Gold’s Conflicting Price Signals: Paper Boom and Physical Bust

Gold’s Conflicting Price Signals: Paper Boom and Physical Bust

Imagine a commodity that posted a strong 12.8% rally in prices in the first quarter despite demand dropping a staggering 26% as buying collapsed in the world’s two biggest consumers. Welcome to the weird world of gold.

Clyde Russell of Reuters raised this very peculiar situation almost a week ago. Highlighting the current disconnect between paper gold and physical gold.

Just in case you’re out of the loop, paper gold is exactly what it sounds like. It’s a piece of paper or acknowledgement of a gold-related asset.

For example, a gold certificate, gold ETF, or even gold mining shares are all considered ‘paper gold’. Investible instruments that don’t entitle you to physical gold but are correlated with it.

It’s the next best thing to actually buying physical gold.

Which begs the question, why is there such a mismatch between the direction of paper and physical gold?

Price on the rise

When it comes to paper, the reason for the rally is simple.

Investors — both retail and institutional — are flocking to gold.

It is an asset that has long held a status as a safe haven during times of market uncertainty. And right now, with a pandemic in full swing, investors are clamouring for that safety.

As long as markets remain volatile, then gold will see strong interest. It’s one of the most well-known and easiest ways to hedge against an economic downturn.

Today, that’s exactly where much of the world economy finds itself. In a downturn.

With nations in lockdown, a deadly virus still about, and ongoing political battles, things are pretty rough right now. And until they we start to see signs of improvement, many people will put their faith in gold rather than the stock market.

Jim Rickards is certainly one of these people. He firmly believes that investors need to be prepared for more pain to come. That’s why he continues to make a case for gold, which you can read about here.

Suffice to say, the surge in price for paper gold hints at potentially more pain for stocks.

Demand on the decline

As for physical gold, well the collapse in demand is a little trickier.

At first glance you’d be forgiven for thinking this may be bad news for gold. After all, if people aren’t buying bullion then perhaps there is a pricing error.

That’s not the case, I’m afraid.

See, this slump in demand is stemming largely from India and China. The two biggest markets for physical gold.

The reason people aren’t buying though is simply because they can’t. With lockdowns still in place in certain parts of both countries, many jewellers and brokers can’t open their stores.

Plus, even if some are open, people aren’t exactly racing outside. The threat and fear of this virus is still very much at the forefront of most people’s thoughts.

Going out to buy physical gold doesn’t really seem to justify the risk of getting sick. Not when you can just buy paper gold from the safety of your own home.

However, that doesn’t mean demand for physical is completely gone either.

In fact, in Australia, demand for physical gold is up! The Perth Mint is having a bumper run at the moment with online sales up 22% recently. A trend that has been fairly consistent for most of 2020 so far.

As World Gold Council director John Mulligan comments:

We recognise local investor interest in the country has been growing lately and has significant potential to grow further.’

So, for Australians, buying physical gold has never been more topical.

If that’s something you’re interested in, then we suggest you check out our gold buying guide. A detailed look at the easiest way to get your hands on some physical bullion. Get your free copy, right here.

Physical demand may be low for now, but it is simply just an anomaly. As soon as these lockdowns are out of the way, we could see a surge in sales.

At the very least, the outlook for gold is looking bright.


Ryan Clarkson-Ledward,
For The Daily Reckoning Australia