With traders spooked, physical gold that you can hold in your hands is being traded for a high mark-up compared to the market price for gold.
BERLIN — It's not just toilet paper, hand sanitizer, pasta and flour that people are stockpiling during the coronavirus pandemic. Germans, we have seen, are also flocking to buy gold. Plummeting and volatile stock markets may be bringing down the price of precious metal futures — but when it comes to actual gold coins and bars, it's a different story.
Physical gold, that you can hold in your hands and take home with you, is already being traded for a high mark-up compared to the stock market price for gold. The stock market price – or paper gold price – refers to futures that are traded in the City of London, for example.
For investors in precious metals, the pandemic has brought about an enforced break. Over-the-counter trading of gold and silver has ground to a halt. "We have closed all our branches until further notice," says Markus Krall, CEO of Degussa. He says his company closed its doors before the official shutdown notice from the government, as it was only fair. "We have people standing in long queues, and that's not what you want in this kind of situation," Krall explains.
Although the pandemic will in all likelihood drive the global economy into a recession, it has caused a rise in customers for precious metal traders. At the beginning of the week, just before the shutdown, Pro Aurum reported a peak in revenue in its branches. They said that their sales had smashed their previous record, set at the peak of the euro debt crisis in 2011, increasing it by almost half.
Degussa CEO Krall also reported a dramatic rise in in-branch sales. On an average day in 2019, he said, they sold around 100 kg of gold in their branches. Just before the shutdown they were selling more than five times that amount. Now that all non-essential shops in Germany have closed their doors, trade has moved online.
The shortage in the physical market is taking its toll.
Almost all gold traders sell gold coins and bars online. However, they are now experiencing bottlenecks with delivery, and this shortage in the physical market is taking its toll. The agio – the mark-up that buyers pay on gold coins and bars compared to paper gold futures – has shot up.
For the most popular gold coin with German investors, the Krugerrand, which contains one troy ounce (31.1g) of gold, the agio is now around 12%. Before the crisis, it was 3 to 4%. In the middle of the week, a Krugerrand cost between 1,520 and 1,540 euros from most sellers. Buying an ounce of gold on the futures market cost around 1,375 euros. The mark-up is even higher for smaller coins. For a quarter ounce, it can easily reach a fifth of the futures price.
The shortage is being exacerbated by the fact that even established organizations are experiencing difficulties with delivery. The Bavarian State Bank, the biggest precious metals trader in southern Germany, has suspended all gold trading, "because of the unclear situation around production and delivery".
Handling gold in Tübingen, Germany — Photo: Fabian Sommer/DPA/ZUMA
The problem is that European production of gold bars and coins is centered in Ticino, Switzerland, which has been hit especially hard by the virus. "There has never been this kind of interruption to delivery," according to the Bavarian State Bank. They say that around two-thirds of the precious metals they sold were produced in Switzerland.
Given the severity of the crisis, people are surprised that the stock market price of gold isn't going through the roof. Krall has an explanation: "The stock market price of gold is going down because investors and sometimes also family-run businesses are having to liquidate their stocks."
People are buying gold like there's no tomorrow.
They are selling precious metals in order to have enough cash flow to see them through the crisis. There was a similar trend after the collapse of Lehman Brothers in 2008, when the margin call forced hedge funds and other major investors to dump all their stock into the market.
With savers, it's a different story. "People are buying gold like there's no tomorrow," says Krall. At the time of his statement, Degussa was still delivering almost all denominations of gold coins, partly enabled by the fact that they have their own refinery. "But logistically we'll struggle if there are any further hitches," he admits.
Closing down branches means that savers will have to wait a few days before they receive their gold coins and bars, and delivery costs are making it more expensive to buy them. Some people are also nervous about the lack of anonymity compared to buying in a branch, as ordering online means they have to give their home address.
Despite all this, gold is having a historic resurgence. In addition to the desire for security, there is another reason to increase the amount of gold in your portfolio. It's hard to predict how this crisis will affect the financial system in the long term, and even before coronavirus, the gold standard was an important benchmark for all other assets. Over the last 30 years, gold investments have paid out better than stock shares. The opposite is true for silver, which in 2020 is almost as far in the red as the stock market.
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