Wikinvest Wire

Gold prices getting fishier and fishier

Friday, October 10, 2008

Michael Zielinski at the Mint News Blog sent me a note the other day regarding this item he recently published, an item that seems to be making the rounds on the internet over the last 24-hours and for good reason.
IMAGEMichael wrote:

There’s one aspect to this entire situation that many people haven’t been discussing. The Mint is always citing “unprecedented demand” as the reason for suspensions, production halts, and allocation programs, but in 1999 gold sales were more than 4 times higher and none of these measures were necessary.

The story is not that the Mint is unable to produce enough gold coins, it’s that they are unable to obtain enough gold on the open market. This all plays into the puzzling situation of physical scarcity and high demand for gold, while the market price of gold remains stagnant.
Well, the price of gold wasn't exactly stagnant today - it was down $63!

Naturally, coin dealers are still desperate for inventory (check out the CNI bullion page which now shows American Eagles available at $80 over spot after having been "Out of Stock" for most of the week and probably "Out of Stock" again by the time you call).

Oh yeah, and the SPDR Gold Shares ETF (NYSEArca:GLD) added another five tonnes today after the price plummeted.

You know, I get the part about investment demand only accounting for about 20 percent of overall demand for gold bullion, but the deal with coin shop shortages really is smelling fishier with each passing day, particularly in light of this data assembled by Michael:
The following table shows the ounces of gold sold by the United States Mint in the form of American Eagle Gold bullion coins. These figures are taken from the US Mint website. You can visit the link for monthly data, as well as the figures for Silver and Platinum Eagles.

American Gold Eagle Bullion Sales (ounces)
1986 1,787,750
1987 1,253,000
1988 851,000
1989 839,000
1990 715,000
1991 472,000
1992 638,600
1993 796,000
1994 559,500
1995 600,500
1996 729,500
1997 1,317,000
1998 1,839,500
1999 2,055,500
2000 164,500
2001 325,000
2002 315,000
2003 484,500
2004 536,000
2005 449,000
2006 261,000
2007 198,500
2008 492,000*
*through October 2008

The demand for American Gold Eagles is clearly not unprecedented. What's actually unprecedented is the suspension and allocation of Gold Eagle coins. Even amidst the booming demand of the pre-Y2K years, the US Mint never resorted to suspensions or allocation programs. Why is the US Mint having so much trouble keeping pace with demand this year?
...
With unfulfilled physical demand, why has the market price of gold remained stagnant? I think we will see this situation play out with some interesting consequences during the remainder of the year.
Yes, the consequences could be quite interesting...

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23 comments:

Aaron Krowne said...

The US Mint is perfectly capable of sauntering down to the COMEX and plunking some Bernanke bucks down on gold contracts.

The reason they do not do it, aside from the fact that this would make the price go up significantly (as it should), is that COMEX probably cannot deliver physical gold.

In other words, if the Mint actually went and bought the gold using the prevailing clearing market to do so, they'd cause it to default. Which would really look bad for "the system".

Chuck Fouts said...

One of the factors for GLD dropping so much today may be because so many people are pulling money out of their mutual funds. SLV was also harshly beaten down today. Volatility in the market remains incredibly high. There are a lot of people sitting on a lot of cash right now. The day to day price swings in GLD are likely to be large for the next few weeks.

Anonymous said...

Tim says GLD added five tons today. How can the gold price go down when so much more bullion was purchased???

Anonymous said...

Burlusconi said the G7 was considering shutting down all financial markets while they re-write the financial rules. They didn't end up doing it. Maybe they are saving it for later in case things get worse or maybe they have been considering it. It just might be that one thing they were/are considering is going back on the gold standard. Maybe the reason for stopping gold coin sales is to make it that much easier to confiscate it and also start hoarding it until the announcement is made.

Anonymous said...

What you have failed to realize is that gold is less valuable when currency is plentiful and it's price is high, and gold is more valuable when currency becomes scarce and its price is low.

Value is what you can trade for.

Gold is rapidly rising in value as it falls in price. Gold buys lots more stock shares today that it did at it's peak price. Same for real estate, or whatever.

