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What drives the disconnect betweenthe "Spot" price on Futures vs. Selling price of Physical Metal?

HJPHJP Posts: 404 ✭✭✭

In the futures market for precious metals, the ability to dictate the price of physical metals (especially gold / silver coins) seems to have come to an end - at least for now.

What specific reasons can we attribute this disconnect (non-political, please)?

Are you a buyer or a seller in this market - or both?
HJP

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Comments

  • Bayard1908Bayard1908 Posts: 3,637 ✭✭✭

    Dealers don't want to take a loss on their inventory. I don't think it's any more significant that this. If and when dealers start paying significantly over spot for your 90% or eagles, then I might be persuaded that there is a disconnect.

  • bronco2078bronco2078 Posts: 8,316 ✭✭✭✭✭

    @Bayard1908 said:
    Dealers don't want to take a loss on their inventory. I don't think it's any more significant that this. If and when dealers start paying significantly over spot for your 90% or eagles, then I might be persuaded that there is a disconnect.

    its 2020 though do we need to care about dealers? as long as the internet isnt down I don't need to care what dealers want

  • blitzdudeblitzdude Posts: 2,372 ✭✭✭✭✭

    Quick and sudden major moves always cause at least a temporary disconnect.

    I don't know if you will be able to buy $11 silver in the near future but premiums will certainly come down if prices remain at current levels for any length of time.

  • HigashiyamaHigashiyama Posts: 1,359 ✭✭✭

    Keep in mind that it is not a disconnect between the spot market and physical metal. What has really happened is that the mark-up on small transactions has increased dramatically.

    If you want to buy 5000 ounces, you can buy it at spot plus relatively modest transaction fees.

    Higashiyama
  • HJPHJP Posts: 404 ✭✭✭

    I have tried to buy 20,000 ozs at spot from dealers - any form. No Luck.

  • derrybderryb Posts: 28,381 ✭✭✭✭✭
    edited March 18, 2020 1:18PM

    @Higashiyama said:
    Keep in mind that it is not a disconnect between the spot market and physical metal. What has really happened is that the mark-up on small transactions has increased dramatically.

    That's called a disconnect.

    If you want to buy 5000 ounces, you can buy it at spot plus relatively modest transaction fees.

    You pretty much always could do this before the current disconnect/

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • HigashiyamaHigashiyama Posts: 1,359 ✭✭✭

    @derryb said "that's called a disconnect"

    Perhaps, but it's not a commodities market disconnnect. If you want to buy industrial quantities, you can definitely get it near spot. It's more of a disconnect in production and distribution to hobbyists.

    Higashiyama
  • derrybderryb Posts: 28,381 ✭✭✭✭✭

    I was under the impression that production is pretty much unchanged and that increased demand is permitting the disconnect.

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • HigashiyamaHigashiyama Posts: 1,359 ✭✭✭
    edited March 18, 2020 1:44PM

    Yes, that's very likely among those of us buying in 1, 10, or even 100 ounce units.

    Higashiyama
  • derrybderryb Posts: 28,381 ✭✭✭✭✭
    edited March 18, 2020 1:50PM

    kinda nice to see a free market set the price of a precious metal. A rare sight indeed. Permanent disconnect on hand?

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • shorecollshorecoll Posts: 5,112 ✭✭✭✭
    edited March 18, 2020 2:18PM

    I thought that some time back contract language changed and you can no longer buy a futures contract and then take delivery. That would allow a disconnect all along supply chains. Is this incorrect?

    ANA-LM, NBS, EAC
  • rawteam1rawteam1 Posts: 2,456 ✭✭✭

    Disconnect - the amount of money one needs to bail them out of a negative financial position held in physical metals... and put someone else in that same position... and them doing it willingly without physical force or threat ...

    keceph `anah
  • HJPHJP Posts: 404 ✭✭✭

    Disconnect in the context I am using it means disjointed or not connected.

    As in why...

