When Will The Physical Market Start Setting The Gold Price?

As readers know by now, currently the gold futures market is dominant when it comes to setting the short term price. But, increasingly, the signs of shortage in physical metal raise the question when the physical market will become dominant in leading the gold price. In this audio interview David Morgan explains his view on this phenomenon (the relevant part starts at 6 minutes 15 seconds). He also explains which signals would reveal a fundamental change.

In general, David Morgan points out that the physical gold market is breaking down, which is based on several facts. Germany was only able to receive its gold from the US over a period of 7 years. Lately, the Dutch bank ABN Amro officially refused to deliver physical metal for its customers with gold holdings; they could only settle in cash. Related to that, a lot of anecdotal evidence has been reported lately in which people testify that they could not receive physical delivery of their gold.

It is clear that something is going on in the physical market, mainly the facts related to Germany’s gold repatriation.

David Morgan believes that the paper market will still dominate the price through 2014. Right now, there are big differentials between the retail price and commercial bar prices. As long as commercial bars will be delivered in a somehow “timely” manner the paper market will have some basic credibility. Once that breaks down, it will signal the tipping point. It may be triggered by some large investors  like Paulson, Einhorn, or Sprott asking for delivery.

What we can expect in such a situation is that it will not be called a default. The mainstream press will find a lame excuse undoubtedly.

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