Gold’s first new
bull market since 2011 last year was overwhelmingly driven by stock
investors flooding into gold ETFs. Traditional physical
bar-and-coin demand was actually quite weak, falling considerably
year-over-year. Nevertheless, it’s still important to stay abreast
of classic gold and silver investment demand. One key microcosm of
that comes in the form of the US Mint’s sales of its popular
American Eagle coins.
When
American investors buy physical
gold and silver bullion, it’s often in the form of these American
Eagle 1-ounce coins. They have a really interesting history. Back
in the early 1980s, foreign national gold coins led by South
Africa’s famous Krugerrand were soaring in popularity. The US
Congress didn’t want the States to be left out of the prestigious
national-gold-coin business, so it finally acted in 1985.
American lawmakers
crafted the Gold Bullion Coin Act of 1985, which president Ronald
Reagan then promptly signed into law. It mandated the US Mint start
producing a family of 22-karat gold-bullion coins containing one,
one-half, one-quarter, and one-tenth of a troy ounce of fine gold.
There were a couple of interesting restrictions, including the
origin and age of the gold and the amount of coins to be produced.
The GBCA required
all gold-bullion coins to be minted from “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.” If that source ever proved
insufficient, the Mint could “use gold from reserves held by the
United States to mint the coins”. It makes sense to support
American miners.
But far more
importantly, this law requires the US Mint to produce these
gold-bullion coins “in quantities sufficient to meet public
demand”. Unfortunately the unaccountable bureaucrats at the US Mint
have failed miserably on this front, and should’ve faced the wrath
of Congress. There have been multiple times since the deep
secular-bear gold lows of the early 2000s where bullion-coin sales
have been suspended.
The most famous
was probably in August 2008 heading into that year’s stock panic,
when demand was growing. The US Mint claimed its suppliers couldn’t
produce enough planchets, the blank flat disks of 22-karat gold that
are ultimately stamped into American Eagle coins. That ignited a
firestorm among
gold conspiracy theorists, and went mainstream with a major Wall
Street Journal story published on page C1.
The US Mint’s
history of producing sufficient silver-Eagle coins to meet public
demand is even worse, with these popular coins rationed for as long
as 18 months at a time. This was even a big problem in 2015,
when these silver coins’ sales were severely restricted for the last
5 months of that year. Because the US Mint has such an ongoing
problem meeting demand as mandated, its coin sales don’t reflect
true demand.
There are
additional factors limiting the usefulness of this data for drawing
conclusions about broader gold investment demand. It’s primarily
American investors buying these American Eagle bullion coins,
effectively excluding the rest of the world. On top of that, these
coins are never destroyed. So the true supply and demand in the
marketplace encompasses the entire stockpile of coins minted
since 1986.
Nevertheless, the
US Mint’s sales of newly-produced bullion coins offer a useful
peripheral read into American gold and silver investment demand as
long as their limitations are kept in mind. This small piece of
overall global gold demand is a valuable barometer of American
physical investment demand. Trends within this dataset help
illuminate broader trends in gold
investment, which dominates gold’s price.
The US Mint
doesn’t sell coins directly to ordinary investors. Instead a
network of authorized purchasers acts as middle men, which
have to be fairly-large businesses to qualify. The US Mint’s
minimum order requirements for gold Eagles and silver Eagles are 1k
and 25k ounces. At current prices this equates to order
sizes of $1209k and $438k, not
including the 3%-gold and $2-per-silver-coin premiums the US Mint
charges!
So buying American
Eagles certainly isn’t cheap for investors, who are forced to eat
these big wholesale premiums. And the retail coin dealers naturally
charge additional premiums on top of that to keep their businesses
running. Thus paying 5%+ over prevailing gold prices is common,
which is very inefficient. That’s one reason why gold ETFs led by
the flagship American GLD SPDR Gold Shares have grown so popular.
Trading like any
stock, GLD’s commissions for purchasing shares are the usual trivial
broker fees. Then GLD’s managers charge a 0.4%-of-assets fee
annually to pay their operating expenses including storing and
transferring huge amounts of physical gold bullion. GLD shares
offer investors portfolio-diversifying gold exposure for well under
an order of magnitude cheaper than traditional coins
including gold Eagles.
