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Recent years have
seen countless claims that gold and silver prices have to head far
lower, implying demand is low or supply is high. But the actual
data continues to prove this false, showing precious-metals
bearishness is rooted in sentiment and not fundamentals. One
fascinating microcosm of gold and silver demand comes in the form of
the US Mint’s sales of its popular American Eagle bullion 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,
where these silver coins’ sales were severely restricted for the
last 5 months of last 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-minted 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 these datasets help
highlight broader trends in gold investment, which dominates gold’s
price.
And contrary to
Wall Street’s assertion that gold and silver demand continue to
implode heralding much-lower precious-metals prices, the US Mint
says these American Eagle coins are selling like hotcakes.
On December 31st it reported that 2015 sales of its gold bullion
coins soared 53% above 2014’s levels, while silver-bullion-coin
sales hit an all-time record! That’s impressive considering
2015’s poor price action.
Gold and silver
dropped 10.3% and 11.9% last year, slumping to brutal 6.1-year and
6.4-year secular lows in mid-December. So naturally sentiment, the
consensus outlook on gold and silver prices, was horrendous. But
that didn’t stop prudent contrarian investors from aggressively
snatching up the US Mint’s bullion coins at super-low prices.
Multiplying wealth requires first buying low before later
selling high!
And that strong
investment demand exploded in early 2016 as stock markets
accelerated their overdue dive towards
bear-market
territory. On just the first day the new 2016 Eagles
were offered, 60k ounces of gold coins were sold. That compares to
81k for all of January 2015. And 2.8m ounces of silver coins sold
that opening day, half of the 5.5m ounces seen in all of last
January. Demand is incredibly strong!
Despite these
bullion-coin sales’ inherent limitations, they can be a
roughly-representative microcosm of the broader gold and silver
investment pictures. So it’s definitely worth considering what’s
going on in American Eagles. These charts include the latest data
on the US Mint’s bullion-coin sales current to this essay, December
2015’s. Actual ounces sold each month are rendered, which are then
averaged annually.
American Eagle
bullion-coin sales started out low as gold’s secular bull began
building momentum in the early 2000s. But despite gold surging
higher in 2005, 2006, and 2007, they fell on balance. That suggests
the investors buying physical bullion coins are real contrarians,
preferring to wait to buy until gold is really out of favor. That
same higher-gold lower-demand phenomenon happened in 2010 and 2011.
The peak year was
actually 2009, when monthly gold-bullion coin sales averaged 119.5k
ounces. And that proved an excellent year for gold after the stock
panic, with its price surging 24.3% higher. That year’s strong gold
demand was also crystal-clear in the gold-bullion holdings of the
world’s leading GLD SPDR Gold Shares gold ETF. Its holdings
rocketed 353.4 metric tons higher that year, or 45.3%, on huge
demand!
Trough
bullion-coin sales in recent years occurred in 2014 at a monthly
average of just 43.7k ounces. That was a disappointing year for
gold, with the metal edging 2.0% lower instead of bouncing strongly
after it had plummeted 27.9% in 2013. That was the fateful year the
Fed’s QE3 campaign ramped up to full steam
levitating the US
stock markets, which
sucked demand
away from all other investments including gold.
So it’s
fascinating to see average monthly US Mint gold bullion-coin sales
soar over 53% higher in 2015 despite the miserable gold
conditions intensifying. Gold’s $1159 average price last year was
8.4% lower than 2014’s average of $1266. American physical
investors clearly didn’t believe the bearish hype that gold was
doomed to spiral lower as the Fed started hiking interest rates, a
myth history has
proven false.
Provocatively
these surging gold bullion-coin sales could prove a very bullish
leading indicator for gold. The last time the US Mint’s gold
American Eagle sales soared dramatically year-over-year was in 2009,
paving the way for gold’s awesome 29.7% gain in 2010. It’s gold
investment demand that sets gold prices at the margin, since it is
so volatile. And rising gold investment demand heralds a
major gold upleg
in 2016.
Interestingly we
can cross-check that 50%+ surge in gold American Eagle sales last
year with a much bigger dataset, to see if it is indeed
representative of broader investment-demand trends. The venerable
World Gold Council collects the best global gold supply-and-demand
data in the world, and publishes its findings quarterly in its
outstanding Gold Demand Trends reports. They are required
reading for all gold investors!