  • zski123zski123 Posts: 222 ✭✭✭

    Don't listen to these people who say "no disconnect"! Suggesting you can find 15-20K oz to buy is an uninformed statement. True. Dealers aren't about to lose money on their inventory because they cannot even dream of replacing it. Physical is nowhere to be found. Let the people who claim there's not a disconnect offer you their silver at the $3 per oz premium. Should be an easy 20% gain once they buy replacement silver for a "small premium".

    The fact is we are seeing $10 premiums over spot everywhere. The US Mint will soon be unable to source to meet demand. Read the news people!

  • MsMorrisineMsMorrisine Posts: 23,595 ✭✭✭✭✭

    the us mint has a working stock from the us treasury reserves.

    Current maintainer of Stone's Master List of Favorite Websites // My BST transactions
  • derrybderryb Posts: 28,381 ✭✭✭✭✭

    It is my understanding the US mint outsources it's purchase of blank planchets. I recall a shortage in 2008-09 that the mint blamed on their planchet suppliers.

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • HigashiyamaHigashiyama Posts: 1,359 ✭✭✭

    @zski123 said "Don't listen to these people who say "no disconnect"! Suggesting you can find 15-20K oz to buy is an uninformed statement."

    May I clarify your assertion? Are you saying that you believe I could not buy 3 - 4 Comex futures contracts (https://www.cmegroup.com/trading/metals/precious/silver_contractSpecs_futures.html) for March 2020 delivery, and take delivery, with a cost close to current spot?

    Higashiyama
  • zski123zski123 Posts: 222 ✭✭✭

    @Higashiyama said:
    @zski123 said "Don't listen to these people who say "no disconnect"! Suggesting you can find 15-20K oz to buy is an uninformed statement."

    May I clarify your assertion? Are you saying that you believe I could not buy 3 - 4 Comex futures contracts (https://www.cmegroup.com/trading/metals/precious/silver_contractSpecs_futures.html) for March 2020 delivery, and take delivery, with a cost close to current spot?

    Not at all. You can buy all the futures contracts in the world. I'm saying you could not source the physical now in that quantity for anywhere near the price of the current COMEX spot. People are buying physical because of a doomsday scenario. The time between contract expiration and taking physical delivery (fees are tacked on) is the risk you take. There are instances where deliveries can be suspended or severely delayed.

    What I find a bit disturbing are the articles regarding the US Mint's sourcing issues to keep up with demand. Why wouldn't the mint use this current situation as a great arbitrage opportunity? They could take delivery at the end of March at these prices and maintain their current price point with obscene spreads. More power to them for it but the issue is taking delivery in a timely fashion. for you and I, it would also resolve the mint's issue with sourcing.

  • jmski52jmski52 Posts: 20,223 ✭✭✭✭✭

    Very good insights, guys. Very good.

    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • topstuftopstuf Posts: 14,138 ✭✭✭✭✭

    You can buy metal at any reputable dealer.
    You might have to wait to get it.

    It has NOTHING to do with the dealer's inventory cost!
    Any dealer who says it does is the wrong guy to deal with.
    Sheeeze!

    W.A.S.P.

  • derrybderryb Posts: 28,381 ✭✭✭✭✭

    @topstuf said:

    It has NOTHING to do with the dealer's inventory cost!
    Any dealer who says it does is the wrong guy to deal with.
    Sheeeze!

    Beg to differ, but like a dealer of rare coins a dealer of bullion is always looking at "what he has in it." While a dealer may sell at some loss, he prices to minimize that loss.

    That said, their are volume dealers who depend on cash flow who will not raise their premiums but will take their losses hoping that tomorrow will bring profit. They have to be large enough to survive the downturns, they do not know how long they will last.

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • jmski52jmski52 Posts: 20,223 ✭✭✭✭✭

    It has NOTHING to do with the dealer's inventory cost!
    Any dealer who says it does is the wrong guy to deal with.
    Sheeeze!

    What does it have to do with then? Do dealers hedge their inventory somehow?