Thus the rise of
gold ETFs led by GLD has certainly cannibalized classic gold-coin
demand. There is no doubt physical gold ownership in one’s own
immediate possession is far superior to gold-ETF shares in extreme
market-breakdown situations. But the vast majority of the time when
markets are functioning normally, gold-ETF shares offer the same
portfolio-diversification benefits of gold coins at a fraction of
the cost.
So the investors
still buying gold coins tend to be hardcore true believers. They
want to own gold for a long time, making the high premiums more
palatable. I amassed my core portfolio foundation of national gold
coins including Eagles in the early 2000s, and would never trade
them for GLD shares. Gold held in your own personal control is the
ultimate insurance policy against devastating black-swan events.
The US Mint’s
gold-Eagle sales offer insights into how the American physical gold
market dominated by traditional investors is faring. This chart
superimposes monthly gold-Eagle sales over gold prices since 2001.
Since gold-Eagle production and thus sales are highly volatile,
annual averages are included in yellow to smooth the trends.
Provocatively gold-Eagle demand proved strong in 2016, defying
world precedent.
Last year the US
Mint sold 985k ounces of gold Eagles to its wholesalers. That was
a major 22.9% jump over 2015’s 802k ounces sold! Averaging
out to 81.5k ounces per month, 2016 was actually the fourth best
year of gold-Eagle coin sales in gold’s modern secular-bull era.
Only 2009, 2010, and 2011 were better. Since the recent trough year
for gold-Eagle sales in 2014, their monthly average rocketed 86%
higher!
Despite the
gold carnage
seen in the wake of Trump’s surprise election win, this metal had a
solid year in 2016. Gold rallied 8.5% higher last year, its first
up year since 2012’s 7.0% gain. So it shouldn’t be surprising that
American physical investors started to return to chase gold’s young
new bull. Investment demand growth is inverted, with higher
prices fueling higher demand unlike normal commodities markets.
Provocatively
these rising gold-Eagle sales really defied the world trend
in bar-and-coin demand. The definitive arbiter of gold fundamental
data is the venerable World Gold Council. It publishes awesome
quarterly reports detailing global gold supply and demand. Until
Q4’s report is finalized and published in a couple weeks, the latest
available is still Q3’16’s. So we can analyze the first three
quarters of 2016.
American Eagle
gold-bullion coin sales ran 692.5k ounces in the first 9 months of
2016, which equates to just 21.5 metric tons. That was only a
slight 3.4% improvement from the 670.0k ounces or 20.8t seen in the
first 9 months of 2015. As this chart shows, the US Mint didn’t
start getting caught up with the surging gold-investment demand in
2016 until Q4. Gold-Eagle sales exploded last quarter, likely also
on bargain hunting.
According to the
World Gold Council, total global physical bar-and-coin demand in the
first three quarters of 2016 was 664.2t. Thus new US Mint
gold-Eagle sales are a vanishingly-small 3.2% of that. A subset of
that bar-and-coin demand, only official coins, ran 129.9t. New
gold-Eagle sales accounted for about 1/6th of that. But the
surprising thing is gold-Eagle sales still rose year-over-year in
the first 9 months of 2016.
Overall world
bar-and-coin demand excluding ETFs and central banks actually
fell 12.9% year-over-year in the first 9 months of 2016, from
762.9t to 664.2t! So it’s rather impressive to see new gold-Eagle
sales buck that trend. This big 98.8t YoY drop in bar-and-coin
demand was far more than offset by an epic 785.8t YoY surge in
gold-ETF demand! That also outweighed falling jewelry demand,
driving overall demand higher.
The sole reason
overall global gold demand climbed 7.4% or 229.8t YoY in the first 9
months of 2016 was this
massive gold-ETF
buying. And that overwhelmingly came from GLD alone, the
world’s biggest-by-far and dominant gold ETF. Its holdings grew
305.6t in that span, well exceeding the 229.8t growth in world gold
demand! So realize new gold-Eagle sales are almost
inconsequential relative to the gold ETFs.
