Last Friday I discussed the US Mint suspending sales of its silver Eagle coin and noted that “at this stage we have not seen any demand surge out of the US but we would expect that if the shortage continues beyond a few weeks”. Well a few days later and The Perth Mint has been hit with a surge in demand for not just our silver coins but gold as well, as our US and European distributors scramble for product.
Due to The Perth Mint’s geographical distance from the US, during past shortages we have found that US distributors scour for supplies closer to home and then we get hit weeks later but this time the delay has been a lot shorter, indicating that dealers see this demand continuing and are trying to get ahead of it. The European interest is obviously not a mystery – bank and stock market closures in Greece are reminding people of the need to have assets outside the financial system.
Coin premiums for silver Eagles remain high (Sharelynx sources the data from Monex) but similar to other periods of shortage so far.
90% silver has also increased back to 2013 levels.
While anecdotal, this comment at the Silver Doctors website may indicate that we are starting to see new buyers come into the market:
Was at one of my LCS [local coin shop] and got to watch a transaction in front of me. This guy dropped $10,000 for a monster box of ASE + 12 more Eagles … And the guy leaves — and the dealer says to me…”He was in here on Friday and got a monster box too. He’s brand new, and something has him lit up, big time!”
This is important because new money drives the price. The Perth Mint’s experience over the past few years has been one of a lack of new buyers rather than any surge in selling by existing holders. We saw existing holders top up on gold’s big drop from the $1500s but then volumes dropped as those investors were happy with the size of their “stack”. The lack of new buyers in our opinion has been a contributing factor to weak precious metal prices since then.
The change in sentiment may not all be individual investors, with Yahoo Finance reporting that a recent Bank of America Merrill Lynch survey showed that “gold was viewed as ‘undervalued’ by fund managers for the first time since August 2009.” This may indicate the beginnings of a turn away from a generally negative mainstream financial market sentiment towards gold, although there is a long way to go on that front.
In terms of how to respond to these increases in premiums, I’d recommend this article by Clint Siegner at Money Metals Exchange. First you have to determine if the shortage is a “temporary bottleneck in the fabrication of coins and rounds, rather than something more permanent”. His view, which I agree with, is that this recent occurrence it is temporary, based on the fact that silver bar premiums have not yet risen or that “investors can still buy 1,000 ounce bars inside an exchange vault without paying an increased premium” (I’ve previously discussed what a real physical-paper disconnect looks like here.) His suggestion is to buy the larger bars (which is easily done via pool allocated type accounts) if you are worried about the price rising, and switch into coins or small bars when premiums return to normal.
It is often tempting to portray coin shortages and high premiums as positive, since they indicate strong demand. However, high premiums just mean that more of an investor’s money is going to coin dealers rather than buying more ounces, the result being that the price of gold or silver is not rising as much as it could – and that isn’t good in the long run.