Back in late 1985, the US Congress
authorized the Gold Bullion Coin Act of 1985 which President Ronald Reagan
promptly signed into law. It ordered the US Treasury, through its US Mint
branch, to start producing gold bullion coins. This law outlined very
specific requirements for these new coins, including that they be produced
from gold mined in the United States.
This legislation, partially in
response to the soaring popularity of foreign national coins like the famous
South African Krugerrand in the early 1980s, ushered in the modern era of
American bullion coins. The American Gold Eagles and American Silver Eagles
that emerged out of this program have since grown very popular among
investors worldwide for several reasons.
As bullion coins (as opposed to
numismatic coins), the American Eagles should sell for not much more than the
fair-market value of their actual metal content. So for any given amount of
capital, an investor can own much more gold or silver in the form of bullion
coins than he could in rare numismatic coins which command steep scarcity
premiums over gold and silver prices.
In addition, the Eagles are very easy
to buy and sell at any coin dealer worldwide. They are universally
recognized, their bullion content is certified by the US government, and their primary one-ounce increments are easy to afford for every dealer
and almost all investors. They are also very durable, as the Gold Eagles are
22 karat gold (just under 92%) alloyed with silver and copper. While
they do still contain a full troy ounce of gold, they are less fragile than
soft pure-gold national coins like the Canadian Maple Leaf.
Finally, the Eagles are very beautiful
aesthetically. While most of my physical gold and silver investments are
hidden away, I always keep a handful of Gold and Silver Eagles floating
around on my desk. They are fun to look at and handle, and they anchor the
vast ethereal world of electronic gold markets to a tangible physical
reality. They are also great to show to potential new gold investors. Once
they first hold real physical gold coins in their own hands, they are usually
hooked and want some of their own.
While I love the Eagles and can never
own enough of them (they are addicting), like most investors I am disappointed
with how the US Mint has handled its legal mandate to produce them. The Gold
Bullion Coin Act of 1985 explicitly states that these coins must be produced
“in quantities sufficient to meet public demand”.
For bullion coins, this means there
must be enough of them in the wild to keep them from trading at a significant
premium over the spot price beyond a normal bid/ask spread. If you or I
want Eagles, we should be able to buy them anytime close to the spot metals prices. For
nearly 22 years after the first Gold Eagles were produced in late 1986, this
was usually the case. But back in August 2008, the US Mint abruptly stopped
selling these popular coins to dealers for the first time.
I discussed this gold bullion shortage
in the September 2008 issue of our Zeal
Intelligence
monthly newsletter. If you are a subscriber, you can download it off our
website archives and learn about last year’s fascinating bullion
shortages in depth. For our purposes today though, the key point is in
August 2008 the Mint gave up all pretenses of trying to meet demand as
mandated and started rationing Gold Eagles on a limited basis.
This episode was exceedingly
interesting because it betrayed underlying physical-gold demand from
investors growing at far higher rates than the futures gold price at the time
suggested. I started digging into the Mint’s Eagle sales in
September, but then I got sidetracked by the epic Great Stock Panic of 2008. When the flagship S&P 500 stock index
plummets 30% in just 3 weeks, it demands our full attention as investors and
students of the markets.
Fast-forward to this week when I
happened to run across a Financial Times article on record bullion sales in
January that rekindled my interest in Mint bullion coin sales. It said
US Mint gold coin sales in January 2009 were almost 4x higher than January
2008’s! So I dusted off my pre-panic spreadsheets to take a look
at Eagle sales by the Mint over the last decade or so. The raw data is
encouraging yet curious in many ways.
The US Mint reports bullion coin sales
monthly, so I superimposed this monthly data on top of daily gold and silver
prices for comparison. It is denominated in thousands of ounces of gold and
millions of ounces of silver per month.
In the case of silver, 100% of these sales are 1-ounce Silver Eagles. So in
the second silver chart below, the right axis shows both actual coins and
actual ounces of silver sold.
But for gold, the Mint produces
American Gold Eagles in 1-ounce, half-ounce, quarter-ounce, and tenth-ounce
increments. The smaller fractional coins are great for very small investors
or to give as gifts to kids to get them interested in precious metals. But
most of the Mint’s Gold Eagle production is still in the full-ounce
coins. Since 2000, about 3/4ths of the Gold Eagle production by bullion
ounces has been in the form of these 1-ounce coins. The right axis in this
gold chart is total ounces
of all Eagles, not total coins.
