Gold and Silver: Why a 2009-Like Price Surge Is Ahead

Gold_Silver_Price_SurgeDespite both gold and silver prices being depressed right now, the premium above the spot price to buy real gold and silver are at absurd levels.

When you go out to buy gold or silver bullion (gold and silver coins and/or bars), you pay a certain premium over the current spot price. If you purchase a gold coin when the spot price of gold is $1,130 an ounce, on a normal day, you might pay a $39.00 premium. For silver, the premium has historically been four to six percent above the spot price; if the spot price for silver is $15.00 an ounce, then you pay about $15.60 an ounce.

Gold and Silver Premiums Shooting Through the Roof

As of September 25, to buy an American Eagle gold coin from GoldCore (a large gold and silver broker), the premium is five percent over the spot price. (Source: GoldCore, September 25, 2015.) At a gold price of about $1,130 an ounce, buyers for real gold are paying $56.50 an ounce more.

The situation is worse for silver.

Taking data from GoldCore again; to buy an American Eagle silver coin, right now the premium is at its highest since 2009. The current premium on these coins is 34% over the silver spot price and you have to wait four weeks to get your coins!

With all this said, usually when the premiums on real gold and silver rise, it means demand is strong and there’s a shortage in the marketplace—this is basic economics. We saw something very similar back in 2009; premiums for gold and silver coins and bullion shot up, and a few months later, we saw a massive bull run in precious metal prices.

Precious Metal Shortage Coming?

If you think this is bad, then brace yourself—this shortage in the gold and silver market will only get worse.

In the first six months of 2015, U.S. mines produced 95,000 kilograms of gold. (Source: U.S. Geological Survey, last accessed September 29, 2015.) In the same period a year ago, they produced 103,000 kilograms. (Source: U.S. Geological Survey, last accessed September 29, 2015.) This represents a decline of eight percent in gold production year-over-year.

Silver production is dwindling, too. In the first seven months of 2015, silver mine output from Canada (one of the world’s biggest producers of silver) came in at 227,860 kilograms. In the same period a year ago, it was 287,857. This represents a decline of 20% in silver production out of Canada. (Source: Resource Canada, last accessed September 29, 2015.)

Gold and Silver: Solid Plays for the Long-Term?

When I look at all this, rising demand and declining supply, it just simply renews my optimism in gold and silver prices.

Over the past few years, gold and silver prices have been irrationally oversold. The spot market prices for both commodities aren’t telling the true story behind the demand and supply equation of the metals. As it becomes clearer and clearer, the Federal Reserve is limited in raising interest rates because the economy is so soft…that some form of QE4 may even be in the cards…gold and silver prices could rise sharply from their current levels.