Tuesday, May 05, 2009

Premiums Dropping on Gold and Silver

Gold Price Close Today : 903.70
Change: 2.10 or 0.2%

Silver Price Close Today : 13.402
Change: 30.9 cents or 2.4%

Gold Silver Ratio: 67.43
Change: -1.431 or -2.1%

Dow Industrial: 8,410.65
Change: -16.09 or -0.2%

US Dollar Index: 84.08
Change: 0.39 or 0.5%

When I left on 30 April gold was at US$890.70, silver at $12.305, the gold/silver ratio at 72.39, & the US dollar index at 84.78. Today, two business days later, gold stands at 903.70 (up US$13), silver at 1340.2 (up 110 cents), the ratio at 67.43, and the US dollar index at 84.08, up from yesterday's 83.69.

What in the world is going on? More than this, the Dow has jumped from 8,168 to 8,426 while premiums on physical gold and silver are plunging. What gives?

Easiest first: stocks were stymied by 8,200 resistance, and once they pierced that veil they were bound to jump. Time is running out on the stock rally, so they better make hay while their artificial sun shines. Top of the rally is probably not much higher than 9,000 Dow. You ought to be using this rally to sell and flee any remaining stock positions.

What puzzles me most are the plunging premiums. The buy side of 90% silver coin has dropped from 140 cents an ounce over spot to 40 cents an ounce over spot, in two days while silver has risen 110 cents. Normally I watch that premium because it grows at bottoms and shrinks at tops. Since September, though, it's been hard to tell what it's saying (other than "Thousands are rushing into silver at any price") because it has been uniformly high, from 35% to 20% over silver.

The sudden drop might have several causes. First, silver and gold dealers (with all due respect) tend to react like scared sheep. When somebody lowers his bid, they all panic and run the other way. That may be driving the premium drop. Or, their fear might have no more complicated explanation than a long wait for silver to rise, and once it topped 13, all those waiting sellers crawled out and sold. Finally, it might say that silver is about to drop, but it would be the first time in the 20 years I've been watching it that it behaved that way.

Best of all, the premium drop brings US 90% coin down to the same price per ounce as one troy ounce silver rounds, which makes me leap for joy, since 90% coin is so much more divisible. Another force suppressing premiums may be the US mint's increased deliveries of gold and silver American Eagles. The gold Eagles have dropped to $38 over spot at wholesale, and the silver Eagles dropped from $3.75 over to $2.50 over in one move. That has pressured premiums across the board.

Dropping premiums can mean that supply is increasing or demand is falling. I suspect both are working here, and if demand is slowing I welcome it as a necessary forerunner of a bottom.

From here gold must close above US$920 and silver above 13.50 to break out of this trading range. Whether it does that tomorrow, or fools around until August, I don't care. I'm just steady buying silver and gold, and will buy any breakout or dip.

The US Dollar index as humiliated yesterday with a trip below 84, but came back today to 84.08 today. Lower prices coming.

On this day in 1893 a panic hit the New York Stock Exchange, and by year-end the whole country was in the throes of a depression. (The more things change, the more they stay the same.)

I'm sorry I missed sending y'all a commentary yesterday, but I had to attend a funeral
in Memphis.

Argentum et aurum comparenda sunt -- -- Gold and silver must be bought.

- Franklin Sanders, The Moneychanger

© 2009, The Moneychanger. May not be republished in any form, including electronically, without our express permission.

To avoid confusion, please remember that the comments above have a very short time horizon. Always invest with the primary trend. Gold's primary trend is up, targeting at least $3,130.00; silver's primary is up targeting 16:1 gold/silver ratio or $195.66; stocks' primary trend is down, targeting Dow under 2,900 and worth only one ounce of gold; US$ or US$-denominated assets, primary trend down; real estate in a bubble, primary trend way down.