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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 determine
the extent of the Mint's production problems, I talked with an industry
friend of many years who also happens to be one of the mint's authorized
purchasers of gold bullion coins. He made two important points that hold
long-term implications for gold buyers.
First, all
the 1-ounce gold blanks purchased by the Mint now come from one refiner in
the western United States.
Second, Mint
officials have made attempts to line up other blank manufacturers both within
the United States
and abroad, but those overtures have been rebuffed.
Refiners
globally are running at capacity and simply cannot take on anything else.
My friend's
prognosis was not a good one -- the problem appears chronic and unlikely,
under the circumstances, 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.
Michael J. Kosares
USAGold - Centennial Precious
Metals, Inc.
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