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Gold and silver come in multiple forms, each with
their own unique yet interrelated supply-and-demand profiles. Among the most
popular in the US physical market are the bullion coins produced by the US
Mint. Investor demand for these beautiful coins has been robust in recent
months despite all the unrelated fund selling
weighing on gold. US Mint bullion-coin sales offer great insights into
physical demand.
The US Mint’s bullion coins are called
American Eagles. The “bullion” distinction means their value is
based solely on the spot prices of gold and silver, with no special premium
for rarity. So they offer investors far more physical metal per dollar spent
than expensive collectible coins. I’ve always believed maximizing
one’s total gold and silver holdings is far more prudent than playing
the scarcity game.
The American Eagles were born in the Gold Bullion
Coin Act of 1985, which Ronald Reagan signed into law. Back in the early
1980s, foreign bullion coins like the famous South African Krugerrand were soaring in popularity. The US Congress
wanted the US to compete in this prestigious national market, so it directed
the US Mint to start producing gold coins exclusively with gold mined in the
US within the past year.
This program has proved wildly successful, although
not without controversy. My last essay in this series
discussed an episode where the US Mint couldn’t meet soaring demand and
was forced to temporarily suspend sales. Conspiracy theorists went
apoplectic, enraged because the Gold Bullion Coin Act legally obligated the
US Mint to “mint and issue the gold coins … in quantities
sufficient to meet public demand”.
But overall, the American Eagles have been a huge
success. They are a fantastic way to get into physical gold and silver
investing. They are beautiful, portable, and easy to buy and sell since they are instantly recognized globally. They are
also easy to hide at home, where no bank shutdown can threaten access to them
and no government can confiscate them. I started amassing my own hoard in
1998.
Besides promoting the obvious virtues of owning
physical gold and silver held in your own immediate physical control,
American Eagles offer unique insights into physical bullion supply-and-demand
trends. The US Mint has been very transparent about publishing detailed sales
data, which is very interesting to take a look at from time to time. It
reflects grassroots physical
precious-metals sentiment like nothing else can.
There are some caveats though. First, the US Mint
bullion-coin sales are only of new
coins. But Eagles are never destroyed. So there is a large supply out
there of past years’ coins trading hands that dwarfs the annual new
supply. If you go into a typical coin shop, they will almost always try to
sell you past years’ coins they have bought back from other investors.
So new-sales data is only the tip of the coin iceberg.
Second, there are plenty of other forms of physical
gold and silver for individual investors to buy. These include foreign
national coins, bars, privately-minted coins, rare coins, old currency, etc.
And some of these other forms offer considerably lower premiums over spot
prices than Eagles, particularly on the silver side. So realize the US
Mint’s sales data is merely a small sample of the total physical market.
Still, the US Mint’s production is based on
real-world demand from coin dealers. When these guys have enough inventory from existing investors selling, they
don’t need to order new Eagles from the Mint. So the Mint ramping up
production is always a response to rising coin-dealer demand, which is in
turn the result of rising investor demand for physical gold and silver. Thus
the Mint’s sales data is valuable.
It is made available on a monthly basis for both
gold and silver Eagles. The charts in this essay superimpose these coin sales
over the daily gold and silver price action over the course of their entire
secular bulls. Despite the perception of 2012 being a weak year for the
precious metals, new physical demand from investors for American Eagles is
actually robust to strong. This
is certainly a bullish omen.
The red line here is the gold price, the blue line
is the monthly US Mint gold Eagle
sales in ounces, and the yellow lines are the annual averages of these
monthly sales. Back in the early years of gold’s secular bull, this
metal remained a hardcore contrarian play. Not many investors would touch it,
so I’m proud that we started recommending 1-ounce gold bullion coins to
our newsletter subscribers at $264 in May 2001.
Average monthly
volumes of new gold Eagle production ranged between about 22k to 45k ozs from 2001 to 2006. The supply was much lower than
recent years because widespread investor demand simply hadn’t
materialized yet. After an odd lull in late 2006 and 2007, the stock panic
proved to be the catalyst that awakened investors. That once-in-a-lifetime
fear superstorm, despite hitting gold too, sparked big physical demand.
2008’s average monthly sales of 72k ozs of gold Eagles dwarfed anything that came before it,
and 2009’s staggering 120k was far better still. 2009 was a great year
for gold, it surged 24%. It also happened to be the first year of the Obama
Administration, which frightened many conservative investors who believe in
limited Constitutional federal government. Whatever the reasons, gold Eagle
demand was massive.