    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • topstuftopstuf Posts: 14,138 ✭✭✭✭✭

    @jmski52 said:
    It has NOTHING to do with the dealer's inventory cost!
    Any dealer who says it does is the wrong guy to deal with.
    Sheeeze!

    What does it have to do with then? Do dealers hedge their inventory somehow?

    At times....yes. Few people ever deal with volume bullion dealers.
    See also:

    https://forums.collectors.com/discussion/1034663/memo-to-all#latest

    W.A.S.P.

  • topstuftopstuf Posts: 14,138 ✭✭✭✭✭

    @derryb said:

    @topstuf said:

    It has NOTHING to do with the dealer's inventory cost!
    Any dealer who says it does is the wrong guy to deal with.
    Sheeeze!

    Beg to differ, but like a dealer of rare coins a dealer of bullion is always looking at "what he has in it." While a dealer may sell at some loss, he prices to minimize that loss.

    That said, their are volume dealers who depend on cash flow who will not raise their premiums but will take their losses hoping that tomorrow will bring profit. They have to be large enough to survive the downturns, they do not know how long they will last.

    See: https://forums.collectors.com/discussion/1034663/memo-to-all#latest

    W.A.S.P.

  • derrybderryb Posts: 28,381 ✭✭✭✭✭

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • isaiah58isaiah58 Posts: 231 ✭✭✭

    @Higashiyama said:
    @zski123 said "Don't listen to these people who say "no disconnect"! Suggesting you can find 15-20K oz to buy is an uninformed statement."

    May I clarify your assertion? Are you saying that you believe I could not buy 3 - 4 Comex futures contracts (https://www.cmegroup.com/trading/metals/precious/silver_contractSpecs_futures.html) for March 2020 delivery, and take delivery, with a cost close to current spot?

    Please tell us how that works including all of the additional costs involved!!?? Start with what the contract is expected to close at please. Thanks

  • derrybderryb Posts: 28,381 ✭✭✭✭✭

    From 2008 but still valid, how to take COMEX delivery

    a real hassle but it can be done

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • HigashiyamaHigashiyama Posts: 1,359 ✭✭✭

    @isaiah58 asked "Please tell us how that works including all of the additional costs involved!!?? Start with what the contract is expected to close at please. Thanks"

    With respect to closing price, I am assuming that most board members who want physical metal are not trading it frequently. If you are a trader, then you should certainly stick only with financial instruments, which are very low risk if held for short periods of time. If this assumption is correct, the closing price is essentially irrelevant. Currently, March 2020 delivery silver futures are trading at about $ 12.12. So, if I buy a single futures contract for 5000 ounces, I will pay $ 60,600 plus a very small fee to the broker. This is my price. The spot price of course will be different in about 10 days when I want to take delivery, but that doesn't matter if I am buying and holding. I know exactly what price I am paying for the 5000 ounces that I will take possession of in 10 days. That of course is the point of a futures contract -- to lock in the price, today, of a transaction in the future.

    The link that @derryb posted is useful regarding the delivery process. It is definitely a hassle unless you are a big player. Personally, if I were buying just 5000 ounces, I would follow the approach mentioned in this amusing paragraph: "Some people actually turn up with a SUV, their receipt or certificate and have the gold loaded into the back of the SUV and drive off with it. Not something to tell the neighbors of course." I wouldn't worry about the risk of driving around with $60,000 of silver in the back of my car, and it would make for a good story, especially on these boards! In this scenario, the "transaction" cost of picking up the silver is mainly my time and expense. If I were to hire Brinks for a transaction of this size, the cost would be significant. On the other hand, if I were an industrial user of silver and were buying, for example, 100,000 ounces, the per ounce cost would drop markedly.

    In any case, at very high volumes, the spot and physical price pretty much converge.

    Higashiyama
  • isaiah58isaiah58 Posts: 231 ✭✭✭

    @Higashiyama I appreciate your explanation. It seems you have left out several additional expenses that you would be responsible for. Those middle man expenses are not easy to understand but are part of taking the initial ownership and eventually taking delivery. In addition, there are loopholes that protect the current owners from having to actually sell their silver.

