Did Warren Buffett just bet against the U.S. economy? His latest investment raises questions.

Buffett deserves credit for shifting his stance to the new reality as a result of the irrational policies of massive borrowing and money printing by U.S. leaders. Berkshire Hathaway BRK.A, 0.23% bought about 21 million shares of gold miner Barrick Gold GOLD, 0.57%, spending about $563 million. That’s according to a filing released Aug. 14.

Buffett’s conversion to gold is a signal for other stock market investors.

Let’s examine this issue.   Read More

The physical precious metals industry (bullion and sovereign coin sales) has never seen a period like this in the past 40 years, if at all. One way to succinctly describe the situation we’re in is a ‘perfect storm’. To explain, demand is elevated due to monetary and fiscal events comparable to the beginning of the Great Recession. This time, however, supply has been constrained by broken down supply chains whether we are talking access to raw material, transport costs increasing due to decreased scheduled airline routes, and labour constraints in production due to Covid-19 safety measures. Like many other industries, there are many aspects that make it not business as usual.

The great misconception by some though is that bullion is not being delivered. However, retail investors have been able to participate in this rally all the way back to its early days of March when silver traded briefly below $12 US/oz. Simply, the process was to purchase first and take delivery later. For many new and even regular buyers, this may have been a foreign concept, but all caught on almost instantly.

From our position though, we began to see demand for physical begin to pick up noticeably in October of 2019. It wasn’t at all to do with investors anticipating the shock of a health crisis or any other world moving events, but the elevated risk associated with equity markets trading near more elevated levels.  For obvious reasons sitting out of the stock markets wasn’t an option for many and precious metals were and still are an attractive and effective hedge.

Still in those months, we would have access to gold and silver inventories necessary to fill large orders and be able to replenish in order to continue to make immediate and forward delivery depending on the item(s) ordered. However, some of the items most in demand delivery was interrupted by the COVID-19 pandemic.

As the Royal Canadian Mint (RCM) shutdown production for the final two weeks of March owing to the unknown nature of the virus, the void for supply of the RCM’s Silver Maple Leaf had to be filled by other refiners (primarily private) out of the United States that made products we refer to as a near perfect substitutes. It’s fabricated silver for the retail investor that buys and sells for a slight discount to sovereign coins, and is just as recognized, and perhaps not as preferred by some. To us as a dealer, if its good silver we will trade it.

Like silver, Gold Maple Leaf coins saw a brief hiatus for immediate delivery, but we were able to make up the void with recognized Swiss Bars. The only challenging investment decision for our customers was whether they were willing to take on the extra premium risk that was in their investment as supplies tightened and prices for physical expanded owing to the excess demand. Those that bit the bullet and bought silver before its biggest weekly rally in 4 decades have been amply rewarded.

Because of this ‘perfect storm’ though, every player in the supply chain was incurring additional costs in the process of getting their product to market. Premiums became wider than historically normal, but in this scenario the Latin term “caveat emptor” comes to mind. This market is extremely transparent in terms of what the paper market trades for (which the physical price is based on) and thanks to the internet, the pricing by competitive sellers.

We had many conversations with customers where the phrase “historically larger than normal premium to the spot price is being paid.” To us more than anything, it highlighted the demand for physical, especially as we’ve seen the alternatives like ETF holdings maintaining all-time-record levels and the resurging interest in mining stocks.  But the times have dictated that the axiom of customers wanting to own real hard metal.

As gold this past week took out its nominal record highs in US dollars, we’ve seen some customers begin to liquidate positions. Whether they were in it for the short-term trade (which isn’t recommended in physical because of relatively higher transaction costs) or they’ve held for multiple years and see more productive use for the cash elsewhere, they’re attracting unbelievably high premiums on their sales, meaning the price we would pay above the spot market. Patient investors in what was an especially dormant decade for silver prices are looking to take advantage.

As investors have not been stunted by higher prices, the question arises around what may give. In many instances gold and silver see a bit of an economist’s quagmire in which higher prices see higher demand. One thing for certain though with the volatility of precious metals markets and when that inevitable pull-back comes (at whatever level), is one again to anticipate some time for delivery.

Robert Levy, Border Gold Corp | www.bordergold.com