Gold Coin Shortage Is Likely to Become Chronic

Is the U.S. Mint's production problem long-term or short-term?

What will be the effect on gold coin prices?

In 1999, at the height of the Y2K crisis and under the strain of record gold demand, the U.S. Mint produced 2,055,000 1-ounce gold American eagles.

In 2008, with the world embroiled in an unprecedented economic crisis and once again under the strain of record gold demand, the U.S. Mint produced only 710,000 1-ounce American eagles and 189,500 1-ounce American gold buffaloes -- just under half its 1999 production.

The Mint's ability to keep up with demand in the ramp-up to Y2K played a key role in suppressing premiums on bullion gold coins. The Mint's inability to keep up with demand in 2008 drove premiums to the double digits at one point and helped add 2 percent to the baseline cost of gold coin acquisitions in 2009.

When the American eagle shortages first cropped up in August 2008, the Mint blamed the problem on its vendors, saying they were "not able to supply enough 1-ounce gold bullion blanks to meet the unprecedented demand we are experiencing." The Mint promptly thereafter suspended all sales of the popular 1-ounce coins.

To understand the full implications of the Mint's production problems, two important pieces of information need to be taken into consideration.

First, all the 1-ounce gold blanks purchased by the Mint now come from one refiner in the western United States.

Second, with global refiners already running at capacity, Mint officials' attempts to line up additional blank manufacturers are likely to be rebuffed.

The prognosis under the circumstance is not a good one: The problem appears chronic and unlikely to resolve itself any time soon.

Unlike the Y2K event, which resolved itself as soon as New Year's Day 2000 came and went, the current strong demand is the result of a secular gold bull market deepened by the worldwide economic crisis. As such this is a whole new ball game for the gold market. Typically, in past bull markets the principal market driver was supply and demand for the metal itself. In the current bull market, it looks like there will be an additional driver to the price paid by those acquiring gold -- the premiums added to the price because of the combination of burgeoning demand and the diminishing supply of gold coins.

The role played by gold premiums -- the add-on paid over the melt value of a gold coin -- is little understood and frequently overlooked by gold investors. Usually, premiums remain relatively constant and cover the costs of minting and marketing the coins. When coin supply and demand get out of kilter, rising premiums are the mechanism that restores balance.

The bad news is that rising premiums can add significantly to acquisition costs for gold consumers. The good news is that rising premiums can add to the profits for those who already own gold coins and for those who were farsighted enough to buy early in the process.

A historical precedent can be found in the gold market of the late 1960s. At that time gold was pegged at $35. As the dollar crisis of the late 1960s and early 1970s unfolded, investors globally began moving into gold coins like the U.S. $20 gold piece, the British sovereign, the German 20 mark, Swiss 20 franc, et al. Though the gold price itself was fixed, premiums on gold coins were not. The demand drove premiums on these coins to unimaginable levels -- in some case four to five times melt value.

We got a whiff of that sort of thing when contemporary gold coins briefly reached premiums of 12 to 15 percent at the height of the gold rush in 2008. (Pre-1933 gold coins went to premiums in excess of 20 percent.) Once the market settled down, though, a base premium 2 percentage points above normal remained.

If the mints are indeed boxed in by the blanks problem, and it appears they are, there will be no easy way to keep those base premiums in check over the long run. It appears that the bullion gold coin shortage has become a chronic problem and something gold owners and accumulators will need to keep an eye on in the months to come.

Comments

[@TexasER:]

I read an interesting article recently (maybe on SA?), citing that the Gold Bullion Coin Act of 1985 includes a mandate that the mint must meet the demand of the citizens for bullion. The reason of course, is to keep the premiums on coins low. They are clearly failing in this and it would be good for congress to remind them about it.

There is always debate about the idea of gold once again becoming a currency. High premiums on coins only increases the likelihood of this, which is the reason for the law. (Granted that likelihood is still exceedingly low.)

The theoretical premium value in a coin is that it’s authenticity is either to verify on the spot by any lay person. That makes it possible to walk in somewhere and literally exchange it over the counter. The jump in premiums say that people want to hold physical gold, and that they want it to be as liquid as possible.

Mar 10 10:38 AM

[mr freddo:]

It all smells a little bad to me. Only one supplier? Production down 70% in the face of booming demand? Is this yet another example of how a government entity is run? Maybe the purchasing manager is nearing retirement and can't make a few extra phone calls?

Those of you who have been around the markets for years can sense when a stock is being manipulated. It takes dramatic drops and then recovers quickly only to drop again. I believe that gold is the current sucker's bet over the short term. First, pile the average guy into gold, have Cramer recommend it, and then drop the floor out of the market. The new gold bugs will feel they were burned and then get out to put their money into treasuries, bonds, or, god forbid, stocks.

