NEW YORK (Kitco News) -- After Sunday night's gold carnage, physical buyers are emerging in Asia and North America providing a bit of cushion for the metal but causing the doubling of premiums paid on physical gold.
Gold prices ended the U.S. day session lower Wednesday, with prices nearing Monday's five-year low. Kitco's spot gold price was last down $11.40 at $1,092.00 an ounce -- off nearly 5% from a week ago. Gold peaked at $1,900 an ounce back in August 2011, but has tumbled on the back of a stronger U.S. dollar and expectations that the U.S. Federal Reserve will raise rates this year.
"[I]t is relevant that physical demand is now surging not only in the Far East but also in North America," said Peter Hug, the global trading director at Kitco Metals. "Silver products continue to be in short supply and now word has come that some of the more popular gold products, most notably the Canadian Maple Leaf, is in limited supply," he told Kitco News Wednesday. "Canadian Gold Maple premiums on the retail level have increased approximately $10 per coin," he said.
With many of the European manufacturers closed or at limited production capacity until mid-August investment product is becoming difficult to source in North America, Hug explained. "We are seeing a frenzy of physically buying," Hug explained, adding that the U.S. Mint and the Royal Canadian Mint were not prepared production-wise for a surge in demand. "We have a shortage of investment bars in the market and we are seeing premiums going higher." Hug warned not to chase the premiums, "people are scrambling to buy silver products at ridiculous premiums -- be a little more circumspect as to the products you buy," he explained.
Hug explained that U.S. Mint Silver Eagles were available at a retail price as low as $2.40 over spot silver. "Now the best price is $3.40 over spot - small silver bars are extremely tight and premiums on these have risen about 5%," he said. Hug suggested investors look at 100 oz. silver bars as an option, where there is steady supply and premiums are stable.
Before Sunday night's selloff, Hug forecasted that a 5% drop in gold was imminent. "Once we lost the $1,165 level for gold, the downside momentum was in place," Hug said, adding he was a little surprised it washed through $1,100. The 40-year trading veteran does not think it is a clear path down to the psychological level of $1,000. "I think it will be a grinding drop and my target is $1,020 -- at that level I would seriously consider being more aggressive on the buy side," Hug said.
On the silver side, Hug said the metal will have a more subdued performance. "Silver in percentage terms, as it did on the upside, is outperforming gold on the downside." If the $1,000 gold scenario came into play, Hug said silver prices can be expected to be in the high $12-range. Kitco's spot silver price was last quoted down $0.09 at $14.76 an ounce.