  • WCCWCC Posts: 593 ✭✭✭

    @HJP said:
    In the futures market for precious metals, the ability to dictate the price of physical metals (especially gold / silver coins) seems to have come to an end - at least for now.

    What specific reasons can we attribute this disconnect (non-political, please)?

    Are you a buyer or a seller in this market - or both?
    HJP

    This has happened before. Last time I remember was in 2013 with another sudden price drop. Spreads returned to "normal" later (not too long to my recollection) and there was ample supply at the lower price.

    One option (mentioned on another forum) is to buy "paper" silver now (like SLV) as a hedge and wait for the spreads to close.

  • rawteam1rawteam1 Posts: 2,456 ✭✭✭

    @zski123 said:
    Don't listen to these people who say "no disconnect"! Suggesting you can find 15-20K oz to buy is an uninformed statement. True. Dealers aren't about to lose money on their inventory because they cannot even dream of replacing it. Physical is nowhere to be found. Let the people who claim there's not a disconnect offer you their silver at the $3 per oz premium. Should be an easy 20% gain once they buy replacement silver for a "small premium".

    The fact is we are seeing $10 premiums over spot everywhere. The US Mint will soon be unable to source to meet demand. Read the news people!

    Lol, and that’s why silver and gold are not money, but they maybe? Since “spot” or contract price for gold or silver as currency is not “honored” in these “volatile” swings, if bullion dealers were hedged, then there is no need for changing of the so called “premium”, but when you are on the losing side of a major inventory one must find a way out, send the risk to someone else and tell a tall tale that cannot be refused, there is zero shortage of silver, the scene in this movie has been played over and over...

    keceph `anah
  • bronco2078bronco2078 Posts: 8,316 ✭✭✭✭✭

    if you want to buy at a lower price just wait a while. This is not going to resolve in a day or a week, it will be months. The spreads will decline .

    Well not on the garbage metals, but silver and gold will get sorted

  • cohodkcohodk Posts: 16,104 ✭✭✭✭✭

    Has anyone walked into a pawn or coin shop with a bag of 90% or box of 1oz rounds to sell?

    What price were you offered?


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • TwoSides2aCoinTwoSides2aCoin Posts: 41,100 ✭✭✭✭✭

    Opinion ?
    The manipulation drove marketeers and wealthy entities to create an interesting paradox, by where there is not enough metal ( currently in the market) to account for the paper holding it. So somebody digs a deeper hole

    Paper or plastic ?

  • derrybderryb Posts: 28,381 ✭✭✭✭✭

    "What drives the disconnect between the "Spot" price on Futures vs. Selling price of Physical Metal?"

    Caused by effort by the seller to reduce/eliminate losses.

    We see this disconnect at its greatest normally right after a big drop in spot. In most cases sellers recently purchased their available inventory at much higher spot prices.

    The bigger the drop in spot the greater the disconnect.
    The quicker the drop in spot the greater the disconnect.

    Gradual/slower drops in spot allow physical sellers time to reduce inventory at much lower losses.

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • HJPHJP Posts: 404 ✭✭✭

    Seems most comments on this subject are addressing the resulting effects of "price disconnect", not underlying or "root" cause issues.

    I think at it most base level, the issue is Fear and Greed.

    IMHO, these polar (opposite) emotions drive all too many of our investment decisions.
    HJP

  • shorecollshorecoll Posts: 5,112 ✭✭✭✭

    Well put, Baley!

    ANA-LM, NBS, EAC
  • derrybderryb Posts: 28,381 ✭✭✭✭✭
    edited March 20, 2020 11:36AM

    beer premium not much different. beer spot price a bunch different because it is based on actual demand of the real, physical stuff. Even advance beer orders have full intention of being filled with delivery of the real stuff. Additionally, wholesale prices cannot be artificially lowered by purchasing beer shorts.