The most fascinating aspect of this
chart is the huge surge in
Gold Eagle sales during the panic months in the second half of last year. In
August GE sales soared to 86k ounces, nearly a bull high (January 2003 had
96k). In September they surged again to 113k, and then stayed high near 122k
in October and 117k in November. In December they rocketed again to
176k ounces, a massive new bull-to-date high.
As you can see in this chart, the
futures-driven gold price was actually falling until mid-November. Gold
was getting weaker, which usually retards investment demand, yet GE sales
were still soaring. The extreme fear billowing out of the stock panic led to
great physical-gold-coin demand. This episode is a perfect example of the
flowing and ebbing disconnect between physical gold and futures gold. I
discussed this disconnect in depth in the 9/08 Zeal Intelligence.
Soaring physical-gold demand for Gold
Eagles is very bullish. As this gold bull continues maturing, more investors
are becoming aware or gold’s dazzling
fundamentals
and great potential. The panic really drove home this message to non-traditional
gold investors. While the S&P 500 plummeted a gut-wrenching 38.5% in
2008, gold actually rallied
5.7% last year. The more investors who ultimately deploy capital in gold, and
every investor should have
a core physical-gold position, the bigger this gold bull will ultimately
grow.
So record Gold Eagle sales in late
2008 are a very bullish omen for gold, its investment market is expanding. It
was investors so aggressively buying these bullion coins that led to
August’s Gold Eagle rationing. I hope the US Mint lives up to its
Congressional mandate to “mint and issue the gold coins… in
quantities sufficient to meet public demand” and ramps production in
response to this incredible gold-demand renaissance.
Speaking of production, I am amazed at
how erratic these monthly Gold Eagle sales are. It is true these numbers are
sales, not production, yet
still production and sales should be directly related. Bullion coins have to
be minted before they can be sold. The Mint has some finite capacity to
produce Gold Eagles and I wonder what its capacity-utilization numbers look
like over the long term. In a Wall Street Journal article last August,
the Mint said it was “working diligently to build up our
inventory”. But during a secular gold bull, shouldn’t the mint
actually anticipate
increasing gold investment demand and produce accordingly?
This erratic sales data masks a
somewhat-disturbing trend. For each calendar year, I averaged the monthly
sales figures and plotted them in yellow above. Between 2000 and 2004,
monthly average Gold Eagle sales gradually grew from under 14k ounces to
nearly 45k. But in 2005, 2006, and 2007, they seriously retreated. By 2007,
amazingly the average monthly GE sales contracted to nearly 2000’s
levels which reflected low demand near the end of gold’s last secular bear. Why?
I don’t know the answer. No
matter how many gold coins I buy, how many coin dealers I talk with, how much
research I do, the gold-coin world remains murky, secretive, and fragmented. Was
physical-gold coin demand lower in 2007 despite gold surging to bull-record
highs in the second half of that year? Was there a glut of Gold Eagles on the
market relative to demand so the Mint had to scale back sales? Was it
still producing at a higher rate than it was selling the Eagles?
One way to help illuminate these
questions would be to get a rock-solid daily
dataset of the premium of Gold Eagles specifically relative to the spot gold
price. The rise and fall of premiums on these coins would make much clear
that the Mint sales data does not. I have tried for years to get such a
dataset, but to no avail. If any coin dealers want to share daily Gold Eagle
premium data with me since 2000, I will gladly give you full credit (and
fantastic marketing exposure for your business) in a future essay exploring
your dataset. If I am lucky enough to get multiple datasets, the cleanest and
most complete one will win.
In the absence of this daily premium
data, the declining average Mint GE sales in 2005, 2006, and 2007 will have
to remain unexplained. Nevertheless, the huge surge to bull-record levels in
late 2008 is very bullish and encouraging. This surge was so darned massive
that a mathematical best-fit line drawn through this entire dataset is rising
nicely solely because of late 2008.
While the Mint’s Gold Eagle
sales seem pretty erratic to me, its Silver Eagle sales make GE’s data
look like the paragon of stability. Sales volume here can literally fluctuate
by an order of magnitude from month to month! A prime example is
November and December of 2002. The 2.5m Silver Eagles sold by the Mint to
dealers in the latter month ran 14x
the sales volume of 0.18m in the former month!
