16 January 2014

How to know when there is a real physical-paper disconnect developing

FastMarkets are reporting intermittent shortages of 400oz bars in London with premiums for physical delivery "as high as" $0.50 an ounce. In May 2013 I reported that

"We have heard that 99.99% purity bars are getting a sub-one dollar premium, which makes sense as they can directly melt them down and convert to kilo bars for Asia where 99.99% purity bars are getting a premium. Interestingly, we have confirmed that the bullion banks aren't paying a premium to obtain 99.99% 400oz bars (or 99.50% 400oz bars), which is not indicative of desperation for physical on their part."

I therefore put a question in to FastMarkets via Twitter to clarify if the premiums are for 9950 bars, which would be much more significant than if it was just for 9999 bars and am waiting for a reply. The detail is important here, particularly when another source quoted in the article says that "there is gold available in London."

The Perth Mint has not seen such premiums and certainly the bullion banks aren't paying a premium to acquire 400oz bars from us. A journalist at Reuters told me today that "We spoke to one of Switzerland's biggest refiners yesterday and they said that business is quiet at the moment. No mention to shortage of any form of bars." (guarantee you aren't going to hear that on KWN).

This report is a good opportunity to discuss how to know if there is a real physical-paper disconnect occurring. The key is to look at the premium above spot for wholesale metal, which is 9950 400oz bars for gold and 9990 1000oz bars for silver.

Shortage of retail forms of gold and silver, that is anything less than 400oz/1000oz, does not necessarily tell us about whether there is a real shortage, and thus price disconnect, in the wider precious metals markets. A lot of people really struggle with the concept that coin shortages may be the result of production capacity shortages, see here and here, for example. You have to rule out production issues first, which in my opinion will be hard to do as when we get some real retail demand I don't think the industry can cope, as I discussed here.

The reason premiums on wholesale forms is the indicator is because the spot price is the price for unallocated, that is, paper gold in London. That is how most trades are settled and if you want physical then a separate physical redemption instruction is issued. As such the industry works on premiums to spot for whatever form and in whatever loco (as spot gold has different prices in different locations).

The problem with this way of pricing (spot + premium, or pay me unallocated gold + $ premium for physical) is that it "hides" any physical-paper disconnect that may be occurring.

For example, say the gold price is stable at $1200 but 400oz bars start to become rare and hard to get, and the premium to acquire them reaches say, $10 an ounce. Then what will happen is dealers will be buying unallocated gold at a "spot" of $1200 and redeeming the unallocated and paying $10 premium separately. However, what will be reported by Reuters and Bloomberg data feed services (on which all the websites rely) is just $1200, not $1210.

This idea of unallocated spot + premium is heavily embedded in most of the industry. To them, loco premiums/discounts and premiums for various forms of physical are normal. They do not think about a physical-paper disconnect and initially may just see premiums on 400oz as unusual but not extraordinary. They certainly won't initially see the premium as a potential precursor to a bullion bank run and so may not consider it worthy to write or commentate about - their frame of reference is that the existing system has survived in the past and thus will continue to survive.

Unless you are in the professional market you won't see this occurring. I will endeavour to report on it if we see it, but you don't have to rely on me as there is another indicator. I would suggest keeping an eye on Bullion Vault or GoldMoney. These two services are backed by 400oz bars. If there is a real shortage of 400oz bars and thus premiums being asked, then you should see one or both of these being reported by these two services:

1. A widening of their normal buy/sell spread, or additional fee on purchases, to cover the premium they are being charged on 400oz bars.
2. They stop taking in new clients due to an inability to acquire 400oz bars.

Now some people, like Jim H, may think that I am not "really here to support me, the common man, [but] the State, who ultimately holds the key to your paycheck" and thus you can't believe what I say about shortages or premiums in the wholesale market, but I doubt anyone thinks that James Turk and GoldMoney are part of the Cartel, so I think you're safe watching them for signs of that a real physical-paper disconnect is developing. Anything else is probably rumor and hype.
Added 6/9/2023: https://www.bloomberg.com/news/articles/2022-05-19/boe-gold-trades-at-rare-discount-in-sign-of-central-bank-selling via https://gata.org/node/21949

Gold stored at the Bank of England has been trading at an unusually low price, in a sign that central banks may be shedding some of their holdings.

The Bank of England’s vaults contain 5,676 tons of bullion, one of the largest stockpiles in the world, which it holds on behalf of other central and commercial banks. Gold held by central banks is typically bought and sold between large institutions in bilateral trades at prices usually within a few cents of the market rate.

In recent days, however, gold at the BOE traded as much as a dollar an ounce beneath benchmark London prices, according to traders familiar with the matter. Such a big discount usually indicates a big institution like a central bank selling a sizable amount of reserves to raise US dollars or other currencies, one of the traders said. ...

