Hypothetical question with gold down to $600

Ciccio

This is hypothetical or maybe it happened in the past but I wasn't around!
Sorry if makes no sense but I wanted to ask.

From January, gold has never been under $1050.
Let’s assume that no dealer had bought a 2010 1oz gold bullion coin for less than $900. (don't know the wholesale price they pays)
What would happen to the 2010 bullion coins if gold falls to $600/oz (I hope so... )?
Will they disappear from the market until gold raise again or the sellers will take the loss?

BigE

If a dealer has paid 1000.00 an ounce for a gold coin, and gold goes down to 600.00, its not a question of "taking" a loss, he has lost 400.00--------BigE

gecko109

Its all about "replacement costs" with dealers. Lets say im a dealer and I buy 10 gold coins at $1,000 each. Tomorrow gold drops to $600 and you call me wanting to buy gold coins. With the new price of gold at $600, if I can replace my inventory at $625/coin, I will sell you as many gold coins as you can buy at $650 each.

So, see, it doesnt really matter when a drop occurs.

PerryHall

<< <i>Its all about "replacement costs" with dealers. Lets say im a dealer and I buy 10 gold coins at $1,000 each. Tomorrow gold drops to $600 and you call me wanting to buy gold coins. With the new price of gold at $600, if I can replace my inventory at $625/coin, I will sell you as many gold coins as you can buy at $650 each.

So, see, it doesnt really matter when a drop occurs. >>



You give dealers too much credit. I know several dealers who will not take a loss on a coin no matter how low its value drops or how long he has to sit on it until he can sell it for a profit.

derryb

<< <i>If a dealer has paid 1000.00 an ounce for a gold coin, and gold goes down to 600.00, its not a question of "taking" a loss, he has lost 400.00--------BigE >>



Dealer doesn't realize the loss unless he sells for less than the $1000.00. Until he sells he only sees a drop in the value of this part of his inventory. If he holds the coin until gold returns to $1200 and then sells he never took a loss - he took a profit.

derryb

<< <i>

<< <i>Its all about "replacement costs" with dealers. Lets say im a dealer and I buy 10 gold coins at $1,000 each. Tomorrow gold drops to $600 and you call me wanting to buy gold coins. With the new price of gold at $600, if I can replace my inventory at $625/coin, I will sell you as many gold coins as you can buy at $650 each.

So, see, it doesnt really matter when a drop occurs. >>



You give dealers too much credit. I know several dealers who will not take a loss on a coin no matter how low its value drops or how long he has to sit on it until he can sell it for a profit. >>



Bullion dealers work under the above mentioned business model. Question is how long can they survive if gold continues a prolonged dive. Answer depends on how well they did (and reinvested) on the earlier ride upward.

roadrunner

If a dealer has paid 1000.00 an ounce for a gold coin, and gold goes down to 600.00, its not a question of "taking" a loss, he has lost 400.00

You're assuming that the "paper" gold (ie Comex futures) price falls to $600 will take the physical price with it to $600. We've already seen that when paper silver got whacked for about 50% of it's value in 2008 the physical price never got close to the low paper price of $8. Premiums were running very high at the time. Gold has reacted similarly. It's quite possible that the Comex or LBMA could run into liquidity issues where paper gold does actually fall to $600 while physical continues to trade for much higher levels (say $800-$1200). Let's face it, the paper gold markets are sort of a scam where they trade the annual world production of gold in about a week. There's not enough real gold to cover even a fraction of those bets. And in a year's time of trading they have effectively traded all the gold ever mined in world history.

Bullion dealers aren't in business to mirror paper gold trading activity. They are in the bullion market. Buyers aren't stupid and have shown that they won't give their gold away for peanuts when paper prices collapse. The world is inexorably devaluing paper currencies into the ground to help cover over the debt holes being created. In this environment where the confidence of currencies and govts is continually weakening, people realize that gold is a safe haven to currencies. It's no secret that gold bullion has far outperformed all currencies over the past 10 yrs. Gold holders won't give that away because of a posted Comex price saying their gold has "dropped" in value. The day will probably come where the paper price falls yet the physical price for real delivery continues to rise.

roadrunner

HalfStrike

When platinum prices crashed it was hard to find platinum near spot prices as well. I would guess though with gold there is enough dreck that it could be purchased at near spot prices and some will have to sell for a loss if that spot price stays for a length of time at $600.

