 It? Easy to Buy Physical Gold. But Have You Ever Tried to Sell It? |
Source |
American Shipper |
Post Date |
02/24/2025 |
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As it turns out, selling gold is more challenging than many had imagined.
For years, we?e been bombarded with commercials that entice us to buy physical metals, primarily gold, to hedge against uncertainty. It is touted as a way of accumulating and building wealth. Except for a lost decade following the 2011 blow-off top in gold, it has delivered on the promise for those who were diligent, patient, and willing to hold a so-called safe-haven asset through a nearly 50% drawdown. However, with gold prices quickly approaching $3,000 per ounce, we are starting to see those with memories of the global financial crisis and the eventual toll it took on gold holders considering selling their gold position to cash in on their urance.
As it turns out, this is more challenging than many had imagined.
This is shocking because many consider gold the quintessential commodity for its popularity, historical use value, and price performance. It is the one tangible commodity that is supposed to save us from an economic meltdown and fiat currency devaluation. Yet, it might not be as valuable as barterable items that can be used practically.
For instance, if the national lights are turned off and we no longer have access to the internet or other utilities, would you rather trade for a barbeque grill with a propane tank or a chunk of heavy metal that can look nice if properly scrubbed and shined?
Physical Gold Liquidity Resembles a Kiddie Pool The gold market is massive, and a relatively large percentage of the investment community has some holdings in gold or gold-related assets (ETFs, gold minor shares, futures, bullion, etc.). On the surface, one would conclude there would be no problem locking in gains on gold assets when the time comes.
With gold approaching $3,000 per ounce for the first time and the masses crowded into the trade, we suspect this is as good as any to cash in?nd arguably (in my humble opinion) a highly opportunistic time to do so. According to our analysis, most of the rally is behind us, and things could get rocky. Nonetheless, realizing the fruits of your patience might not be as easy as you think.
Those holding gold ETFs, futures, or miner shares won? have a problem offsetting positions, but if you are the type who prefers to acquire gold in a tangible form, you might find that the market is far less liquid than assumed.
To revisit the definition of liquidity, it is ? measure of the ease at which assets can be bought or sold without triggering large changes in price or experiencing price slippage.?Have you ever tried to sell a gold bar? Deping on the buyer, you will probably need documentation to prove ownership and an assay certificate of authenticity (as you can imagine, there are a lot of scammers out there).
Finding a buyer is problematic even after proper quality and ownership checks are completed. A jewelry store or pawn shop might take it off your hands for a significant haircut. eBay (EBAY) or other gold trading sites are options, but fees, shipping costs, and price slippage will be substantial, not to mention the inconvenience and risk of fraud involved in the process.
Bullion exchanges or gold dealers are probably the most efficient, but shipping, storage, and insurance costs could be a burden. I live in Las Vegas; there are multiple dealers here that will buy gold and silver bars directly from the public, so even if I were to drive across town to make the transaction, I would expect to take a haircut of $10 to $20 per ounce (remember, buyers of bars and coins pay a similar premium to acquire the asset so the entire round turn transaction might shave 10% from your profits).
But what if you are someone who has been buying gold bars incrementally for decades? A small dusty gold and silver shop a block off the Las Vegas strip isn? going to help you offload large hauls. In some cases, the gold might be held in a Brink? storage vault that requires a storage fee of about a half percent of the gold value, which might later require an armored and guarded vehicle to relocate the metal. As you would expect, this is quite costly.
Lastly, those with vast amounts of gold bullion to sell might be surprised to learn it will be necessary to shop the asset to several buyers. A single dealer or store would unlikely be able or willing to purchase large quantities of metal bars or coins. By definition, this is a vastly illiquid market.
Gold Futures Are Liquid and Convenient
For the sake of liquidity, convenience, and price efficiency, I genuinely believe the best way to participate in the long side of gold is via the futures markets. There is an opportunity to buy or sell 23 hours per day, five days per week, with minimal price slippage. It also offers the luxury of limit orders (name your selling price and let the order work around the clock for you).
There are no storage, insurance, or transportation costs, and the market is extremely deep. If leverage makes you nervous, it can be eliminated by funding your trading account with the full value of the futures contract. For instance, $30,000 on deposit with a commodity brokerage can be used to buy a single micro gold futures contract; this leaves the trader in a situation where they can only lose the entire $30,000 if gold goes from $3,000 to $0. Thus, it is a no-leverage proposition.
The full-sized gold futures contract traded on the CME Group? COMEX futures exchange division represents 100 ounces of gold with a minimum assay value of 995 fineness (99.5%) trades over 200,000 contracts per day. At $3,000 per ounce, each contract is valued at $300,000; a large gold futures holder could seamlessly liquidate millions of dollars in holdings without impacting the market or suffering from considerable price slippage.
Of course, the downside of futures trading is the hassle of rolling over expiring contracts three or four times per year and potentially suffering from a difference in contract price (known as contango). For instance, in mid-February, the April gold futures contract was $2,945, and the June contract was $2,970. Thus, a trader needing to roll from April to June to prolong the holding period would eat $25 per ounce.
Will Physical Gold Players Sell Futures?
We believe physical gold holders, realizing the lack of speed and ease of liquidating their holdings, will turn to the ?aper?markets to offset their price risk. In other words, they will be highly compelled to sell futures contracts to lock in current pricing while they attempt to undergo the process of getting their metal assayed and marketed for liquidation.
We suspect the lack of liquidity did the gold market in following the 2011 rally; markets don? always repeat, but they often rhyme. The bull market in gold was born during the financial crisis and had three large waves before peaking in 2011. During the last wave of buying, gold miner stocks did not follow the futures markets higher. We are seeing a similar t pattern and divergence between miners and prices. To put this into perspective, a 45% correction would put $1,650 in play if gold suffers the same fate.
Seasonality in gold turns bearish this week, and the gold bugs seem to be getting a bit over their skis. According to the COT Report, most buying power is likely employed, and the sentiment is quite lopsided.
Lastly, the gold market is being held hostage by threats of tariffs and the "smuggling" of gold from London to New York to avoid those tariffs and cash in on the arbitrage (New York gold is trading at a premium to London gold). We are hearing about commercial airline passengers coming over with precious metals (however, I have to question how they would get past security). In any case, The COMEX (New York) gold rush seems to be entering its silly era, and it could be a sign of trouble ahead for the gold bulls.
Both Londoners and U.S. natives have approached us with bullion to sell, but finding a buyer is challenging due to the requirements to get it assayed (certified), transported to the correct location, and in an amount someone can or will buy. This often means melting the gold into bite-sized pieces or at least 100-ounce bars, standard for COMEX delivery (London bars are 400 ounces by standard).
In short, those holding the heavy, dirty, illiquid metal will likely look toward derivatives to either hedge or lock in their price. If so, technical resistance and seasonal bearish tencies should reject the rally in the coming week or two.
Bottom Line
For a brief time, there was some talk of Bitcoin being the ?ew gold.?This mantra was about having an native asset to preserve wealth without the inconveniences of a physical asset. The precious metal has overcome that premise and has truly shone despite it. Yet, as the price of gold climbs, it is becoming evident that the most popular commodity in the world is shockingly illiquid. In our opinion, this is a recipe for disaster and might lead to massive selling pressure in the futures (paper) market.
Before buying a gold bar from Costco (COST) or booking tickets from London to New York in hopes of arbitrage, please consider more liquid options.
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