Yes, if it's gold coins you're after. But not if
it's gold bullion in other forms...
OVER the last few years, during the great investment demand for precious
metals, we have seen sporadic shortages in silver and gold coins, writes
Miguel Perez-Santalla at BullionVault.
Many people have written about these shortages as a
harbinger of things to come in precious metals more widely. One of the fads
is to decry supply issues in silver and now recently gold.
However, the truth of the matter is less dramatic,
if not quite so simple.
In most cases, supply issues with silver or gold
coins are caused by abnormal or let's say surprising increases in demand from
bullion coin buyers. Simply put, coins don't come out of thin air. They need
to be manufactured. This all takes time and money. No one wants to tie up
their money in a product that is not going to sell. That exposes gold and
silver buyers to "just in time" inventory gaps if it's coins they
want to buy.
Imagine
you are selling a low-cost product with a high margin. It is much more likely
that you will have enough inventories for almost all eventualities. Look at a
typical retail product – how about lip balm? I don't really know the costs
but I can guess. Some of the more premium brands sell individually for $10
each and more, but many quality brands sell for $1.00 or so.
I
have never seen a retailer that sells this product run out. Though it is
possible, most likely that chance is very remote because I believe their
profit margin is probably around 100% or more. This typically is called the Keystone markup. My guess is that the retailer pays lower
than $.50 for each one of these $1.00 lip balms. So their profit of 50 cents
or more covers any carrying charges that may be represented from holding the
inventory.
Now
let's take a look at gold
coins. The price of gold currently is $1250 an ounce. If I am a
distributor selling gold coins and the average quantity I sell in a month is
5,000 one-ounce coins that would represent sales of $6,250,000 plus my
margin. This not only is a lot of gold but represents a lot of money.
Do
I always have on hand 5,000 ounces of gold? No, because financing eats away
at the profitability, even at today's low cost of interest. Also, tying up
the capital in inventory may not let you properly cover all your expenses
such as salaries, healthcare, supplies and utilities. So in the end I may
stock 500 coins or maybe 1,000 at a time.
If
I were making 100% markup then I may carry 5,000 ounces. But that does not
exist in the gold coin industry. The wholesaler is lucky to make a quarter to
half a per cent per ounce. Without doing the math it's obvious that financing
costs are significant in this scenario. But a comparison of the inventory of
holding the full amount at a 6% financing would represent an overhead of over
$31,000 a month. Holding only the 1,000 in inventory at 6% is a little over
$6,000 per month. This doesn't even take into account all the other factors
in running a coins business.
The
decision to hold lower inventory levels is good management of capital. What
this tells us is that the demand the manufacturer sees is usually on an as
needed basis. Which means that they also go through the same motions to
calculate cost, and to produce what they believe is needed. In the end the
amount being produced on what is known demand will never be enough for an
explosion of short term demand. But this does not mean that there is any
difficulty in acquiring the raw material needed to produce the gold coins or
bars.
Prior
to the collapse of Lehman Brothers in 2008, for instance, the demand for gold
and silver coins and bars began to grow. The pace became brisk and the
industry began to expand. Unfortunately, the US Mint – like most other
producers worldwide – was not prepared for the explosion that was to come in
what proved the near future. But they did begin at that time to explore for
more suppliers of what the coin industry call "blanks".
Blanks
are the basis for the coins. The Mint contracts outside vendors
to produce the round shape gold or silver pieces needed for their coins.
They have no edging, they have no artwork and they are at the lowest form of
preparatory production. For the Silver Eagle, back in the beginning of the
rising demand, it had been hard for the US Mint to find another supplier in
addition to the one they already had.
The
question most people would put is, why? The simple answer is because sales of
gold and silver bars and coins had been so low for an extended number of
years that there were very few companies with the capability to produce
blanks in the United States of America, nor in the wider world for that
matter. It took quite some time until they were able to authorize another
producer, as coins are not a simple product. It requires high-quality
processes and also a high level of confidence from the government that the
supplier will be able to meet the specifications and demands when required of
them.
With
this additional capacity, the production of Silver Eagles has continued to
grow. But it has been sporadic and cyclical. And again there come moments –
inevitable events – where immediate supply does not meet immediate demand. It
is at these times that silver and gold coins in supply go to a significant premium.
This is caused by the simplest of supply and demand fundamentals.
Isn't
this unique to gold and silver? No, it's much like any other product. When
Apple launched the iPhone 4, I recall people lined up at the Apple store on
Fifth Avenue for blocks to get in and be the first to buy the new phone. Some
of the early buyers were already ready online to sell their phones at a
tremendous premium, and make a large profit. Then they would come back a few
weeks later and buy the phone again at the regular price.
Ask
yourself: The people who paid that premium online for these iPhones – were
they thinking that the world was about to run out of plastic? That we may run
out of circuit boards? Or that Apple wouldn't produce these phones ever again
at any price? No, it was none of these. It was simply a very human desire to
have the new product in their hands immediately.
Now,
in the gold and silver markets the same thing can occur. But there is a
different concern, because of the investment value in owning physical bullion.
Here the worry is that people may not be able to buy at the lower base price
of gold and silver, and that the price of the commodity itself will also
continue climbing. Hence they want to lock in their price on the product
before it goes higher.
No,
there are no shortages of gold and silver at this moment. Unless we go back
to the gold or silver currency standard, with government demand for bullion
locking massive new quantities inside central-bank vaults, I don't see any
physical shortage to come. But because of how coin producers, wholesalers and
retailers need to manage their capital – as well as the physical logistics of
putting metal into your hand – this corner of the market is subject to
short-term shortages. Retail bars and coins are only a small corner of the
gold and silver market, however. They represented less than 9% of supply last
year in fact, based on World
Gold Council and Silver
Institute data.
So
what of the excessive premiums being paid by some investors today to lock in
their gold and silver price? Could that cost be avoided?
If
we were talking 20 years ago the answer would have been no. Because there
were no other competitive products to offer physical gold and silver
ownership. But modern technology helps offer the public alternative products
today. Now you can buy gold and silver from your laptop, desktop or
smartphone, and sell them just as easily when you choose. All these service
are offered in a transparent and liquid precious metals exchange online at Bullionvault.com.
So
unless you need to own gold coins and bars held in your home right now, there
are better alternatives. Why pay a higher premium for a product that you
don't need at that moment? Even if you do want to buy those coins instead of
holding gold or silver at low cost in professional, secure storage, then you
could still the gold or silver at BullionVault
as a hedge, waiting until physical supply of the coins again meets demand and
premiums retreat. At that time an individual could then sell their vaulted
holdings and buy the coins, without losing money due to excessive premiums or
to market moves in the price. And all while paying the lowest costs in
outright precious metals ownership.
Many
times, of course, solutions exist which others would prefer you not to know
about. In the end the regular gold bullion coin and bar items will return to
their normal premiums, when coin supply meets coin demand. Why not look at
other methods to cut your costs or hedge your base commodity price risk
through another vehicle? Remember, patience is a virtue and good things come
to those who wait.