The WGC divides
gold investment demand into several major categories including
physical-bar demand, official-coin demand, and ETF demand. Even
though central banks effectively invest in gold, they are excluded
from investment demand in their own
separate category. As the latest Q4’15 GDT hasn’t been published
yet, the best 2014-to-2015 comparison now available
encompasses each year’s first three quarters.
During that span,
official-coin demand worldwide only grew 6.7% to 159.7 tonnes. The
US Mint’s gold American Eagle sales totaled 670k ounces in 2015’s
first 9 months, which was a staggering 77% above the 379k ounces
sold in 2014’s comparable span. 670k ounces works out to 20.8t, so
the US Mint’s sales of new gold bullion coins only accounted for
about 1/8th of global official-coin demand. They weren’t
representative.
Overall
global gold investment demand per the WGC rose a similar 5.3% during
the first 9 months of 2015 to 684.0t, which makes the soaring gold
Eagle sales look even more anomalous. But again due to US Mint
production limitations and rationing, as well as the vastly larger
market for past-produced gold Eagles as opposed to brand-new
ones, we can’t draw many broader conclusions from the US Mint’s
sales data.
Nevertheless, the
big surge in 2015 gold Eagle sales is very impressive within its own
US-Mint-sales dataset. The US Mint doesn’t sell directly to
investors, only dealers. And dealers certainly wouldn’t have
purchased so many more gold Eagles in 2015 compared to 2014 without
similar end demand from their investor customers. The dealers
couldn’t satisfy that demand with past-produced coins, they needed
lots more.
This strong
physical gold demand from American investors last year is a sharp
contrast to the
record selling by American futures speculators that forced gold
to its recent secular lows. Because of the high costs and
inefficiencies of buying physical gold, investors who purchase coins
are very strong hands. They are investing for the long haul, and
certainly aren’t going to be shaken out by any gold-price
volatility.
This contrasts
with the speculators shorting gold futures, which are the
weakest of hands. They need to effectively borrow gold futures they
don’t own to sell them, at extreme leverage to the gold price.
These contracts soon have to be repurchased to close out their
hyper-risky positions and effectively pay back their debts. So last
year’s secular gold lows driven by futures shorting were
totally
artificial and unsustainable.
Gold-futures
speculators are only trying to game near-term gold-price action,
they couldn’t care less about fundamentals and only follow technical
momentum. So gold-price action based on their whims of sentiment
is ultimately noise, with little bearing on gold’s long-term
potential. It is physical gold’s buy-and-hold investors that drive
gold investment demand, which is surging according to the US Mint’s
sales.
And interestingly,
its silver bullion-coin sales last year confirm American
precious-metals investment demand is really growing.
Silver is slaved
to gold’s fortunes, it’s effectively a gold sentiment gauge.
Investors only get really interested in buying silver when gold is
rallying. Yet the enormous appetite for Silver Eagles last year,
despite silver’s secular-low woes and US Mint limitations, betrays
fast-growing demand.
2015 saw record
Silver Eagle demand according to US Mint sales averaging 3.9m
ounces per month! This is very surprising given silver investment
demand’s dominance by gold’s price action. In a year where gold was
despised and grinding ever lower, American investors flocked to
physical silver. And demand was actually even higher than the US
Mint’s sales indicate, as it couldn’t keep up with demand.
By early July
2015, the US Mint had run out of 2015 Silver Eagles! It was yet
again failing its mandate in the Gold Bullion Coin Act of producing
“quantities sufficient to meet public demand”. But the US Mint kept
on stamping new coins, and resumed sales on a limited basis by
August. But because of supply constraints, these coins were limited
to weekly allocations of roughly 1m ounces for the rest of the year.
So the record year
of Silver Eagle demand occurred despite 5 months of rationed
sales! They would’ve been considerably if not much higher if
the US Mint took its Congressional mandate seriously and spun up
enough capacity to meet demand. But despite the record demand in
terms of silver volume, 2015 was nowhere close to being a record in
terms of dollars invested. Silver’s price levels were dismal last
year.
Silver averaged
just $15.68 in 2015 as it slumped to major secular lows, weighed
down by the
record gold-futures short selling by American speculators. So
the 47.0m ounces of Silver Eagles sold by the US Mint last year were
worth about $737m. Back in 2011 when silver’s powerful secular bull
peaked in sheer
euphoria, silver’s average price was 125% higher at $35.29.
Silver Eagle sales that year ran 39.9m ounces.
