The 3 trillion dollar industry.
It’s really no secret what investment bullion is used for and this article isn’t really intended on harping on those things. The real issue is inventory.
Anytime Gold and Silver make it into a news cycle it always sends retailers (us included) into a nightmarish buying frenzy, calling every importer and supplier in the world and saying these words, “I’ll buy whatever is left.” This is something that is sort of unique to our industry. Now, the Precious Metals industry is large, in fact it’s huge. The global precious metal market is valued at around USD $185 billion dollars annually and is expected to grow at about 9% each year, for the next 7 years.
However, more than 80% of that market is for either industrial use or jewelry. This doesn’t even include Precious Metals ETF’s or futures, which on a daily over-the-counter basis encompasses USD $200 billion dollars’ worth of transactions. Market capitalization is nearly USD $3 trillion dollars, which surpasses the size of ALL European sovereign debt markets. In fact, only U.S. Treasury bonds and Japanese Government bonds are more liquid.
1 oz Silver Philharmonic Coins.
So what are you squeezing?
GameStop for instance has a market cap of $2.84 billion, which is a mere .01% the size of the PM market. On a daily basis 10 times more transactions occur than their entire market capitalization.
This is why that GameStop jump was awesome but would never happen to Gold or Silver futures.
Why the shortage then?
Some folks took the trending hashtag #silversqueeze as a buy indication for physical precious metals not futures or stocks. This emptied inventories globally which drove up the premiums (markup) of the coins, bars and rounds. This is because, unbeknownst to most, physical precious metal inventories are extremely small. There are certainly warehouses across the globe that house massive portfolios of solid, physical, Gold and Silver but when everyone is buying, they certainly aren’t selling. Those portfolios are privately owned and not considered inventory.
The reason inventories are small at distributors is an obvious one that folks don’t consider very often, which is money. A shoebox of Gold can cost $1 million dollars easily. For a company to have that type of liability sitting around waiting for someone to buy it is not only risky (think market loss) but is not a sound use of the money. It’s much more fruitful to broker multiple deals at a time, place an order with a mint and have them manufactured for the sale. This mitigates market loss potential and does not tie up enormous sums of money in the form of inventory at your warehouse.
Another reason is something that is always overlooked which is markups are miniscule for the retailer and supplier. Take a kilogram bar of Gold for instance, let’s say they are going for around $60,000 per kilo. You could expect to make about 2.5% on the sale of that bar which is $1,500. Not bad, but if you consider that you had to put up $60,000 worth of inventory for a return of $1,500, it’s actually not that great when you consider $60,000 worth of t-shirts could easily yield $120,000 in gross revenue.
Not to mention, in this day and age, and current market volatility a 2.5% deviation in market price could easily happen. Now you have to sell that kilo with a mark up of 5% and you’d better hope your competitor didn’t just order some bars and can now undercut you.
Are Physical Precious Metals rare?
By definition they are rare, on a daily basis it is very rare but the total above-ground stock of Physical Gold is estimated to be around 190,000 tons. Let’s dig into this a little bit deeper.
Gold Stocks, ETF’s and futures have a market capitalization of of $3 trillion dollars. Investors who own these investment vessels don’t actual own any physical Gold, though they are “backed” by Gold. Translate that how ever you want.
Physical above-ground Gold is estimated at 190,000 tons which is the equivalent of about $10 trillion.
190,000 tons? You are probably wondering why we don’t have Gold spilling out of the vaults.
No. Gold and Silver investors are a unique breed. Precious Metals are largely regarded as an investment that you hold on to forever, leave it in the will for the grand kids type of commodity. And when everyone is buying, the folks who have it do not sell.
There are two types of physical markets, the first type of market is the general distribution market. This is the stuff (typically) you get from us and the other big 3 dealers. This comes either directly from the mint to us or directly from the mint to an importer/supplier.
The secondary market encompasses folks who finally sell their bullion. This stuff is always awesome to get a hold of because it’s old, has a bit of wear and tare to it and just has amazing character. This usually gets gobbled up quickly by the guys who deal in numismatic bullion, which we do not. We do, however, get lucky and get some of this old stuff in and surprise everyone with some unique rare pieces in the crates. The premiums are honestly pretty low on this stuff too, but high everywhere else so we always get excellent reviews/comments from everyone.
1 oz Silver Buffalo Rounds.
Just a little insight.
Anyway guys, I hope this gives you a better understanding of why Gold markets seem so absolutely massive but inventories are constantly out of stock. As always, this is not intended as a buy or sell indication nor should it be considered as investment advice. All of our blogs and content on our website and social media accounts are for entertainment and informational purposes only. The prudent thing to do is to consult with a financial advisor before doing anything with your hard earned cash.
1/4 oz Silver Rounds.