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Gold Coin Premiums Soar

Gold Coin Premiums Soar

By Patrick A. Heller
December 08, 2009

The U.S. Mint put the three fractional sizes of gold American Eagles (half, quarter and tenth ounce) on sale last Thursday and had to suspend further sales the next day as virtually everything was sold out.

The U.S. Mint also indefinitely suspended sales of gold Buffaloes last week. The Mint had suspended sales of the one-ounce American Eagle on Nov. 25. Apparently there is one more planned delivery of gold and silver Eagles late in December. So many of these coins have been ordered by primary distributors that some of the orders may not be filled until January, with 2010-dated coins.

The primary distributors may also be stuck waiting for 2010 silver Eagles instead of the 2009-dated coins they thought they would be receiving later this month.

You can still purchase one-ounce gold ingots, but are looking at 3-5 weeks delivery time while new pieces are fabricated.

Amidst the growing shortage of physical gold and silver bullion-priced products, the premiums at which such products trade above their metal value keeps rising. We saw this occur late last year, with premiums increasing almost daily for nearly two months. I would not be surprised to see premiums continue to go up for at least the next four weeks.

Gold topped $1,200 last week, but started falling just before last Friday�s announcement of the U.S. unemployment rate (which, in typical government double-speak, was totally confusing � the number of unemployed increased but the unemployment rate declined!). Spot prices fell some more over the weekend and early this week.

The weakness in gold and silver prices was almost to be expected. First, the prices of both metals had closed in U.S. markets at new highs almost every day in November. This was an extraordinarily long stretch of almost constant higher prices, without any major retrenchments. So the decline in the last few days can be considered an overdue correction that will be expected to occur during a long-term bull market.

Second, the price of gold has been clobbered almost every month for the past four years when the U.S. unemployment rate was being announced. Last month was almost the only exception during that time period. Other traders have noticed this pattern and were ready to reap profits while they helped knock down the price in cooperation with the U.S. government.

Third, the U.S. government has an extra large amount of Treasury debt to issue this week. In order to demonstrate the strength of the U.S. dollar and thereby issue this debt at a lower interest rate, the price of gold needs to be suppressed.

Would-be gold and silver bullion buyers have filled our store and flooded our phone lines early this week. They have been frustrated by higher premiums and delayed deliveries on so many products. There have been virtually no sellers, which is compounding the supply squeeze.

Some mainstream analysts are starting to throw out words like �bubble� in describing the gold market as having reached a peak. In my judgment, we are nowhere close to the top. Even though there has been a surge in the demand for physical gold, there is still only a small minority (less than 10 percent) of adult Americans who own investment gold coins or ingots. Also, the sellers tend to be those who need to raise money as opposed to those who think that prices really are at a peak.

Even Barrick Gold Corporation, which recently conceded that it still owed 9.5 million ounces of pre-sold gold, has further stated the firm will try to close out its entire position promptly rather than waiting for the gold price to drop to their �expert� opinion of $900 in the next few months.

The price of gold may not recover above $1,200 until Thursday afternoon this week, after the last of the weekly U.S. Treasury debt auctions, but I do expect it to resume seeking higher levels as the overall financial and economic calamities that have pushed up prices have not been resolved.

Last Thursday, Rep. Peter DeFazio, D-Ore., introduced H.R. 4191 to impose a 0.25 percent transactions tax on all stock trades, futures contracts, stock options, swaps and credit default swaps placed on U.S. exchanges. Sen. Tom Harkin, D-Iowa, announced that he would be the sponsor of the companion bill in the Senate. At her weekly briefing last Thursday, House Speaker Nancy Pelosi, D-Calif., announced that she supported this new tax in hopes that other nations would also impose a comparable tax. Her stated reason for supporting this tax increase on individual investors is that it would help cover the cost of the government bailouts of Wall Street firms.

There is significant opposition to this legislation, even within the ranks of the Democrats. For instance, Rep. Carolyn Maloney, D-N.Y., the chair of the Joint Economic Committee, is one of three Democrats circulating a letter in Congress urging that H.R. 4191 be defeated. With Goldman Sachs and JPMorgan Chase being among the highest financial contributors to President Obama�s election campaign, there is a significant possibility that this legislation will die without enactment.

However, should this transaction tax on paper investments become law, I expect that it would further increase demand for physical precious metals. Some investors would be unwilling to pay the 0.25 percent tax to purchase shares in gold or silver exchange traded funds or commodity contracts when they would not have to pay it when purchasing physical metals.

Is it possible that the U.S. Mint is deliberating trying to restrict gold and silver ownership by refusing to fabricate as many gold and silver coins as the public wants to purchase? For more than a year now, the U.S. Mint has been trying to lay the blame for inadequate coin output on the inability to get sufficient quantities of coin blanks from suppliers. For Silver Eagles, for example, the U.S. Mint has only three suppliers, one U.S. and two foreign. Sunshine Minting, the lone U.S. supplier contends it has the ability to produce a much larger volume of blanks if the U.S. government could assure a regular supply of the raw silver and gold. At least two other U.S. companies, including one whose subsidiary had previously supplied Eagle blanks to the Mint, have complained publicly that the U.S. Mint is dragging its feet at accepting their applications to supply blanks to the Mint.

With physical gold and silver demand growing to such strong levels that we are on the brink of having to wait for new production to fill future orders, I see no practical reason why the Mint claims to have additional capacity to strike coins if only they could obtain larger supplies of coin blanks, yet it continues to block offers to increase the supply of blanks.

In my latest monthly newsletter finished last week, I identified three categories of gold coins that have recently overachieved in price gains. From here into the future, I now expect them to underperform. They all represent good candidates to sell or swap at current prices. On some of these coins, owners can now sell them for five to six times what they paid when we recommended that they buy them. To save space here, I refer you to my company�s Web site (www.libertycoinservice.com) to read the �Liberty�s Outlook Newsletter� for details.

If you own gold or silver and also have significant tax losses from your other investments, you might be able to sell your profitable gold holdings without having to pay any income taxes. It may even be possible to repurchase your position at prices close to your selling price if you don�t want to really sell your precious metals, but wouldn�t mind establishing a higher cost basis to reduce possible future tax liabilities. The IRS has rules for �wash sales� that apply to intangible assets, so I recommend you contact your tax professional for guidance on any such potential transactions.

In the meantime, if you have not yet fully established your physical gold and silver position yet, I urge you to do so without any further delay.

Patrick A. Heller owns Liberty Coin Service in Lansing, Mich., and writes �Liberty�s Outlook,� the company�s monthly newsletter on rare coins and precious metals subjects. Past newsletter issues can be viewed at http://www.libertycoinservice.com. Other commentaries are available at Financial Sense University (www.financialsense.com). His periodic radio interviews on WILS-1320 AM can be heard at http://www.amlansing.com, on the Korelin Economic Report at http://www.kereport.com, and on Coin Chat Radio at www.coinchatradio.com.

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