In the face of an unprecedented financial crisis, gold continues to perform in a lackluster manner. If everyone in the world is rushing to get into gold, why hasn't the price increased? Manipulation is my bet.

The question is, can the governments of the world hold the line against gold or will someone break and run to cover their shorts? Right now we are still in the throes of deflation. Let's see what happens when inflation starts to roar a few months down the road.

Disclosure: Long GLD, GDX.

Mar 10 11:04 AM

[Conan the B...:]

Gold coin supply is limited. Why are gold coins the only means of investing in the metal itself?

Buy ingots of varying weights if you want to hold gold.

The Fear of confiscation should include the Coins themselves. Each purchase is identifiable as to purchaser. The Government has your Names and addresses and knows exactly what you bought.

If Gold prices rise to the extent that the Government steps in, Gold will be well north of $2,000.

I have been and will continue to be a proponent of high grade gold Jewelry bought at a discount from retail of at least 50%.

You can do this now. Cash and Carry. Unidentifiable as to purchaser.

IMHO

Mar 10 11:30 AM

[Beach Bubba:]

It is all very simple....as long as I hold my PM investments, the price of gold will continue to fall. Should I give up and sell those golden objects and
E-sheets of paper, then the price of gold will go to undreamed of heights. It is heavy on my mind, the knowledge that I control the whole precious metal market.....and know one knows that but me.

Mar 10 11:47 AM

[Mad Hedge F...:]

I am hearing complaints for shortages everywhere.The Financial Times printed a great interview with Peter Munk, the visionary chairman of Canada based Barrick Gold (ABX), the world’s largest gold producer. He says that it will only take decisions by a few central banks to move gold up to $2,000 an ounce. The feeling of insecurity is here to stay, and the appeal of gold as a hedge has broadened enormously. With a new floor of gold at $800, the profitability of gold mining companies is soaring. Gold is a win-win play because if financial distress continues, so will gold’s flight to safety bid. If the economy recovers, jewelry demand will come roaring back. The world’s gold supply is constrained as miners are having to dig deeper and deeper. Send me another sack of American eagles!

Mar 10 12:10 PM

[User 371080:]

The Gov't won't know who you are if you walk into your local coin dealer with cash and don't identify yourself. Parking your car a block away will avoid it being recorded in the parking lot by a camera. If the gov't knows how much gold you have its because you want them to.


On Mar 10 11:30 AM paultaut wrote:

>
>
> The Fear of confiscation should include the Coins themselves. Each
> purchase is identifiable as to purchaser. The Government has your
> Names and addresses and knows exactly what you bought.
>
>

Mar 10 01:33 PM

[Conan the B...:]

User371: What you say is true, I should have mentioned it.

Unfortunately, the average person goes onto Ebay or some online Bullion or Coin shop, does their transactions electronically via credit/debit cards or Checks.

In fact if had bothered to look back into the commentary on Gold or Gold/Silver Coins, you will find a slew of recommendations as to what sites people can visit to buy them.

The Opinion I gave stands. As far as I know, I am the first to give a Caveat to online purchases of Gold/Silver Coins.

Since you seem to be versed in circumventing Governmental scrutiny, would you please make some other recommendations for those wishing to buy coins.

There have been quite a few comments regarding Coin Dealers in general, the gist has been "be Careful, know the Dealer, etc".

Just wandering into a Coin Dealership isn't enough.

Just asking.

Mar 10 02:18 PM

[User 371080:]

Better to deal with a supplier to jewelers. They will have coins and bars in both gold and silver as well as many other forms of those metals. If they are unknown to you make a small purchase of 1/2 oz coin or bar. Take it to another dealer and sell it. You'll find out whether its genuine in fast order. After you have established an ongoing relationship you can ask to be taught how to judge for yourself if you have the genuine article when the time comes.

Mar 10 02:38 PM

[svosavvy:]

Just got off the phone with blanchard I can get all the 1oz eagles I want. Supply problem? I like paultauts gold idea about buying some jewelry, heck I bet retailers would trip over themselves just to sell something.

Mar 10 05:49 PM

[Avoiding Alpha:]

May I recommend for all coin buyers the fisch instrument (www.fisch.co.za/). It’s a full proof mechanism to check the authenticity of the coin(s) in question. I just received my order from kitco today and ran them through the Fisch. I feel much better knowing I own actual bullion. I searched long and hard to find a “fake gold coin detector” on the internet and I can attest to its accuracy.


