The Gold Shortage: Why It Might Be Hard to Find Gold When You Want It

There is a treasure near the city of Cartagena, in Colombia.

Buried 600 metres under the sea, it’s estimated Galleon San Jose holds around US$17 billion — yep, with a ‘b’— in its belly. It could be the largest treasure discovery ever. That is, if it ever comes back up to the surface.

Over 300 years ago, the 35-metre long ship left the docks heavy with gold, silver and precious stones for Spain. The cargo was supposed to be much-needed tax revenue from the colonies to the Spanish crown to pay for war.

Yet after it left Cartagena, the English attacked and sunk the galleon.

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In 2015, the Colombian government announced they had found the ship’s location. But it’s been five years since the discovery already, and the galleon and its fortune are still resting at the bottom of the sea.

That’s because no one can agree on who the ship belongs to.

The underwater archaeology company, Sea Search Armada, claim they have a stake in it. They say that the Colombian government found the ship by using coordinates they had provided them back in 1982 when they went looking for it.

Colombia, on the other hand, says the ship isn’t located on those coordinates, but near them.

And then there’s Spain, who claims they have a right to the ship as it’s the tomb of hundreds of Spanish nationals.

And of course, much of that gold actually came from Peru’s mines…

So, who does the ship belong to?

Is it Colombia, as the ship is in their waters…Spain, as it’s their warship…Peru, where the gold and silver came from…or the treasure hunting company Sea Search Armada?

I haven’t got a clue.

All I know for sure is that there wouldn’t be so much interest in Galleon San Jose if instead of holding gold it was holding…oh, I don’t know, US continentals or German papiermarks for example.

For now, the treasure still lies under the sea, untouched.

Now, there is a reason why I bring up Galleon San Jose.

Something interesting is happening in the gold and silver markets.

You see, as countries and states go into lockdown, shutting borders and restricting travel because of COVID-19, some gold miners are making changes to protect their workers and communities.

In late March, Newmont Corporation [NYSE:NEM], announced it was putting four mines into temporary care and maintenance. These are Musselwhite and Eléonore in Canada, Cerro Negro in Argentina and Yanacocha in Peru, which make up 20% of their production.

Newmont is one of the largest gold explorers in the world. At the same time, they withdrew their full-year 2020 guidance because of the outbreak. They anticipate that some of the production may be pushed back into 2021.

They’re not the only ones.

Kitco reports:

One-third of NYSE-listed senior gold miners have withdrawn 2020 production guidance […] And as more miners reckon with the impact of COVID-19, the number should rise.

Gold Shortage - Senior Gold Miners Who Withdrew Guidance

Source: Kitco

Why We Have A Physical Gold Shortage

The supply of gold is there, we are just having trouble accessing it. As a result there is a perceived shortage of physical gold.

And then there is shipping…or lack thereof.

Miners usually use commercial airlines to transport their metals to refineries, who then turn it into bars or coins. With most commercial flights stopped around the world, miners need to find alternatives.

Problem is, miners are supplying less at a time when demand is surging.

A pandemic has stopped the world, and the world as we know it is changing.

Central banks have quickly lowered interest rates to record lows, or even negative. It’s why the price of gold has also gained ground. You see, gold has no yield. Yet with developed countries increasingly lowering their interest rates towards zero or even negative, and banks starting to charge to keep a deposit, gold’s appeal is increasing.

Central banks are also starting unconventional policies like quantitative easing to stop the fallout. They are testing the limits of how much central banks can do to prop up the economy.

Is there a limit to the credibility of fiat currencies, that is, currencies that aren’t backed up by anything? We could be about to find out.

At the same time, unemployment is spiking and there are shortages as the outbreak affects global supply chains.

All this fear and uncertainty is increasing the demand for gold. But as I said, dealers and mints are having trouble sourcing gold to meet demand.

If you jump onto the Perth Mint’s website for example, they’re out of stock on cast and minted bars and they’re only producing a handful of gold and silver coins.

On 15 April, the US Mint announced they would be temporarily stopping production at their mint in West Point, New York because of COVID-19. This is after selling out of American Eagle silver coins and gold coins.

It’s getting harder for investors to find physical gold.

As Bloomberg reported:

Some dealers are desperately contacting clients to see if anyone is willing to sell their gold bars and coins, and offering a rare premium over spot prices. Others have given up trying to trade altogether.

“People want to buy, not to sell gold,” said Mark O’Byrne, the founder of GoldCore, a dealer based in Dublin. “We have a buyers’ waiting list and we emailed our clients seeing who wished to sell their gold. At this time there is roughly only one or two sellers for every 99 buyers.”

Size is a key reason for the crunch. While there’s plenty of gold in a big trading hub like London, banks and other institutional investors there typically use large bars of 400 ounces. That’s not practical for a regular person who may not want to cough up more than $600,000 for a single bar. Instead, retail investors prefer kilobars (about 32 ounces), 1-ounce bars and coins, or something even smaller…

Premiums in the retail market “have exploded,” said Markus Krall, chief executive of German precious-metals retailer Degussa. The average price of products in shops is somewhere between 10% and 15% over spot prices, which he’s never seen before, Krall said. Demand, too, is at the highest level he’s experienced.

You have to wonder what all of this will do to gold prices, which are still influenced by changes in supply and demand.

The matter could be short-lived…or it could go for a while. There is no telling how long COVID-19 will keep causing disruptions.

We are entering a period of uncertainty and change is happening very fast. Our economic world has stopped, and we don’t know yet what the effects of this economic hiatus will be, but the world could look very different when we resume.

It’s likely that investors will keep on buying gold and precious metals as long as the pandemic lasts, but they may have trouble finding it…or have to pay a premium for it.

Best,

Selva Freigedo

PS: In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you must take now to protect your wealth. Learn more.


Selva Freigedo is a research analyst for The Rum Rebellion. Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table. Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default. Selva has also lived in Brazil, Spain and the USA. Back in 2000 she was living in the US as the dot com bubble popped… And in 2008 she was in Spain as the property market exploded and then collapsed… She has seen first-hand what happens when bubbles burst. Selva joined Port Phillip Publishing’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


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