Dr. Dr Constantin
Gurdgiev, Head of Research with St Columbanus AG, member of the investment committee of GoldCore and the adjunct lecturer in finance in Trinity
Of all asset classes in today’s markets, gold is
unique. And for a number of reasons.*
Firstly it acts as a long-term hedge and a short-term
flight to safety instrument against virtually all other asset classes.**
Secondly, it supports a wide range of instruments, including physical
delivery (bullions, coins and jewellery),
gold-linked legal tender, gold-based savings accounts, plain vanilla and synthetic
ETFs, derivatives and producers-linked equities and funds. All of these are
subject to diverse behavioural drivers of demand.
Thirdly, gold is psychologically and analytically divisive, with media
coverage oscillating between those who see gold as either a long-term risk
management tool, or a speculative “bubble”.
In the latter context, it is interesting to look closer
at the less-publicized instrument -- gold coins, traditionally held by retail
investors as portable units to store wealth. Due to this, plus demand from
collectors, gold coins are less liquid and represent more of a pure
‘store of value’ than a speculative instrument.
Classical bubbles arise when speculative motives (bets
on continued accelerating price appreciation) exceed fundamentals-driven
motives for holding gold. In later stages of the “bubble”, we
should, therefore, expect demand for gold coins to fall compared to the
demand for financially instrumented gold.
The U.S. Mint data on sales of gold coins suggests that
we are not in the last days of the “bubble”. But there are
warning signs to watch into the future.
August sales by the U.S. Mint were up a whooping 170 per cent year on year in terms of total
number of coins sold, while the weight of coins sold is up 194 per cent. On
the surface, this gives some support to the theory of gold becoming
overbought by retail investors. However, monthly comparatives reflect a huge
degree of volatility in U.S. Mint sales and August results comfortably fit
within statistical normals for the crisis period
since January, 2008. August results also fall within the historical mean
(1987 through Monday).
At 112,000 oz of gold coins
sold, August, 2011 is only the 19th busiest month in sales since January,
2008. Since 1988 there were 87 months in which average gold content per coin
sold by the U.S. Mint exceeded the August, 2011 average and on 38 occasions,
volumes of gold sold exceeded last month’s. In other words, current
gold coinage sales do not represent a dramatic uptick in demand.
The data also shows that physical demand for coins is
largely independent of the spot price of gold. Historically, since 1986,
average 12-months rolling correlation between the spot price of gold and the
volumes of gold sold in US Mint coins is negative at -0.09. Since January,
2008, the average correlation is -0.2. And over the last 3 years, the trend
direction of gold spot price (up) and the volumes of gold sold in coinage
(down) have actually diverged. The latter is, of course, concerning and will
require closer tracking in months to come.
The chart above also highlights the fact that the
current trend levels of U.S. Mint sales are significantly elevated on
previous periods, with the exception of 1986-1987 and 1998-1999 demand
spikes. Since the global economic crisis began, annual coinage sales rose
sevenfold, from just under 200,000 oz in 2007 to
1,435,000 oz in 2009, before falling back to
1,220,500 oz in 2010. Using data through August, I
expect 2011 sales to remain at around 1,275,000 oz.
Once again, the evidence above does not imply any
definitive conclusions as to whether gold is or is not a
“bubble”. Instead, it points to one particular aspect of demand
for gold -- the behaviourally anchored, longer-term
demand for gold coins as wealth preservation tool for smaller retail
investors. Given the state of the US and other advanced economies around the
world since January, 2008, U.S. Mint data does not appear to support the view
of a dramatic over-buying of gold by the fabled speculatively crazed retail
investors that some media commentators are seeing nowdays.
Disclosure: I am long physical gold and hold no
positions in other gold instruments
* These and other facts about gold are summarized in my
recent presentation available at
** As shown in the recent research paper by Profs Brian
Lucey, Cetin Ciner, and
myself, covering the period of 1985-2009:
This article authored by Dr. Constantin
Gurdgiev was originally posted on the Globe and Mail Blog on
Wednesday, September 7, 2011