The BOE gold discount has narrowed since the dollar-an-ounce margin, but remains large by normal standards, said the people, who asked not be identified discussing private information. Bullion has slipped more than 12% since peaking in March, leaving it close to unchanged this year.


Gold at BOE Commands High Premium, Signaling Central Bank Buying

Thursday, May 27, 2021


Gold stored at the Bank of England has been selling for unusually high premiums recently, signaling that central banks may be back in the market buying.

The gold in the Bank of England's London reserves -- one of the largest stashes of bullion in the world -- is stored and sold on behalf of other central and commercial banks as opposed to being owned by the Bank of England itself. It usually trades within a few cents an ounce of gold held at other London vaults run by commercial banks such as JPMorgan Chase & Co.

But in the past week, gold sold from the Bank of England has traded for as much as 50 cents above benchmark London prices, according to bullion traders. These premiums are at least in part being driven by buying from the Bank for International Settlements, which regularly trades gold on behalf of the world's central banks, a person with direct knowledge said, asking not to be identified because the information isn’t public.

The BIS bought as much as 1 million ounces of Bank of England metal from various commercial banks at a premium of 30 to 40 cents recently, one person said. The premium for gold at the Bank of England rose to as much as 50 cents an ounce late last week before tapering off to about 20 to 40 cents, according to bullion traders. That compares with a range of zero to 20 cents during normal circumstances, the traders said.

The buying may be a sign that one or several central banks are increasing their gold reserves, bullion traders said.


  1. good post and I'd rather continue to listen to you, than James Turk or anybody else who was ever on KWN :)
    Greets, AD

  2. 1) PROOF that there is no "shortage" of 400 oz bars: PHYS trading below NAV. Q.E.D.

    2) Bron wrote: "Then what will happen is dealers will be buying unallocated gold at a "spot" of $1200 and redeeming the unallocated and paying $10 premium separately."

    but Bron - the very act of doing this will drive up the $1200 price and close the gap... that's how arbitrage works...

  3. " A journalist at Reuters told me today that "We spoke to one of Switzerland's biggest refiners yesterday and they said that business is quiet at the moment. No mention to shortage of any form of bars." "

    Imo, 2500 to 3000 tons were liquidated in 2013(etfs, lbma, comex). Not much is left. The surpluses built up by the lbma in 2009 through 2012 were largely wiped out last year. So I would think activities of refiners would cool down some vs. 2013. Once China can't buy cheap gold, I think gold ramps up.

  4. Bron's Minutiae Aside, Let's Get Back To The Big Picture:

    GLD and Comex Make Up About 83% of The Top 15 ETF Gold Stocks Available For China To Steal. http://etfdb.com/type/commodity/precious-metals/gold-etf/

    This is where I think "THE INDICATOR" will materialize: When GLD can no longer give up it's gold to Asia, or give up its gold in order to prop up the totals for comex to keep it from collapsing.

    Top 15 ETF Gold Stocks Measured In Dollars (Gold at $1240): $39,836,897,000.

    Comex Gold Measured In Dollars(at gold $1240):

    Comex plus 15 Top Etf Gold Holdings:
    Comex Plus GLD/Comex Plus Top 15 ETF Gold Holdings = $41,051,642,000

    41051642000/49520360000 = 83%

    Before the GLD Gold Holdings Began To Collapse on 12-15-2012, GLD Held 43,040,927 oz

    Comex Held 10,990,000 oz.

    Today, GLD Holds 25,385,022 oz and Comex Holds Just 7,809244 oz. This is a depletion total of 20,836,661 oz. or 38.5% drop.

    At this rate, both GLD and Comex should hold zero oz. 2 years from today. Of course, I don't think it'll take that long. Something will trigger a complete shift in confidence long before that 2 years has passed. Here's a good recent article on this subject: http://www.zerohedge.com/contributed/2013-12-16/gold-etf-holdings-gobbled-china-where-gold-feed-golden-dragon-2014

  5. Bron, I agree with your comments about the premiums on wholesale vs. products, and really my agreement doesn't matter as long as the physical delivery mkts are based on the wholesale bars.

    Where can one find good information about what the real price of gold is? For example, what Perth Mint is really selling 400oz bars for, etc.

  6. Those premiums, even for kilobars, are not publically reported anywhere. You may seem them mentioned in news reports here and there.

    Thre is no premium on 400oz bars in wholesale market that we deal in. More than happy to sell a tonne of them at $0.50 - BBs, you have our number :)

  7. Isn't unallocated gold in essence bullion bank credit?

    Wouldn't a widening spread between the bid for Perth Mint physical gold & bullion bank credit be a sure sign of a run on the bullion bank? Or is that just a different way of saying the same thing?

    And does a run on one bullion bank automatically mean a run on them all?

  8. Yes, unallocated is mostly credit gold. A spread is not necessarily indicative of a run, I think we would have to see it increasing over time to establish a run. Whether it will affect only one or all I don't know, but I would imagine that it will affect all, depends on how factional each bank has gotten with their unallocated.