This crazy variability makes trends
harder to perceive at first glance, so I again averaged monthly sales on a
calendar-year basis in yellow. Interestingly, Silver Eagle sales were
far more consistent on average
than Gold Eagle sales between 2000 and 2007. These ultra-popular silver
bullion coins saw no significant falloff in Mint sales in 2005, 2006, and
2007 like the Gold Eagles did. And 2008 proved a banner year for Silver Eagle
demand too.
Even though there was no record spike
on a monthly basis, the Mint sold large amounts of Silver Eagles in almost
every month last year. This drove an annual average of over 1.6m ounces per
month, more or less doubling
the sales volume of any previous year! These sustained high sales imply
sustained high investor demand, which is especially bullish considering
silver’s brutal 53.4% plunge between July and November. Most of this
selling, of course, was irrational and driven by the extreme fear from the
stock-market panic.
So just as physical-gold investors
refused to believe what the futures markets were telling them in the panic
months, so did physical-silver investors. They were flooding into silver
including the Silver Eagles, which are not a cheap form of silver. Unfortunately
the Mint has continually failed to produce “quantities sufficient to
meet public demand” so Silver Eagles always trade at high premiums over
the spot price of silver.
Interestingly, the Mint sales of
Silver Eagles usually spike dramatically in December. These year-end spikes
have been seen every year since 2000. There was even one in 2008,
although it looks smaller simply because it erupted from a much higher base
than normal. Why does the Mint sell far more Silver Eagles in December than
any other time of the year? Does the Mint produce more Silver Eagles in
December than other months, or are these sales of stockpiles built throughout
the year?
Silver Eagles make great Christmas
gifts, I have given them away myself. Are the December spikes driven by high
popular demand for holiday-season giving? Are small investors doing most of
their Silver Eagle buying for investment purposes near year-end once they
understand how much surplus capital they have available for silver
investment? I don’t know. I bet there are some coin dealers out
there who do though.
Just as with Gold Eagles, I am very
interested in studying a daily
dataset since 2000 of Silver Eagle premiums relative to spot. These would
yield a much clearer picture on scarcity and end-investor demand trends. If
you are a dealer and you share such a dataset with me, I’ll analyze it
in a future essay and give your business full public credit and exposure. If
I get multiple datasets, the cleanest and most complete will win out. More
transparency on Silver Eagle premiums could help pressure the Mint to produce
more to meet its Congressional mandate.
And Gold Eagle and Silver Eagle
premiums lead into the most crucial issue for investors to understand
regarding these popular bullion coins, the
fabrication bottleneck. If you understand this, it will
protect you from unscrupulous coin dealers and some of the more extreme
bullion-shortage conspiracy theories.
I can’t count the number of
times people have told me that because they can’t buy Silver Eagles
today, or bags of junk silver coins, or any specific gold or silver coin,
that there must be a general shortage
of physical gold or silver. This inference, while understandable, is not
necessarily true. There may indeed be a shortage of one particular form of physical gold or silver, but
this doesn’t mean the general metal itself is hard to come by.
Since gold is so valuable, the vast
majority of investors can only afford small-unit gold. They can buy ounces at
a time, but not hundreds of ounces. The same applies to silver to a lesser
extent. This is one reason why Gold Eagles and Silver Eagles are so
popular. Pretty much anyone can scrape together the cash to buy these
coins. But they are a highly-specialized, and relatively small, part of
the global gold trade.
Central banks, institutional
investors, and ETFs trade gold in the form of large London Bullion Market
Association good-delivery bars. LBMA bars must run from 350 ounces to 430
ounces each, with the average running near 400 ounces. They are each
individually weighed and stamped with a unique serial number. They must
be at least 99.5% pure gold and sometimes range up to 99.99%. They must also
be free of any physical irregularities and easy to stack.
But at $925 gold, just one of these bars costs $370k. Thus
coin dealers don’t carry them because the market for them among
individual investors is vanishingly small. Yet they are the backbone of
the world physical gold trade and are always available. So if your dealer
doesn’t have Gold Eagles on any particular day, ask him about LBMA
bars. You front the cash and he’ll have no problem ordering one to
hook you up.