But ever since then it has tapered off. 2010’s
average monthly sales of new Eagles were 101k ozs,
2011’s 83k ozs, and 2012’s slumped to
63k ozs. Though new investment demand in terms of
gold ounces has been cut in half
since 2009, it still remains double
average pre-panic levels of 30k ozs. And of course
gold is worth far more now than it was back in 2009, so this ounces
comparison is understated.
Back at the 2009 peak year for sales of
freshly-minted gold Eagles, the average gold price was $974. Multiply this by
the 119.5k average of monthly sales, and the actual capital volume ran around $116m per month (or $1.4b per year).
Meanwhile in 2012 the average gold price was $1669, 71% higher. So the average capital volume last year was $104m per
month ($1.3b per year). Real demand remains healthy.
Instead of being cut in half as the ounces sold
indicates, in terms of money investors are plowing into physical gold Eagles
demand in 2012 was only down around 10% from its peak in 2009! So gold
investment demand remains robust despite this metal’s high
consolidation in 2012 and odd fund selling last month. And remember that the
supply of Eagles is cumulative,
all older ones remain in existence.
So either the great majority of earlier investors
aren’t selling their gold Eagles back to dealers, or there is so much
new demand from existing and new investors that dealers can’t get enough
inventory from buying back earlier years’
coins. Dealers are seeing big investor demand they can’t meet through
trading, so they continue to consistently order large quantities of new
American Eagles directly from their source.
Interestingly monthly sales indicate physical demand
has improved dramatically since early 2012, from 21k ozs
in February to 137k in November. November 2012 happened to be the strongest
November for new gold Eagle sales in 14
years, since 1998! And back then the gold price only averaged $294, a far
cry from the $1722 in November 2012. So this latest November’s gold
demand in dollars was just staggering.
Why? Obama winning reelection. After talking with
countless gold investors over the last dozen years, I have a pretty good
understanding of our demographic. We tend to be hardworking conservatives,
living within our means so we can save surplus income to invest. We believe
government must live within its means just like we do. And we love freedom
and generally distrust government and its paper money.
So half of the Americans who bothered voting
rewarding Obama for his disastrous first term was
dumbfounding. He ran the biggest deficits in US history, driving the biggest debt growth in
US history. His spending and deficits as a percentage of GDP were staggering,
truly Greece-like. He presided over the worst employment record since the
Great Depression, and poverty surged to record levels under him.
So Obama’s win really scared the conservative
backbone of American investors. After all the vast damage done by this
man’s horrendous philosophies and policies in his first four years,
what would America look like after four more years? And Obama was stepping up
his Marxist class-warfare rhetoric, attacking successful Americans who worked
hard and made wise decisions. So investors flocked to physical gold.
I fully expect this trend to continue. The only
reason Obama can run his mind-boggling record deficits is because the US
Federal Reserve is directly monetizing half
of them going forward. Its December expansion of QE3 is
wildly bullish for gold and silver in 2013. We’ve never seen such a
gigantic surge of pure inflation, so it should absolutely ignite huge
investment demand for all forms of gold and silver.
If all this is true, you may be wondering why the US
Mint’s new gold Eagle sales plunged from 137k ozs
in November to just 76k in December. Odds are this has nothing to do with
investor demand. In early December, the US Mint winds down
current-year coin production so it can start up the following year’s
which are released in January. The new year’s date stamp is highly
prized, often driving large demand spikes.
So this month’s sales data ought to prove very
interesting once released. Will the US Mint have the production bandwidth
“to meet public demand” for 2013 gold Eagles? We have
QE3X’s new Treasury monetizations spinning
up, a terrible fiscal-cliff deal with
no spending cuts, more brazen attacks on our Constitutional freedoms
coming from the Obama Administration, and festering market uncertainty.
Gold bullion-coin demand is already robust in
capital-volume terms, and has been rising dramatically in ounces terms since
Obama’s odds of winning the 2012 election started growing. Investors
want to own physical gold held in their own immediate physical custody, which
is the ultimate insurance policy for every conceivable market, political, or
personal hardship or calamity. This
trend should only accelerate.
And boy, if gold Eagle demand is looking robust then
silver Eagle demand is astounding! Silver Eagles occupy a strange niche.
Though they are universally loved and highly-prized for their beauty, they
are far from the cheapest way to buy silver bullion. That prize falls to junk
coins (old everyday-use currency like quarters that
had some silver content), generic “rounds” (privately-minted
silver coins), and bulk bars.
So most experienced silver investors don’t
bother with silver Eagles unless they are going to be used for gifts. This
implies that the massive silver Eagle demand in recent years is from newer
investors. They are also probably smaller too,
implying silver investing is starting to catch on with the masses. The fact
that silver bullion-coin demand is dwarfing gold bullion-coin demand also
supports this smaller thesis.
