Are Derivatives Threatening Physical Gold & Silver?

The gold bullion holdings of the 14 largest gold ETF stocks fell 31% in 2013 to a paltry 1,813 tons. The gold spot price plunged 26% within the same time frame, the largest one-year decline since 1981. Bloomberg analysts have predicted that gold bullion ETFs could lose a collective 317 tons or more this year, so recent mint reports outlining steady U.S. sales of physical gold and silver may sound surprising. Let me explain why this trend makes perfect sense and could become a popular investing strategy among certain investor demographics.

Hedge funds and elite investors have been buying and selling gold for decades. They tend to trade in sizeable futures contracts and other derivatives. The innovation of ETFs gave household investors a similar opportunity: investing in paper gold.

Gold ETF companies are gold ETF companies. Not bars, not coins, not rounds. The vast majority of U.S. gold investors are focused on diversifying into a long-term wealth protection vehicle. Physical gold and silver is more suited to such strategies, while gold and silver derivatives probably have a better chance of making (or breaking) day traders.

With that said, massive sell-off in gold-based derivatives can (and have) demolished the gold price. That was a key cause of the price crashes in April and June of 2013. But again, part-time investors who just want to get some physical metal in their hands and/or their retirement accounts likely understand that while profits are likely in the long run, the immediate need is securing vulnerable paper with physical gold.

If you’re looking to make a quick buck by day-trading any type of gold-related investment, I wish you the best of luck. The many obvious discrepancies between physical gold and silver, and derivatives based on those metals, will likely come to a head soon. Gold and silver prices may be threatened by derivatives exoduses, but gold and silver values are as solid as they have been for the last 5,000 years.

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