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 buy 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.
