating to purchase all of the remaining gold that the International Monetary Fund was planning to sell over the course of multiple years. There was even a report that the German central bank may begin purchasing gold reserves.

However, the U.S. Thanksgiving holiday provided a prime opportunity for the U.S. government and its trading partners to try to temporarily stem the rising price of gold. When commodity markets are closed somewhere around the globe, trading volumes are lighter, which makes it easier to manipulate prices with less effort. In 2008, for instance, the closing COMEX price on the Monday after Thanksgiving was 4.3 percent lower for gold and 7.3 percent lower for silver than the closing prices on the day before Thanksgiving. It took all the way until Dec. 11 for the prices of both metals to close higher than on the Wednesday before Thanksgiving.

With the price of gold threatening to top $1,200 and the COMEX closed last Thursday (and only lightly traded on Friday), it was an ideal time to knock down gold and silver prices. That is what happened, with the price of gold on Friday trading as much as $50 lower intraday than it did in foreign markets on Thursday.

While we have seen an increase in demand for gold and silver from less than wealthy purchasers, it has not yet reached a frenzy, which would be a sign of nearing the top of a market. Most of the increasing demand in the past year seems to be coming from governments, central banks, investment funds and very affluent individuals. For example, investor John Paulson, who earned billions of dollars in 2007 selling short collateralized debt obligations, announced recently that he was establishing a $6 billion fund to focus on purchasing gold. Paulson also stated that he would invest $250 million of his personal fortune in this fund. With such signs of growing demand, even ignoring the two factors I discuss below, I think there is little prospect for the price of gold to ever sink under $1,100 again. On the other hand, I am highly confident that gold will end 2009 above $1,200, possibly much higher.

So, no matter what effort may have been made to suppress gold and silver prices in the past few days, I expect that impact will quickly be overturned.

There are two developing stories that could result in exploding prices for gold and silver in the near term.

The initial reports about gold-plated tungsten 400-ounce gold bars that China’s central bank recently received from bonded warehouses look like they may just be the beginning of a much larger scandal. Analyst Jim Willie reported that the initial discovery involved the receipt of four of these bars that came from bonded warehouses in the United States. Willie predicts, and it makes sense to me, that the bonded warehouses for gold bars are soon going to have to test every bar for authenticity before they deliver it. On top of that, the warehouses will also have to provide an extra guaranty of authenticity which would make them liable should the bar later turn out to be counterfeit. Should the warehouses not offer these customer protections, a panic could develop where owners of paper contracts seek to covert their paper holdings into physical gold that they can trust.

The Commodity Futures Trading Commission (CFTC) has been working for more than a year on possible regulations to minimize the potential for manipulation in the U.S. commodity and futures markets. It is possible that the proposed regulations could be announced as early as December. Conceptually, the trading limits would be determined in relation to the number of contracts normally traded by producers and manufacturers so that an investor could not establish a position large enough as to distort the market. However, I have heard of a number of potential loopholes in such possible regulations. For instance, one story is that the limits would only affect long positions, leaving short sellers free to manipulate the market. Another story is that investors who already have positions beyond the trading limits would be allowed to keep such large positions under a grandfather clause. I have also heard that these trading limits might apply to all commodities other than gold and silver.

The reason why any proposed regulations might exempt short sellers of gold and silver contracts is because of the extraordinarily large short positions held by banks. For instance, should JPMorgan be required to reduce its humongous silver short position, the silver commodity and futures markets would fail. There is simply not enough physical silver readily available in the entire world, no matter the price, for JPMorgan to cover its exposure.

Should the CFTC announce new regulations imposing trading limits on investor holdings of commodity and futures contracts and not leave any exemptions for the holders of large gold and silver short positions, gold could reach $1,500 and silver pass $30 in as little as 24 hours.

For many reasons, if you are considering owning physical gold or silver, I recommend that you take action sooner rather than later.



Patrick A. Heller owns Liberty Coin Service in Lansing, Michigan and writes Liberty’s Outlook, the company’s monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Financial Sense University (www.financialsense.com). His periodic radio interviews on WILS-1320 AM can be heard at http://www.amlansing.com, on the Korelin Economic Report at http://www.kereport.com, and on Coin Chat Radio at www.coinchatradio.com.

More Resources:

• Standard Catalog of United States Obsolete Bank Notes 4-CD Set, 1782-1866

• Fascinating Facts, Mysteries & Myths About U.S. Coins

• 2010 Standard Catalog of World Coins 2001-Date, 4th Edition

• State Quarters Deluxe Collector's Folder