Getting In the Mind of the Retail Gold Investor

My mother always told me that first impressions are everlasting so before I wrote this comment I put on my best suit and splashed on expensive cologne and got started.

Today we will attempt to get into the mind of the retail Gold investor. Who is this so called retail Gold investor? A person who is kind of middle-aged. Either retired or close to retiring. Has a stock portfolio. Trades with a stock broker or the more sophisticated, trades online. Has some money in the bank getting near zero pct. Has a big concern that he or she can’t retire because they believe that their money will not last. Probably has a small pension, might not be able to afford health care or long term care. Watching the wild swings recently in the equity markets and getting migraines watching the action.

So what is one to do? Dad, who probably is not around anymore, gave you or his grandchildren some coins to hold onto. You are sitting in the living room watching TV and a commercial comes on. “Now is the time to invest in Gold and Silver. Diversify your portfolio, get some hard assets in your hands. You will need it in this ever changing world.” The announcer says, “Governments are printing money at a unprecedented pace, you need to buy precious metals.” So you think to yourself, it might be worth a try. Gold is trading around $1,100 and silver is below 15 dollars. Maybe it’s time to put some money to work.

So we look at our markets over the last 6 months and what do we see? Prices are lower, but steady demand for physical products is off the chart. Wait times for delivery can be a month or more. Refiners and government mints are doing the best to meet the demand. Metal dealers are spending more time answering delivery questions than trading the actual product.

If you talk to brokers at some of the major brokerage houses, they will tell you that physical precious metal purchases have picked up of late, but overall not a number that will turn heads. Just some repositioning in their portfolios to prepare for more stock market volatility.

So why isn’t the price of gold skyrocketing? Why is there a disconnect between futures prices and the physical Gold and Silver demand? One Wall Street gold trader I believe has the answer. He said, “The best way to describe the disconnect between the price of silver and the strong physical demand we are seeing is the nervous retail investor seeing crazy swings in the equity markets. One would think, ‘With the price of silver so low, why not diversify a little and buy some gold and silver, price seems right.'”

So what do you think is on the minds of every precious metal dealer on the planet? What happens if the precious metals markets all of a sudden take a dive? What’s your guess? Ever hear the statement be careful what you wish for? Well buckle up my friends. With Gold and Silver not moving that much and refineries still playing catch up, if our markets head lower for whatever reason, we will NOT have enough metal to meet the demand. Even now every world mint is on allocation and every refinery and producer is on maximum capacity. So I’m reading your mind, why can’t they make more product? Is it a supply issue? Not enough scrap metal going into the refineries because of low prices? That is a factor, but a small one. The REAL reason is manufacturing capacity. What does that mean? It means that to produce a product, careful preparation takes place in every government mint and every refinery. At the beginning of the year, you plan for what you think the demand will be by putting in place the right machinery and the right talented employees to meet the expected demand. And when you get blown away, as all mints and refineries did in the most recent demand for metal, you are left scratching your head on how to boost up production. The answer is, you CAN’T! It’s not as easy as turning on a switch. So I stand before you not defending the mints or the refineries, just trying to explain hard facts. So back to my question what happens if the demand picks up? I’m running for the hills to hide for a while ’til the smoke clears. There just won’t be enough metal to meet the demand.

I think it’s time to take off the suit and roll up my sleeves I’m going to have a lot of work to do.

Walter Pehowich is the executive vice president of precious metals investment services for Dillon Gage with over 38 years of experience in precious metals investment services. His career began in 1977 at Bache (which evolved to Prudential-Bache Securities and then Jefferies Investment Bank). While at Jefferies, he served as senior vice president with oversight of investment grade precious metal products. Pehowich holds a National Futures Association (NFA) Series 3 license, authorizing him to advise and sell alternative investments in commodities and futures markets.