If gold ever gets so valuable that it trades for $50 or less, the government will probably confiscate it, as one ounce will buy the Dow.

Anonymous said...

I think the shortgage is due to anti-money-laundering laws, and/or fed currency monopoly preservation laws.

It just wouldn't do if people had enough gold coins in their hands to start using them as effective currency again. What would our corrupt leaders do if the people started taking back the power into their own hands?

Italian said...

Interestingly, bullionvault has no more physical gold for the New York vault. They are waiting for a delivery on next thursday.

Physical gold in NY is trading at 917.5 right now.

John said...

Shortgage of SLV and supsension of GLD conis. Hope the demand is satisfied as soon as possible.

John
Investment Banking Jobs

Italian said...

oops, tuesday

shasta said...

$10 trillion lost between real estate and stock market. vanished from monetary system.

2/3s of economy based on consumer spending and 1/3 based on real estate.

Real estate was the first leg to drop and consumer spending is the second leg to drop.

true unemployment is 11% for Sept(see labor dept statistics)

We will have massive deflation and gold will drop in price like a rock.

Unemployment will soar!

WATCH OUT BELOW!

dnw said...

Great Depression style "deflation" only happens if the government lets it happen ---- that was the lesson of the Great Depression for modern day policymakers (unfortunately it was the wrong lesson).

With a system of fiat money and democratically elected governments, there is only one maxim ----- "inflate or die" ---- and nobody wants to die.

Remember that most people are clueless when it comes to fiat money/hard money and they just want the government to make things better, something that governments can surely do (for a little while) when you run an electronic printing press whose output has no no upper limit.

shasta said...

True, but printing $10 trillion paper dollars to replace the lost trillions will take a lot of trees.


I do not think Enviromentalists will let it happen.

Anonymous said...

they cant mint gold because right now they are making a new currncey called the amero wich when the dollar collapes in feb they will have the amero as back up ask china they are already getting ameros to replace the dollar for the end of the dollar wich is now here you watch

Italian said...

The new G7 plan is to print 2 Trillions using government deficits.

Moreover you now have Fannie Freddie printing at a tune of 40 billion per month, that is another 0.48 trillion a year.

The US treasury is printing like a mad, flooding the world with T-bills (around 100 Billion in 3 days).

While all this paper is printed to save the financials, the size of the good producing economy is shrinking: we are in for a massive devaluation of the currencies, starting with the dollar, when it will become clear that this enormous amount of debt can't be repaid or even rolled over.

Short term: price deflation in commodities but gold.
Middle term: huge price inflation.

During price deflation the price of gold will stay more or less par with the currency. Look at graphs: it has already disconnected from the other commodities. Oil price is free-falling, Gold is not.

During the inflationary period the price of gold will soar.
Physical gold, not paper GLD.

Anonymous said...

Perhaps before you jump into elaborate conspiracies, you should consider the obvious explanations, one of which appears in the very table you show in this post.

The demand for American Eagles had been low for the past eight years. It seems likely that the mint decided not to maintain a vast warehouse of millions of coins, or the manufacturing capacity to pump out millions of coins at a moments notice. Actually, they may never have had that capacity; it could be that those millions of coins sold in the past were from inventory built up from over-production in earlier years.

When I look at the numbers, I see a mint that had decided to lower inventory and production to match a leaner demand. When demand started rising, they had neither the inventory nor the immediate manufacturing capacity to satisfy it. The numbers bolster my point: the number the mint has been able to produce, 492,000, seems like it would be in line with estimates considering demand in the recent past. So this number more likely represents a limited production capacity and a production ramp.

What I suggest from all of you commenting here on the conspiracy is that you get a job where you actually build something for a living, instead of living off the buying and selling of others, or living off ad-clicks. Then, instead of seeing a paranoid conspiracy, you'd see the world for what it is: full of people with imperfect estimates of the future.

James said...

Wow! What a pompous a$$ you are Anon 10:11.... if that is your real name

Vespucian said...

DNW,

Inflationary contractions wipe out good money with bad, and leave a less sturdy financial foundation when finished than deflation does (the latter wiping out much more bad money than good).