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • jmski52jmski52 Posts: 20,223 ✭✭✭✭✭

    Dang it, Baley. I forgot to stock up on beer.

    Q: Are You Printing Money? Bernanke: Not Literally

    I knew it would happen.
  • blitzdudeblitzdude Posts: 2,372 ✭✭✭✭✭

    The Commonwealth just closed down all nonessential businesses until further notice. Luckily amongst the grocery, pharmacy and gas stations; beer distributors made the list of essential. God bless The Commonwealth!

  • isaiah58isaiah58 Posts: 231 ✭✭✭

    Somehow they are discussing allowing alcohol delivery in Maryland!!!

  • shorecollshorecoll Posts: 5,112 ✭✭✭✭

    Not discussing...they are! Of course the daiquiris don't show up looking so hot. Shots are just fine.

    ANA-LM, NBS, EAC
  • cohodkcohodk Posts: 16,104 ✭✭✭✭✭
    edited March 21, 2020 8:59AM

    @cohodk said:
    Has anyone walked into a pawn or coin shop with a bag of 90% or box of 1oz rounds to sell?

    What price were you offered?

    Buehler? Anyone?


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • derrybderryb Posts: 28,381 ✭✭✭✭✭

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • bronco2078bronco2078 Posts: 8,316 ✭✭✭✭✭

    @cohodk said:

    @cohodk said:
    Has anyone walked into a pawn or coin shop with a bag of 90% or box of 1oz rounds to sell?

    What price were you offered?

    Buehler? Anyone?

    what do you mean? Just to screw with the owner?

  • cohodkcohodk Posts: 16,104 ✭✭✭✭✭

    @bronco2078 said:

    @cohodk said:

    @cohodk said:
    Has anyone walked into a pawn or coin shop with a bag of 90% or box of 1oz rounds to sell?

    What price were you offered?

    Buehler? Anyone?

    what do you mean? Just to screw with the owner?

    I want to know how much i can sell my silver for today....because its an emergency and i need cash now.

    I wish to cash in my insurance policy....how much will i get?


    Excuses are tools of the ignorant
    Knowledge is the enemy of fear
  • BaleyBaley Posts: 21,610 ✭✭✭✭✭

    @cohodk said:

    @bronco2078 said:

    @cohodk said:

    @cohodk said:
    Has anyone walked into a pawn or coin shop with a bag of 90% or box of 1oz rounds to sell?

    What price were you offered?

    Buehler? Anyone?

    what do you mean? Just to screw with the owner?

    I want to know how much i can sell my silver for today....because its an emergency and i need cash now.

    I wish to cash in my insurance policy....how much will i get?

    Put up a picture right here and the cash offers will just roll right in!

    Liberty: Parent of Science & Industry

  • derrybderryb Posts: 28,381 ✭✭✭✭✭

    @cohodk said:

    @bronco2078 said:

    @cohodk said:

    @cohodk said:
    Has anyone walked into a pawn or coin shop with a bag of 90% or box of 1oz rounds to sell?

    What price were you offered?

    Buehler? Anyone?

    what do you mean? Just to screw with the owner?

    I want to know how much i can sell my silver for today....because its an emergency and i need cash now.

    I wish to cash in my insurance policy....how much will i get?

    whole life or term?

    Money relies on its credibility with the people who are its users. And once that credibility is destroyed the currency is destroyed with it.

  • bronco2078bronco2078 Posts: 8,316 ✭✭✭✭✭

    @cohodk said:

    @bronco2078 said:

    @cohodk said:

    @cohodk said:
    Has anyone walked into a pawn or coin shop with a bag of 90% or box of 1oz rounds to sell?

    What price were you offered?

    Buehler? Anyone?

    what do you mean? Just to screw with the owner?

    I want to know how much i can sell my silver for today....because its an emergency and i need cash now.

    I wish to cash in my insurance policy....how much will i get?

    CALL JG WENTWORTH 877-CASH-NOW !!!!

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