Still, it’s very
encouraging to see American investors’ demand for new gold Eagles
defy the world bar-and-coin demand slump to rise year-over-year
in 2016. That implies gold psychology is really improving.
Investors don’t want to pay the high premiums to hold physical gold
in their own possession unless they think gold is going to climb on
balance for years to come. Only true believers go to the trouble of
buying coins.
But despite the
strong 2016 gold-Eagle demand in ounces terms, in dollar terms it is
still way down. At 2016’s average gold price of $1250, the 985k
ounces of gold Eagles sold were worth about $1.2b. That is nothing
in market terms, a rounding error. Back in 2011 when gold averaged
$1573, a similar 1000k ounces of new gold Eagles sold were worth
around $1.6b. But 2009 saw the biggest modern gold-Eagle sales.
That year they ran
a mammoth 1435k ounces, surging as gold soared emerging from 2008’s
first stock panic in a century. But at 2009’s average gold price of
$974, they were still only worth about $1.4b. So at $1.2b last
year, new gold-Eagle sales have lots of room to grow before they hit
normal levels for gold bull-market years. If the US Mint can keep
up, odds are they will power considerably higher again in 2017.
Arguably the smart
thing to do if you own physical gold coins in your own possession is
to tell no one. If the wrong people hear you have
substantial gold bullion on your property, that makes you a target
for theft. And since gold is usually well-hidden, any thief
thinking you had some would likely torture you to get its location.
Thankfully most gold investors tend to be well-armed too, ready to
defend with lethal force.
Security concerns
aside, gold coins are a powerful evangelism tool to promote gold
investment. When I get the chance to speak to new investors or kids
about gold, I always bring a handful of gold Eagles to pass around.
Portfolio diversification through gold is a broad and abstract topic
that is hard to grasp at first. But when someone holds physical
gold bullion in their own hands for the first time ever, their faces
light up!
All of a sudden
gold transcends an academic concept to become tangible and real.
Decades ago when I was young, the same thing happened to me. My
interest in gold and contrarian investing grew out of a
friend letting me actually hold some gold coins. They happened to
be South African Krugerrands, but the timeless allure of gold is
universal for all people. I hope the growing gold-Eagle sales boost
such opportunities.
While you don’t
want to advertise your physical-gold hoard, you can buy fractional
gold Eagles to gift on special occasions. You can show trusted
close friends the latest few Eagles you bought, and use that
opportunity to tell them about the
vast upside
potential in gold. So while gold Eagles remain a small fraction
of world gold demand, their possible impact on gold psychology lets
them punch far above their weight.
For over 17 years
now as a newsletter writer, I’ve strongly recommended every
investor amass a core portfolio foundation of at least 5%
of investable assets in physical gold and silver bullion held in
their own immediate possession. Eagles are a great way for
Americans to do that. Physical gold and silver is the ultimate
portfolio insurance, protecting investors from various extreme
market or political situations.
While the odds are
thankfully very small, there’s always the chance that paper markets
could crash or be inaccessible indefinitely. When such black-swan
events smash the rest of your portfolio, your small gold allocation
will soar and offset some of those losses. Physical gold and silver
you possess can also be used for transactional purposes if severe
market upheavals are accompanied by disruptive real-world unrest.
Interestingly the
increase in new gold-Eagle demand last year didn’t translate into
higher silver-Eagle sales. This next chart looks at the US Mint’s
monthly and annually-averaged silver-Eagle sales along with silver
prices. They actually fell rather sharply last year, which is
somewhat surprising given silver’s 15.1% gain in 2016. But the
silver-Eagle market is really considerably different from the
gold-Eagle one.
Last year the US
Mint sold 37.7m new silver-Eagle coins, down 19.8% from 2015’s
47.0m. This pushed the monthly average sales down to 3.1m, the
lowest seen since 2012. That implies silver demand was weaker.
Unfortunately world silver fundamental data comparable to the World
Gold Council’s gold data isn’t available quarterly. It is
only published once a year by the Silver Institute, and that’s not
until May.