TwoSides2aCoin

Well if gold drops, it creates opportunity for acquiring . If it spikes, it creates opportunity for profit.
In the meantime , there isn't much of a "wholesale" market on 2010 AGEs. Dealers typically have to pay spot plus 5 per cent, plus shipping, plus +++++++++ see the plus ?

Buy some. Even small amounts is better than none. Start with a small piece and move up if it drops. Or buy a lot and if it drops, buy a lot more. Gold is money when you need it, and a good savings plan if you don't.


( joe's humble opinion)

CaptHenway

<< <i>Its all about "replacement costs" with dealers. Lets say im a dealer and I buy 10 gold coins at $1,000 each. Tomorrow gold drops to $600 and you call me wanting to buy gold coins. With the new price of gold at $600, if I can replace my inventory at $625/coin, I will sell you as many gold coins as you can buy at $650 each.

So, see, it doesnt really matter when a drop occurs. >>



That is the way that the smart people do it, but it only works with easily fungible bullion such as eagles and maple leafs and bars and KRs. If I can replace it at x, I can sell it at x + a profit.

Of course, some people cannot think that way, and they lose business. That is why they are small-time dealers. I knew a guy here in Chicago who had a Singapore gold set he bought at $600 gold who would not sell it at $300 gold unless he got the $600 gold price. He died still owning it.

Of course, the same thing holds on the other side of the counter. Lots of people who want to sell to us cannot bring themselves to do so at a loss. They want us to buy from them at more than market because they are buried in the item. It doesn't work that way.

That is why when prices drop premiums rise, because sellers won't sell at the lower spot. In the meantime buyers are buying, and it gets harder and harder to find product.

TD

CaptHenway

<< <i>This is hypothetical or maybe it happened in the past but I wasn't around!
Sorry if makes no sense but I wanted to ask.

From January, gold has never been under $1050.
Let’s assume that no dealer had bought a 2010 1oz gold bullion coin for less than $900. (don't know the wholesale price they pays)
What would happen to the 2010 bullion coins if gold falls to $600/oz (I hope so... )?
Will they disappear from the market until gold raise again or the sellers will take the loss? >>



I assure you, the wholesale price of gold eagles is never $150 less than the spot price.
When we buy them from the public, we pay a little over spot.
When we buy them from the official Mint distributors, we pay about $44-45 over spot at current spot levels.

Ciccio

<< <i>

<< <i>This is hypothetical or maybe it happened in the past but I wasn't around!
Sorry if makes no sense but I wanted to ask.

From January, gold has never been under $1050.
Let’s assume that no dealer had bought a 2010 1oz gold bullion coin for less than $900. (don't know the wholesale price they pays)
What would happen to the 2010 bullion coins if gold falls to $600/oz (I hope so... )?
Will they disappear from the market until gold raise again or the sellers will take the loss? >>



I assure you, the wholesale price of gold eagles is never $150 less than the spot price.
When we buy them from the public, we pay a little over spot.
When we buy them from the official Mint distributors, we pay about $44-45 over spot at current spot levels. >>



Thanks Captain, I just put nbrs down.
Since you joined the conversation and I didn't make myself clear enough to have a clear answer, in my scenario, what would you (dealer) do with your 2010 gold bullion?
I am talking about the gold coins minted in 2010. Let's say that gold stays at $600 for 5 years and, as you said, you didn't pay any of them for less than $1050. Will those disappear from the market or what? Thanks!

PS: sorry I am not clear again, my english still sucks...