But more importantly, inflation (the hyper variety, at least) often disinclines the powers-that-be (MOTN, big creditors)to support the status quo, leading to profound political instability. Think Weimar, the US under the Articles of Confederation, and Latin America in the late 20th century.

The only two options open to our country at this point are to soak-the-rich or print -- the middle class is tapped out and the foreigners may not be so happy to loan to us with abandon anymore. I agree with you that printing is going to be a large component of whatever ultimate "solution" is coming.

If so, history suggests our politics will get even more interesting in the years to come, and probably not a "good" kind of "interesting".

FWIW

Goldilocks said...

Anon at 10.11 seems to be a very naive soul. He or she seems to believe that markets are never manipulated and to even suggest the possibility is a sign of a paranoid conspiracy nut. Go back to sleep, dear, and let the grown-ups try to figure out why the market is moving in the direction that is completely contrary to logic - ie falling when there is rising demand.

marc said...

I just about laughed my butt off about this, but gold is selling(with bids)for $1000-1200 an ounce on Ebay, while market price, set by the bullion banks, is $840!

I don't know if you've been following this, but there is a genuine shortage of gold and silver coins and bullion. England has NONE for sale at any price, it is 6 to 12 weeks wait in France and Germany for coins. In the US, there are NO gold or silver Eagles currently being minted as the government claims they have been unable to meet demand. The dealers are adding huge premiums to reflect the real value of gold and silver coins.

In Canada, Maple leaf coins are 2 months behind orders. The only silver and gold you can buy from Kitco, the big bullion dealer here, is 1000 ounce bars of silver and 400 ounce gold. Everything else is on backorder. There is a shortage, And the US govt. price of both metals is dropping!! HAHAHAHAHA!! Lies, damned lies, and the fed!! They've repealed the law of supply and demand!! Anyone posting on this site expecting gold to drop like a rock, please sell me your gold now, I'm using it to pave my driveway. Hahaha! Idiots!

Paul Andrews said...

I have put up a chart that shows the difference between paper gold and physical gold over the last two weeks. Will extend back to show the increase in the spread over time.

http://pricewatcher.blogspot.com/2008/10/physical-gold-vs-paper-gold-oct-2008.html

Bron said...

"The US Mint is perfectly capable of sauntering down to the COMEX and plunking some Bernanke bucks down on gold contracts."

Well, they could, but that wouldn't necessarily help them. The US Mint does not make its own blanks, it only mints. It has outsourced blank production, so it is their blank suppliers who have to get the raw 400oz bars. This addition of another company into the production process add another layer for inventory forecasting stuff ups.

It is not just that easy to buy some gold and bang out some coins. Those interested in some of the commerical factors in play may find this of interest http://goldchat.blogspot.com/2008/08/fud-fear-uncertainty-doubt.html

None of what I say is to deny conspiracy or manipulation, but there can also be other more mundane explanations as well.

Aaron Krowne said...

I appreciate your discussion, Bron, but there was nothing in it I was not already aware of. Your arguments are very good at serving as descriptive "excuses" of the breakdown, but they do not really do much to explain why it persists.

The fact that the Mint has to source coin blanks from the a supplier is not material, since this seemed to pose no problem as recently as 1999. So clearly the difference is that supply is being actively diverted away from retail, and the Mint is doing nothing about this.

This may be, as you explain, because a decision is being made to keep the silver users "happy" (and maybe, god forbid, financial entities piled heavy on shorts). But that in itself is a political, not market, assertion of priority. Price should determine where supply goes. So I resent this as much as I'd resent ration cards for food or gasoline.

If the Mint really wanted to fulfill their duty, I suspect they could acquire 1000-oz bars and find someone who would turn them into little round slugs, for a reasonable fee.

Retail "premiums" remain lofty. I think your post, dated August, is right -- we are seeing who has "egg on their face".

Aaron Krowne said...

By the way, to other readers: none of these excuses for why the retail market is gummed up acknowledge one basic fact, which is automatically true by extension: if the overall market was working properly, the paper market price of silver WOULD be higher. How much, and what would happen in the future are open questions, of course.

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