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.
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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 4, 2013
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