That works out to
about $1408m spent on new US Mint Silver Eagles by American
investors, which is almost twice as much. So overall silver
bullion-coin demand from the US Mint last year was still far lower
than in 2011 straddling silver’s peak. Nevertheless, the record
Silver Eagle demand in volume terms is still very impressive
considering the
epically-bearish psychology plaguing gold and silver all of last
year.
Unfortunately
there’s no ready way to attempt to square the US Mint’s silver
bullion-coin sales with the larger global silver market. The Silver
Institute is silver’s definitive fundamental-research organization,
and it doesn’t break out its supply-and-demand data quarterly like
the World Gold Council does for gold. On top of that, coins and
bars are lumped into one category. So there’s no way to compare
apples to apples.
Per the Silver
Institute, global silver coin-and-bar demand in 2014 (the latest
data available) ran up at 196.0m ounces. That year the US Mint sold
44.0m ounces of Silver Eagles, representing just over 1/5th of
global silver investment demand. So the US Mint’s slice of the
silver-investment pie simply isn’t big enough to draw many broader
conclusions about overall silver demand either. But it’s still very
interesting.
If American
investors’ demand for physical silver bullion was that strong last
year when silver was totally hated and despised, imagine how much
demand will soar as silver recovers and mean reverts higher with
gold in 2016. Both the US Mint’s gold- and silver-bullion-coin
demand last year make it appear like investors are chomping at the
bit to migrate back into the precious metals in a big way as prices
recover.
And they sure
should be. Gold and therefore silver are very unique assets in that
they move counter to the stock markets. So as the stock
markets inevitably roll over into their
overdue
Fed-delayed bear this year, American investors’ demand for gold
and silver to diversify their stock-heavy portfolios is set to
skyrocket! I really doubt the US Mint will rise to the occasion to
sufficiently meet public demand this year either.
For many centuries
if not millennia, the great majority of the wisest and
most-successful investors have advocated having at least 5% of
every portfolio invested in gold. That way if the rest of one’s
portfolio tanks with stock markets, the surging gold price offsets a
sizable portion of those losses. Gold acts as the ultimate
portfolio insurance. And silver fills that role too, although it
has always been much more speculative.
But despite the
resurgent American Eagle demand last year, Americans remain
radically underinvested in gold. One empirical way to
illustrate this is by looking at the value of that GLD gold ETF’s
bullion holdings compared to the market capitalization of the
benchmark S&P 500 component stocks The ratio of the value of GLD’s
bullion to the S&P 500’s market cap
was merely 0.115%
as 2015 waned, vanishingly small.
In other words,
American stock investors had just 0.1% of their portfolios
invested in gold. That is a far cry from the 5.0% minimum
recommended! But it’s even extremely light by recent years’
standards. In the last normal years of 2009 to 2012, this GLD/SPX
value ratio averaged 0.475%. So American stock investors alone
would have to more than quadruple their gold holdings merely
to mean revert to normal levels!
Given how
untrustworthy and predatory our government has become, I’ve always
believed physical gold and silver bullion in your own immediate
possession is vastly superior as portfolio insurance than just
owning paper gold and silver ETF shares. That opinion is becoming
more widespread, aided by far too many scandals like the Obama
Administration using the dreaded Internal Revenue Service to attack
conservatives.
So 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 US 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 so darned 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
languishing today!
Bold and wise
contrarian calls like these have earned our subscribers fortunes,
and you really ought to join them with big changes afoot in the
markets this year. We’ve long published acclaimed
weekly and
monthly
newsletters for speculators and investors. They draw on our decades
of exceptional experience, knowledge, wisdom, and ongoing research
to explain what’s going on in the markets, why, and how to trade
them with specific stocks.
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and cultivate an essential contrarian worldview!
The bottom line is
US Mint bullion-coin sales surged in 2015 despite the dismal new
secular lows gold and silver carved. Even though the US Mint again
failed in its Congressional mandate to produce enough to meet
demand, gold Eagle sales soared over 50% from 2014’s levels while
Silver Eagle sales hit an all-time record in volume terms. Such
strong demand in such hostile market conditions is very bullish.
And it’s only
going to grow as gold and silver mean revert dramatically higher as
the Fed’s stock-market levitation continues collapsing into a major
new bear market. Investors will remember the wisdom of prudent
portfolio diversification with precious metals, and rush to buy gold
and silver in all their various forms. The really wise ones will
accumulate physical gold and silver bullion held in their own
immediate possession.
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