So unfortunately
we can’t do a silver-coin analysis on par with the gold-coin
analysis above. But silver Eagles are very different from gold
Eagles. While silver Eagles are certainly very beautiful and thus
highly desirable, they are an expensive way to own silver bullion.
Once again the US Mint charges the large wholesale dealers a
whopping $2 per coin in premiums.
At prevailing silver prices, this is a staggering 11.4%!
Once the retail
coin dealers take their cut on top of that, silver Eagles are not an
economic way to amass silver bullion. They make great gifts, but
serious silver investors generally don’t bother with them since they
are so expensive. When building up core investment positions in
both gold and silver bullion, the prudent thing to do is buy the
forms of these metals with the lowest premiums to get the
most bang for your buck.
Silver-Eagle
demand is also exceedingly volatile. When silver surges and
excitement grows, the coin dealers often steer newer naive investors
towards high-margin silver Eagles. But as silver inevitably falls
out of favor again, this demand collapses. These big swings are
impossible to forecast, making it very challenging for the US Mint
to achieve its Congressional mandate of producing sufficient coins
to meet demand.
2015 is a great
recent example. Though silver-Eagle demand surged to record highs
that year, by July the US Mint had already run out of these coins
thanks to a strong early-year silver rally. So as the Mint
struggled to catch up, it actually had to ration silver-Eagle
sales for 5 whole months! So these new sales the Mint reports
aren’t necessarily a true reflection of investor demand, but often
reveal Mint limitations.
Silver actually
acts as a gold sentiment gauge. Investors only start getting
excited about silver after gold has rallied long enough and far
enough to convince them its upside is sustainable. Gold embarked on
a new bull market in December 2015 out of deep secular lows, and
powered 29.9% higher by early July 2016. During that short
6.7-month span, silver surged up 47.7%. But a half-year isn’t much
in the grand scheme.
The shift in
investors’ silver-coin demand from bear to bull levels will take
some time. Silver may have to rally on balance for a year or two
before sustained new demand kicks in. And the US Mint will take
even longer to respond to that demand shift, since it requires
considerable lead time to source and fabricate raw silver bullion
into finished Silver Eagles. So I suspect 2017 will better reflect
growing demand than 2016.
Precious-metals
physical-bullion demand among American investors should only grow as
gold and silver
mean revert higher this year and beyond. There’s no doubt the US
Mint will be able to sell every last American Eagle coin it
produces. Since the Mint has to buy this gold and silver from
American miners, all this bullion-coin demand will certainly
contribute to driving gold and silver prices higher as well.
If you’ve never
bought gold and silver bullion coins, it’s a fantastic time to get
started and stockpiling with gold and silver prices still low. All
you have to do is find a reputable local coin dealer who’s been in
business a long time and stop by to chat. He’ll help you understand
what kinds of coins are available, and the premiums they command.
Buy your coins, take them home, hide them, and forget about them.
At Zeal we’ve
always advocated physical-bullion foundations for every investment
portfolio. I started to recommend gold-bullion coins to our
subscribers in May 2001 when gold traded near $264, and
silver-bullion coins in November 2001 when silver traded at $4.20.
These long-term investments trounced the S&P 500 ever since, with
gains still in the hundreds of percent even with gold and silver
relatively low today!
We’ve been in the
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The bottom line is
US Mint bullion-coin sales were mixed in 2016. While gold-Eagle
sales surged with the new gold bull, silver-Eagle sales fell despite
silver following gold higher. American investors’ gold-coin demand
as evidenced by new Eagle sales grew last year, bucking the world
trend of weakening bar-and-coin demand. The return of hardcore
physical investors here in the US is very bullish for gold.
It reflects
improving gold psychology, as investors are more willing to pay high
gold-coin premiums that are far larger than gold-ETF fees. This
only makes sense if they expect gold to climb on balance for years
to come in a major new bull. As gold continues mean reverting
higher out of recent years’ deep secular lows, global bar-and-coin
demand should really start growing again. Investors love chasing a
winner. |