Monday, March 16, 2009
Gold Shortage Discontinues Proofs
Today I was browsing the website of the US Mint (by the way, do not mistake this with "American Mint" which is a dealer of high markup numismatic coins), when I noticed something very interesting. Production of proof and uncirculated editions of the American Gold Eagle coin have been suspended because of an overwhelming demand for bullion investment coins. If you don't know what proof and uncirculated coins are, the basic idea is that they are struck at a higher quality without blemish and are intended to be collectors items, rather than investments. Their value is partly determined by their metal content, but also by their limited minting status and rarity, their superior image striking and absolute mint condition. Thus they are sold at a significant premium over the spot price of their constituent precious metal. Bullion coins, however, are priced based on their precious metals content alone, plus a small premium.
In this unstable economic climate, investor demand for gold, platinum, and silver has has exploded, leaving the US Mint scrambling to fill public demand. The interesting thing is that the mint is required by law to produce enough bullion coins to reasonably satisfy public demand. From the United States Mint's website:
the United States Mint is required by Public Law 99-185 to produce these coins “in quantities sufficient to meet public demand . . . .
Being legally bound to produce bullion investment coins, the mint has suspended all minting of proofs and uncirculated coins because all available gold blanks are being allocated to bullion coins. This applies to silver and platinum versions of the American Eagle coin series.
But this shortage does not affect only proofs and uncirculated editions. Even bullion platinum coins are behind on their deliveries. Here in Japan Platinum American Eagles are nowhere to be found. The same is true for Platinum Canadian Maple Leafs. Gold Maple Leafs are available, but an increased premium is being charged over the spot price. My most recent coin purchase (a Maple Leaf) had a premium of nearly 20%. That's probably double the standard premium. From what I have read and heard from fellow investors online, this is the case all over the world (though in Japan premiums do tend to be higher than many other places).
What this shortage of physical gold and the subsequent increase in the above-spot premium tell me is that the economic climate is convincing a lot of non-investors
to buy gold. By that I mean people who don't buy mutual funds or stocks or anything but usually keep their money in cash are seeking safety in gold. It could also be that people have grown weary of invisible electronic investments that send their money off somewhere to potentially vanish. With the Dow falling so hard, and with people losing their life savings to scumbags like Bernie Madoff, people are realizing that if you can't hold it in your hand, it can potentially vanish.
Real physical gold in your own possession is the safest and best way to invest in gold. The proof is in the demand.