Physical gold comes in different
forms, and a shortage of any particular small-unit form is merely a
reflection of isolated supply-and-demand dynamics within that particular form. If you choose a different
form to buy, a less-popular form, premiums (which reflect demand) and
availability can vary radically. This same principle applies to silver, and
junk silver coins (pre-1965 US quarters, dimes, and half dollars which had
some silver in them) are the best example.
Junk silver has long been my favorite
form of silver for physical investment since it usually had the lowest
premiums over spot back in the early 2000s when I was buying. I want the
most bang for my buck, the most bullion for every dollar I spend. Yet the US
Mint hasn’t produced most forms of junk silver since 1964, and none
since 1970. So no matter how much more silver is mined, there will never be more junk-silver coins. Their
supply is hard-capped. This means premiums can fluctuate wildly with
demand.
Junk silver has the ultimate
fabrication bottleneck. While physical silver in big bars (the
1000-to-1100-ounce bars used in COMEX silver futures settlement) is readily
available, no more junk silver will ever be fabricated. This same principle
applies to a lesser extent with Gold Eagles and Silver Eagles. If the Mint is
not converting large-unit bullion into desired small-unit forms fast enough,
there can be small-unit shortages even while large-unit supplies are readily
available to large investors. Just because you can’t buy a Gold Eagle
one day, it doesn’t mean an ETF can’t buy LBMA bars right then.
Interestingly, back in August 2008
when it temporarily quit selling Gold Eagles, the Mint blamed its vendors.
It claimed they were unable to supply enough 1-ounce gold blanks (the disc of
gold alloy before it is stamped into an actual coin) to feed the Mint’s
production. The Mint said it
wasn’t the fabrication bottleneck, but its suppliers were. The whole chain
couldn’t produce popular small-unit gold fast enough.
The point of all this is not to let
dealers convince you that because X bullion coin is hard to get right now,
that there must therefore be a general bullion shortage. Each coin has its
own finite supply and demand driving individual premiums. And each
coin’s supply is isolated from the general large-bar bullion supplies
worldwide since this large-unit bullion can’t be easily or rapidly
converted into small-unit bullion. Dealers love to scare investors into
spending money right now
because bullion might not be available for long. Nonsense.
Anyway, the US Mint Gold Eagle and
Silver Eagle sales during these secular precious-metals bulls are very
interesting. Monthly sales volumes have been highly erratic, which seems to
imply underlying production is erratic too. If this is the case, the
Mint is not producing at its full capacity. And if not, then it is violating
its Congressional mandate to produce these coins in “quantities
sufficient to meet public demand”. If it was, there would never be more
than modest premiums on all Eagle coins. If significant premiums exist,
the Mint is failing in its legal mission.
At Zeal we have long followed this
coin world and started recommending one-ounce bullion coins as long-term gold
investments in May 2001 when gold traded at $264. We started
recommending bags of junk silver in November 2001 when silver traded at
$4.20. Occasionally I look at the physical gold and silver world in our
acclaimed monthly
newsletter,
analyzing it thoroughly and objectively, free of emotional bias and
coin-dealer hype.
Our subscribers knew this stuff I am
sharing today last summer,
they weren’t confused by all the bullion-shortage hoopla last
year. If you want cutting-edge analysis, to be ahead of the herd for
tomorrow’s great investment opportunities, subscribe today! You may like these web essays I write, but the
best, most important, and most actionable information is always preserved and
woven together for our subscribers.
The bottom line is US Mint sales of
Gold Eagles and Silver Eagles soared in the second half of 2008 during the
stock panic. Physical bullion coin demand from investors was stellar, even
bringing the Mint to its knees for the first time in decades at one point. Such
high demand in the face of gold and silver prices being sold down with nearly
everything else during the stock panic is exceedingly bullish.
And while the Mint couldn’t keep
up with the panic-driven demand surge, it will probably gradually adjust
production higher to ensure sufficient supplies of American small-unit gold
and silver bullion coins. Its Congressional mandate requires it to meet public demand and
I suspect it will over the long term. These bullion coins are a very
important subset of global gold and silver investment demand.
Adam Hamilton, CPA
Zealllc.com
February 13, 2009
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