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Eagles Suffer, Gold Bounces, and Where Are All the Silver Ounces?

When gold prices tumbled to $1539 for a short moment on Thursday 4/4/13, this was the third time in the last year-and-a-half that level had been reached. Each time it happened, gold found firm support, and a surge in physical buying. During aftermarket trading on Friday afternoon, gold prices had rallied some $40 from Thursday’s low, trading over $1580 once again. Meanwhle, US gold Eagles are losing market share, and demand outpaces supply on 1-ounce silver coins.


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This article first published   April 6, 2013

 
“One man’s ceiling is another man’s floor,” a poet once sang, and on Friday, other songs were being sung to mark gold’s third trip to an 18-month low price.

The Wall Street Journal on 4/5/13 documented the gloom around gold in their commodities column, titled “Golden Moment Wanes for Investors.” They found Suki Cooper, a precious metals analyst at Barclays saying, “The sentiment around gold is particularly negative at the moment. There’s a real lack of investor conviction.” Also one Michael Shaoul, CEO of Marketfield Asset Management, who contended that “People who looked to match the price of gold to central-bank activity have been very, very disappointed over the past 18 months.” According to the WSJ, his fund has been ‘holding a bearish bet on gold and silver through a physical–metal back exchange-traded fund.’

“The fast money is selling,“ the article quotes Stephen Klein, portfolio manager at AT Global Capital. Presumably, since fast money tends to seek out momentum trades, some of this cash is now going to US equities, with the stock market having been on a tear for months now.

We should mention that, if the pattern of the last 18 months hold, the plunge in gold prices may already be over. Gold traded down to $1539 on Thursday 4/4/13, and by Friday afternoon had recovered to over $1580 in post-Comex trading. The $1540 level, for the third time in the past 18 months, was pure catnip to gold buyers, and physical buying overwhelmed all the prevailing negative sentiment, sending gold some $40 higher by the end of the week.

So, until we see a definitive and sustained break in gold prices below the $1540 ‘floor’ that gold has bounced off of repeatedly, the long-term secular bull market in gold appears to remain in place.

In the market for gold bullion in it's most popular form, 1-ounce coins, we are seeing a strong shift in demand towards Canadian Maple Leafs, and to a lesser extent, to Australia Kangaroos. This shift is due the lower price premium that the Royal Canadian Mint and Perth Mint now charge, which makes the price of these 99.99% pure gold coins almost 2% less than the price of our usually most-popular 1-ounce bullion choice, the US gold Eagle.

A quick look at the US Mint’s website show that production of 1-ounce gold Eagles in March was an anemic 54,000 coins. In the past, we have used US Mint Eagle mintages as a rough proxy for domestic US gold bullion sales, but with the surging popularity of now lower-cost bullion alternatives, particularly Canada’s gold Maple Leaf, that correlation has lost all validity. This March was one of the busiest months in the US physical gold bullion business in a long time, yet the fact that the Mint could only sell 108 boxes of gold Eagles shows that they are losing market share at a rapid rate.

Of course, there are plenty of different gold bullion choices out there, with Krugerrands and gold ingot bars being major sellers for us, along with Pandas, Philharmonics and Australian Lunar Series issues. But our #1 seller for decades has been gold Eagles, which have accounted for over 75% of our sales of newly-struck 1-ounce gold bullion coins. But now, a price war is taking place that the US Mint's bullion division has so far chosen to ignore, and things have changed. A review of our gold sales for March shows that, for the first time ever, we shipped more Maple Leafs and Kangaroos in total than we did Eagles. And at prices about $30 lower than Eagles, is it any wonder?

As for silver, demand for physical silver in the popular 1-ounce coin form has increased tremendously as silver has fallen nearly 10% in price this year so far. And prices for the pre-1965 US silver coins (sometimes referred to as 'junk silver') have gone from virtually no premium to nearly 10% over melt value at the retail level.

We are now starting to see some delays in silver coin deliveries, and for the silver-buying public, this inevitably brings up the question: If silver prices are going down, implying that there are more sellers than buyers, then why is it getting harder to find silver coins? After all, gold has also gone down, but there aren't any delays in getting 1-ounce gold coins. So what’s up with silver?

We've seen this scenario many times before, and the short answer is that government bullion mints and private refiners have a fixed capacity to strike coins, much as a factory can only produce so many widgets per day.

To illustrate, here’s what inevitably happens when the price of silver takes a sharp drop in the futures markets, aka 'paper markets':

There is always a large group of people who are constantly watching silver prices, so they can buy whenever prices take a dip. They usually buy the most convenient forms of silver, which are 1-ounce silver Eagles, Maple Leafs, or other .999 coins or rounds. So when the price drops, silver dealers quickly get cleaned out of their stock on hand (you'd be amazed how fast that happens), so they tap their distributors, who also have only so much stock on hand, which quickly gets depleted. The distributors then contact Mints and refiners to place orders, and find themselves in the same boat with other distributors who also have large new silver coin orders in hand. Everyone has to wait, since there is only so much capacity available to strike coins. It's not like a mint can go out and borrow additional 30-ton presses whenever they get a little backed up.

The supply of silver in 1-ounce size coins is particularly susceptible to this phenomenon. Just think about the process involved in making them - it starts with refining and rolling the metal into sheets. Then to actually produce the coins for distribution, blanks have to be cut, weighed, cleaned and prepared, and coins are then struck, counted, and packaged. To produce enough silver coins to fill a million-dollar order, this process has to repeated about 35,000 times.

However, to produce a million dollars in gold 1-ounce coins only requires that those same steps be done some 625 times.

In short, producing a certain dollar amount worth of 1-ounce coins silver is 58 times more labor-intensive (that is, involves more factory time) than producing the same dollar amount of gold coins. Which is why shortages of 1-ounce silver coins happen in volatile markets, but not very often for gold coins.

If you have a large order for silver in mind, be advised that as of this week we encountered some delays, up to a two to three weeks for some silver coin products. If you are ordering an amount that we cannot ship immediately, you can always place your order at today’s price and ‘lock in’ with a 20% deposit. We will take orders on a first-come, first served basis, and give you a time-of-delivery estimate when you place your order. We will notify you when your silver is here and ready to ship, at which time you pay the balance due.


 


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