CaptHenway

I have 2010's in stock. I will sell them next week basis next week's spot prices, and replace them at next week's spot prices. It doesn't matter if gold is $600 or $1600. We will sell what we have and buy more to replace them. Our profit will be the difference between what we sell them for and what we replace them at.
TD

jmski52

Ciccio, does your scenario assume that gold is $1,000 one minute, and $600 the next? In that case, nobody will be replacing inventory right away. The market will be in turmoil, premiums will rise dramatically to cover the volatility, and it will take a few days to sort it out. Make no mistake - in that case, Captn will be taking an immediate hit if he decides to sell his current $1,000 inventory at $600 and then replace it at $600. When that happens, his premium will be high enough to allow him to do some fancy dancing until his profit margin is healthy again.

CaptHenway

<< <i>Ciccio, does your scenario assume that gold is $1,000 one minute, and $600 the next? In that case, nobody will be replacing inventory right away. The market will be in turmoil, premiums will rise dramatically to cover the volatility, and it will take a few days to sort it out. Make no mistake - in that case, Captn will be taking an immediate hit if he decides to sell his current $1,000 inventory at $600 and then replace it at $600. When that happens, his premium will be high enough to allow him to do some fancy dancing until his profit margin is healthy again. >>



Exactly.
I would sell at the new spot price plus whatever my new premium to replace is plus my profit.
That does not mean that if right now I am selling at $1100 + x I would be selling at $600 plus the same x. x would change.

Ciccio

Thanks again Captain and thanks jmski52.
My question wasn't clear enough and I didn't consider that such a drop won't happen in one day.
I had that thought and wanted to discuss it.

I have a better idea now on how things work. Grazie!

OzzyAndy

I would have thought that, say a dealer owns an average of 100oz of gold at a time lets say. Then he would sell 100oz of futures so that he's not exposed to the actual price of gold. Isn't that the whole reason for the futures market? I assume there are many companies using it to hedge their exposure, not just with gold, but with all other commodities.

I don't know any female bullion dealers so I've used he

Andrew

CaptHenway

Most retail dealers don't bother to offset. It costs a little money to do, and eliminates the possibility that you can make money on a rise in prices. We would rather gamble.

roadrunner

I would have thought that, say a dealer owns an average of 100oz of gold at a time lets say. Then he would sell 100oz of futures so that he's not exposed to the actual price of gold. Isn't that the whole reason for the futures market? I assume there are many companies using it to hedge their exposure, not just with gold, but with all other commodities.

That's how the gold futures market was supposed to work back in the 1970's but not any longer. Over the last decade the big banks have figured out that they control the bullion markets by being allowed to be labeled as commerical "hedgers" even though they have no significant gold in the ground (or above ground for that matter) to hedge against. And the CFTC has deemed that there really is no need for position limits on those short side hedges. Hence they can be as large as the banks want to make them. In silver, the situation is even more skewed.

roadrunner

jmski52

I would have thought that, say a dealer owns an average of 100oz of gold at a time lets say. Then he would sell 100oz of futures so that he's not exposed to the actual price of gold. Isn't that the whole reason for the futures market? I assume there are many companies using it to hedge their exposure, not just with gold, but with all other commodities.

roadrunner is correct in what he says - the banks can have 5,000 contracts on one side and 5,000 contracts on the other. Then, they can do as much imaginary buying and/or selling as they need in order to tip the market in the direction that is most advantageous to them.

In reality, the banks have a large position on the long side, but they have a gargantuan position on the short side, and when supply puts them in a bind someday, the CFTC will probably come to the rescue like they did when they torpedoed the Hunt Brother's attempt to take delivery of their legitimate position - the CFTC will simply suspend any buying and only allow selling to occur. That will cause the price to decline. Problem is, if the industrial users need metal and only selling is allowed, the market will have convulsions. Thank our illustrious regulators for that.

Back to the question. If a dealer did buy a 100 oz. hedging position for his 100 ounces, at some point he will be selling a portion of those ounces. When he gets down below 50 ounces, then his contract becomes more important to his propects for making money than his actual bullion buying & selling. Most dealers would rather be dealers than futures speculators, I suspect.

HalfStrike

The mining companies i think had a lot to do with the long gold selloff as they hedged their productions all the way down, and not until they started to cover those hedges did the gold price improve.

If the miners start to hedge again then I think that could be another top for gold.