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(Kitco News) – While gold prices appear to be trapped in neutral below $1,850 an ounce, physical demand for the precious metal seems to tell a different story, one of growing investor anxiety, according to some market analysts.
In its monthly sales data, the U.S. Mint sold 147,000 ounces of gold in various denominations from its American Eagle Gold bullion coins, May’s best performance since 2010. Compared to April, sales rose by 67%. For the year, demand for bullion increased by 617%.
Even excluding production issues related to COVID-19 from the equation, sales of gold bullion in the United States increased by more than 400% compared to the five-year average between 2015 and 2019.
Phillip Streible, chief market strategist at Blue Line Futures, said there is a false equivalence between gold futures prices and market sentiment.
“Bullion sales better reflect the anxiety investors are feeling right now. When you hear economists talking about a recession, it starts to show why bullion sales are so strong,” he said. “Gold will always be a long-term store of value.”
Daniel Pavilonis, senior commodities broker at RJO Futures, also said bullion sales better reflect current market sentiment.
He added that the futures market is currently too closely tied to interest rates which are expected to rise throughout the year. The Federal Reserve has signaled that it plans to raise interest rates by 50 basis points at the next two meetings. However, the markets expect three moves of 50 basis points.
Although markets expect the U.S. central bank to tighten monetary policy aggressively, Pavilonis said he doesn’t think interest rates can go too high because of the government’s huge twin deficits.
“Gold futures are capped by rising interest rates, but people have gone to buy physical metal to have real money hidden away,” he said.
Pavilonis added that he was ultimately bullish on gold as demand for the precious metal was solid. He said he considered gold to be undervalued given the inflation situation and its persistence through 2022.
While gold saw strong demand in May, investor interest in silver was relatively tepid. The US Mint sold 850,000 ounces of silver last month, unchanged from April.
The Mint has no data on silver sales as of May 2021. Silver sales are down 58% from the five-year average between 2015 and 2019.
Streible noted that the physical demand for silver is closely tied to prices. He added that if silver prices fall below $21 an ounce, he would expect demand for bullion to pick up.
A perfect storm is brewing in the global economy which is weighing on the silver market. The precious metal is in trouble as interest rates rise. At the same time, fears of a slowdown in global growth have dampened industrial interest in silver.
Disclaimer: The opinions expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure the accuracy of the information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. This is not a solicitation to trade commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article accept no responsibility for loss and/or damage resulting from the use of this publication.