Divergence Between Paper and Physical Metal

There's something happening here
What it is ain't exactly clear
--Buffalo Springfield

Wanted to record observations that, after last week's meltdown in the paper precious metal markets, we have seen little change in physical metal prices--particularly silver. Some of the data points include:

Big demand surge in Asia. Retailers report months' worth of business done in a day or two last week. On Ask Fleck, a retail customer in Hong Kong reports: "The guy in front of me bought over $1 million USD in gold. He paid in cash and walked out of the door with the bullion in a Nike bag."

Prices of $10 face rolls of 1964 Kennedy halves (a favorite 'junk silver' denomination) on ebay have fallen about $10, from $250-$255/roll down to ~$240/roll, despite a ~20% decline in spot silver. Premiums between spot and Kennedy rolls have thus increased rather than decreased.

Apmex and other precious metal dealers are nearly sold out of silver bullion products. One dealer calls the current physical silver market 'ugly.'

Even high end coin dealers such as Legend Numismatics report very little decline in bid/ask on common old gold like as 'generic' ms66 Saints.

The data suggest a growing divergence between paper and physical markets. Lower prices are bringing out buyers for physical, which is what ECON 101 would suggest. The paper metals markets are dominated by leverage and subject to being pushed around, meaning that they are not subject to the same economic laws--at least in the near term.

Can't help but wonder whether we get a price flip at some point. The paper markets collapse as people lose confidence in the ability of the futures markets to make good on underlying physical metal. Investors subsequently pile into the physical market.

In such a case, bids for paper gold will be near zero; bids for physical gold will be, um, large.

position in gold, silver