by Louis Golino for CoinWeek ………
In the week since precious metal prices suffered their biggest decline since the 1980’s, buyers of silver and gold coins and bars have been taking advantage of the lower prices at a frenzied pace. That bodes well for those looking for higher prices.
There are all kinds of factors that show there is a worldwide trend of sharply higher buying of physical metal, and this is an important part of why what is happening now is so different from the aftermath of the sharp correction in gold prices after it peaked at $800 in 1980.
Back then sellers of physical metals were lined up at coin shops to dump their gold and silver, but things could not be more different now. For example, on April 22 Barry Stuppler said in his weekly market report that in the past week he has had ten times as many buyers as sellers of precious metal bullion, and his buyers were purchasing between $5,000 and half a million dollars worth of bullion.
Sales of American silver eagles have been reaching new records almost every month this year with total sales for the year at 16,610,000, according to Barry Stuppler. The U.S. Mint has been rationing sales of those coins since January on an allocation basis to its network of authorized purchasers because it has been unable to produce enough coins to meet increased demand, and in January sales of silver eagles were suspended for ten days.
Part of the problem is the difficulty in sourcing the planchets needed to strike the coins, which are only produced by three U.S. companies. The Mint has the capacity to strike 50-60 million silver eagles a year, according to a report in Coin World’s May issue, but the planchet issue has prevented the Mint from reaching that capacity.
With demand rising at a record pace, silver eagles have been sold to authorized distributors on an allocation basis all year, many dealers are now selling coins they do not yet have, and premiums have continued to rise on both the wholesale and retail levels. Wholesale premiums are currently running about $5 over spot, while retail premiums are about $7-8 a coin with most dealers selling silver eagles at $30 a piece.
Texas Precious Metals (www.texmetals.com) posted an inventory update on April 22 that noted the extensive problems in faces sourcing enough silver coins to meet demand, especially those from the U.S. Mint and Royal Canadian Mint. And it characterized the physical market as “ugly,” noting: “There is no telling at this point when mint inventories will return to normal, but you can be sure it will not happen within the next 8 weeks. Most dealers, at this point, are selling their current customer demand forward, meaning they are selling product they do not presently have, expecting to pull from future mint allocations. Consequently, future allocations will face pressure from today’s demand.”
In addition, foreign mints such the Perth Mint in Western Australia are also reporting sharply higher sales of silver and gold coins. Texas Precious Metals also noted that it is pleased with the way Perth has been able to increase production to meet higher demand unlike the U.S. and Canadian Mints and attributed this to the fact that it is the only major world mint that is truly run as a business.
Gold coins have been selling at a record pace all year as well, especially American gold eagles in one ounce and one-tenth ounce sizes. On April 17 alone (two days after gold hit a bottom of $1321) the U.S. Mint sold 63,500 ounces, or two tons, of gold, according to the web site Zero Hedge (www.zerohedge.com). Moreover, in just two weeks this month sales were equivalent to the past two months of combined sales.
In April the one ounce gold eagles reached their highest sales level of the year so far with sales of 175,000 coins from the Mint to its distributors. For the year sales of these coins are up 100% compared to last year.
On April 22 the U.S. Mint announced that it is suspending sales of one-tenth ounce American gold eagle coins to its authorized distributors so that inventories can be replenished, and noted that sales of those coins are running 118% higher than at the same time last year. For the year the Mint has sold 295,000 one tenth-ounce coins.
Sales of the one-tenth ounce coins, the second most popular bullion gold eagles, will resume when the Mint can produce enough coins “to satisfy anticipated marketplace demand.”
It is clear, as many commentators have noted, that there is a war going on between the physical and paper metal markets.
Jim Rickards, a prominent expert on precious metals and financial markets and author of the book, Currency Wars, recently told Business Insider (www.businessinsider.com) that the real difference between the paper and physical markets is not one of price, but of behavior. In his view what matters is the difference in how people react to changes in the market.
In particular, what he calls the “weak hands” such as hedge funds and those who buy on the futures markets run for the hills and sell like crazy when gold corrects sharply, whereas the “strong hands” such as central banks and retail buyers take advantage of the opportunity to buy at lower price points.
He added that “The weak hands are retail jumping into GLD, at a top, using margin, futures players, and people who don’t really understand gold. There are a lot of trend followers out there who started following gold on a trend basis, but didn’t really understand anything about gold, or how it works, etc.
The key is that the weak hands are people who are leveraged buyers with liabilities for futures contracts and margin calls, who need to dump gold when it declines, whereas physical buyers can sit tight and wait for higher prices.
Two other key trends to watch are central bank gold buying and Chinese and Indian gold purchases, both of which are harder to track than data on U.S. Mint sales since the information is not as readily available.
Jim Nichols, another noted gold expert (www.nicholsongold.com), said last week that he expects central banks to take advantage of lower prices, but to do so quietly so as not to drive prices higher too quickly. And based on other reports in the past week, buyers in China and India do appear to be increasing purchases at the new, lower prices.
Louis Golino is a coin collector and numismatic writer, whose articles on coins have appeared in Coin World, Numismatic News, and a number of different coin web sites. His column for CoinWeek, “The Coin Analyst,” covers U.S. and world coins and precious metals. He collects U.S. and European coins and is a member of the ANA, PCGS, NGC, and CAC. He has also worked for the U.S. Library of Congress and has been a syndicated columnist and news analyst on international affairs for a wide variety of newspapers and web sites.