Like the gold Eagles, silver Eagles’ demand
was remarkably consistent early in this secular bull before 2008’s epic
stock panic. That year silver Eagle demand doubled, and it has continued
rising every year since until last year. But with average monthly demand of
2.8m ozs of silver Eagles in 2012, that was still
the third-best year of this bull and very high in absolute terms. Much of
this was from a colossal January spike.
When investors want silver Eagles, they often prefer
the current year’s date for their coins to commemorate their investment.
So in January 2012, coin dealers purchased an astounding 6.1m ozs of silver Eagles! Given the still-strong demand for
the rest of last year, generally well above panic levels, odds are January
2013 will prove similar. So we may really see some blowout silver demand with
everything going on.
And once again, last year’s silver
bullion-coin demand is far more impressive when considered in capital-volume
terms. Back in 2010 when monthly demand averaged 2.9m ozs
of silver Eagles, the silver price averaged just $20.24. This implies monthly
capital volume of $58m, or $699m per year. But in 2012 when a similar monthly
average of 2.8m ozs of new silver Eagles were sold,
silver averaged $31.19.
This works out to a much larger average monthly
dollar value of $88m in silver Eagles being purchased, or $1.1b per year. So
investor demand for physical silver as represented by new silver Eagle sales
remains incredibly strong. I imagine it will skyrocket again once
silver’s young upleg
regains steam soon. Silver demand in 2011 was incredible after its last
massive upleg ignited
by the Fed’s QE2 peaked.
So despite the headline weakness in gold and silver
in recent months, grassroots physical investment demand remains robust to
strong. Buying gold and silver bullion coins takes a high level of commitment
and motivation. Investors have to find a coin dealer, go there or order the
coins, and take delivery. This is far more time-consuming than spending a few
seconds adding the GLD or SLV ETFs to one’s portfolio.
And investors buy physical coins for great reasons,
usually as the ultimate insurance policy for the unexpected. Physical coins
can’t be frozen like a bank account, can’t be stolen or
confiscated if hidden well enough (and
kept secret), and are the ultimate portable and liquid form of storing
wealth. For a dozen years now, I’ve zealously recommended every investor have a physical-coin
portfolio foundation.
These should be hidden on your own property, not
stored with some third party. The only gold coins confiscated in the infamous
1933 seizure by Democratic President Franklin Roosevelt were ones stored in
bank safe-deposit boxes. The government never bothered going door-to-door, a
politically-risky, dangerous, and expensive strategy. It’s sad, as
earlier in this bull I thought a new gold confiscation was
all but impossible.
But the Obama Administration is now making lots of
noise about going after our guns, taking away our Constitutional right to
defend our families from criminals and
the government with effective firearms. Obama already stole our right to
choose whether or not we want medical insurance, a private product. So under
this power-drunk profligate autocrat, I’m no longer so certain that
private gold won’t be targeted again someday.
So if you’ve never bought gold and silver
bullion coins, now is a great time to get started and stockpiling. It’s
easy, just find a reputable local coin dealer who has been in business a long
time and stop by to chat with him. He’ll help you understand what coins
are available, what kinds of premiums over spot they command, and how to make
your purchase. Then take your coins home, hide them, and forget about them.
At Zeal we’ve long since laid in physical
bullion-coin foundations for our portfolios, so we are looking for higher
returns for new capital. Thus we remain really excited about the beaten-down
gold and silver stocks today, which are incredibly
undervalued relative to prevailing gold and silver prices. As the
precious metals continue higher in their young uplegs,
the stocks of their miners are overdue to soar dramatically.
We recently finished a new deep-research project
digging into the universe of silver
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Each is profiled in depth in a fascinating new 23-page report. One was already bought out at an epic 72% premium!
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The bottom line is grassroots physical gold and
silver investment demand remains robust to strong. This is despite the recent
months’ atypical weakness in the precious metals. The US Mint continues
to sell lots of gold and silver Eagles to coin dealers, who would only be
ordering them if they had demand from investors. Actual coin volumes look
fine, but the capital being poured in at today’s prices is quite
impressive.
And as the recent surge in gold Eagle demand
indicates, the political environment can be a big driver of investment
demand. We are now stuck with four more years of out-of-control federal
spending and the resulting ruinous deficits. The Fed is aggressively monetizing
this new debt, which is highly inflationary. As gold and silver start
powering higher again, investment demand is only going to continue growing.
Adam Hamilton, CPA
January 05, 2013
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