NEW YORK (TheStreet) -- These are extraordinary times for the precious metals markets. And not just because of the headline price action. Underlying developments in the supply-and-demand fundamentals for physical gold and silver are extraordinary in their own right.
If recent trends could be summed up in one word, it would be bifurcation. On one hand, the paper market (i.e., futures contracts) continues to be heavily pressured in a bearish direction by extraordinary levels of institutional short-selling. On the other, the physical market is heating up with robust investor buying and increasingly bullish long-term supply/demand prospects.
It's been extraordinarily difficult for some investors to keep their conviction and hold on to real value while paper markets relentlessly discount it. But most bullion investors recognize the extraordinary buying opportunity at hand. That's evidenced by the fact they are rushing to buy, not sell, gold and silver bullion products at discounted prices.
1. Investment Demand for Gold and Silver Coins Surges
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The first (and perhaps most important) extraordinary development now taking place in precious metals markets is a surge in demand for bullion coins, bars, and rounds. The U.S. Mint suspended sales of Silver Eagles for most of July because it couldn't keep up with demand. The Mint's sales of Gold Eagles in July reached their highest monthly total in more than two years.
Australia's Perth Mint reports its inventories are being cleared out by surging demand, especially from Asia. "Everything we get in is going straight out the door as soon as we refine it," said Perth Mint Treasurer Nigel Moffatt in a Bloomberg interview.
Private mints are swamped as well, pushing out delivery for weeks while scrambling to obtain raw silver for minting so they can keep the manufacturing process running at full tilt.
2. Supply Tightness Drives Rising Premiums
When demand for refined precious metals products exceeds available supply, the inevitable consequence is rising premiums. The premium over spot prices attached to Silver Eagles hit multiyear highs in July.
Premiums on pre-1965 silver coins and other popular bullion products are also on the rise. Even privately minted rounds and bars that are normally plentiful in the market are becoming harder to come by. In short, the physical bullion market is beginning to decouple from the paper price-setting market.
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