On Mar 10 02:18 PM paultaut wrote:

> User371: What you say is true, I should have mentioned it.
>
> Unfortunately, the average person goes onto Ebay or some online Bullion
> or Coin shop, does their transactions electronically via credit/debit
> cards or Checks.
>
> In fact if had bothered to look back into the commentary on Gold
> or Gold/Silver Coins, you will find a slew of recommendations as
> to what sites people can visit to buy them.
>
> The Opinion I gave stands. As far as I know, I am the first to give
> a Caveat to online purchases of Gold/Silver Coins.
>
> Since you seem to be versed in circumventing Governmental scrutiny,
> would you please make some other recommendations for those wishing
> to buy coins.
>
> There have been quite a few comments regarding Coin Dealers in general,
> the gist has been "be Careful, know the Dealer, etc".
>
> Just wandering into a Coin Dealership isn't enough.
>
> Just asking.

Mar 10 06:18 PM

[thotdoc:]

My brother and I seem to have the same power. In fact, at MSFT's height, we wrote Bill Gates and told him for a $1,000,000 each, we would not buy any MSFT.

G


On Mar 10 11:47 AM Beach Bubba wrote:

> It is all very simple....as long as I hold my PM investments, the
> price of gold will continue to fall. Should I give up and sell those
> golden objects and
> E-sheets of paper, then the price of gold will go to undreamed of
> heights. It is heavy on my mind, the knowledge that I control the
> whole precious metal market.....and know one knows that but me.

Mar 10 06:24 PM

[Third Party...:]

Shortages for U. S. bullion coins may be caused by the requirements placed on the Mint by Congress.

From the latest Coinage Act
"...the Secretary shall mint and issue the gold coins described...of this section, in quantities sufficient to meet public demand..."
AND
"The Secretary shall acquire gold for the coins issued...of this title by purchase of gold mined from natural deposits in the United States, or in a territory or possession of the United States, within one year after the month in which the ore from which it is derived was mined. The Secretary shall pay not more than the average world price for the gold. In the absence of available supplies of such gold at the average world price, the Secretary may use gold from reserves held by the United States to mint the coins"

Mar 10 08:44 PM

[Third Party...:]

I should have also pointed out the same applies for silver.

Mar 10 08:44 PM

[Conan the B...:]

User371 and User321: thanks to both of you.

Buying off the Net has to be approached as a better alternative for its security.

371? how does one identify the suppliers in any given geographical area, Yellow Pages? I'm serious on this.

321? the Fisch Instrument, can you apply it before you buy or does it require extensive testing which the dealer will not allow?

Will the dealer know what the device is?

Third Party: Gold mined in the US. Does anyone know how much Gold is actually produced in the US? Does Gold Coin demand in the US exceed available supplies?

The other thing in this ACT, "public demand"
Is the "public" confined to US citizens? And if it is, it may be that they are meeting US public demand but not worldwide demand.

Conjecture.

Mar 11 12:21 AM

[James Davis:]

The only confiscation will come when gold retreats back to 500 or less

Mar 11 01:01 AM

[User 371080:]

A jewelry supplier will have a substantial commitment to the community. He will have a great deal of money tied up in items you are not likely to purchase. He will have a great deal of money tied up in retail space likely in a building he owns. He will have a following of jewelers who have done business with him for several years and often generations. I'll believe these guys much more than a faceless voice from Brokers-R-US selling me his bosses' latest pump and dump scam.

As for security. How secure are your purchases if the gov't knows about them? How do you know what some nameless faceless click on a "BUY NOW" button will send you? How can you be secure knowing for certain you're getting what you paid for? I can't.

I've purchased gold coins all over the world. Often from merchants I haven't seen before or since. I have never been cheated. I have never purchased via the internet and have therefore never been cheated.

It also won't do you much good to buy gold for cash and then buy a large safe to store it in with a credit card. Also won't do you any good to store it in a bank "safety deposit" box.

An obvious question is, as you are unsure of your security owing bullion, what are you considerations for buying it? Once answered you will then have a new larger set of questions you may be uncomfortable giving voice to.


On Mar 11 12:21 AM paultaut wrote:

>
>
> Buying off the Net has to be approached as a better alternative for
> its security.
>
> 371? how does one identify the suppliers in any given geographical
> area, Yellow Pages? I'm serious on this.
>
>

Mar 11 12:24 PM

[Conan the B...:]

User371: I feel comfortable with what I already have.

Heck, I've even kept my gold fillings. Scrap Gold is still gold and I've been at it for 35 years.

However, the Bandwagon has never been lit up so brightly as it is now. This type of activity has almost always been accompanied by Scams and Scam artists.

I am preaching to the Choir, so to speak. But, I want people to be aware of from whom they buy.

Just because a site is on the Internet, doesn't mean that it is legitimate. There will be lookalikes galore.

Many people here feel that Gold will be confiscated, I want them to be aware of the pitfalls of buying everything on the Internet.

I care enough to ask questions which some do not appreciate. But hopefully some will listen.

Mar 11 11:26 PM