Wednesday, April 24, 2013

More on Paper vs. Physical Gold

I'm getting too old for nonsense and am apt to start quoting Charlie Munger* so it is probably best if I turn this over to Mish's Global Economic and Trend Analysis:

U.S. Mint Runs Out of Smallest American Eagle Gold Coin; Is There a Shortage of Physical Gold? Coordinated Smackdown by Naked Shorts?
Demand for gold coins has surged following the record price plunge in gold last week. Demand is so high that the U.S. Mint Runs Out of Smallest American Eagle Gold Coin.

The U.S. Mint ran out its smallest American Eagle gold coin after demand surged following the biggest drop in futures prices in 33 years.

Sales of the coins weighing a 10th of an ounce were suspended after demand more than doubled in 2013 from a year earlier, the Mint said today in a statement. Total sales of American Eagles in April have almost tripled from a month earlier, according to Mint data on the website.

On April 15, gold futures in New York plunged 9.3 percent, the most since 1980. Retail sales and jewelry demand soared in India, the world’s top buyer, and China, the second-biggest. Coin sales also surged in Australia.

The Mint also sells 22-karat American Eagle coins of 1 ounce, half an ounce and a quarter of an ounce.

The U.S. Mint suspended sales of silver coins in January for more than a week because of lack of inventory. Sales of the coins jumped to a record that month.
Bullish or Bearish?

It's possible to make a bullish or bearish argument out of this shortage. The bullish argument is simple: demand is strong. The bearish argument is small investors are a contrarian indicator just as they were with silver in January.

I am not taking a short-term stance one way or another, so don't ask. I do like my chances longer-term as I explained at the Wine Country Conference. See Mike “Mish” Shedlock: A Brief Lesson in History.

Shortage of Physical Gold?

Some writers have spun this story into the message there is a shortage of physical gold. No there isn't. There is a temporary shortage of certain coins, no more no less.

Divergence Between Physical Gold and Paper Gold?

Other writers have noticed the price premium on small denomination coins and concluded there is some sort of "divergence between physical gold and paper gold".

Once again, that's nonsense. Premiums on small denomination coins is not the same a general premium on physical gold itself.

How do I know?

Easy: If I went to buy or sell at GoldMoney (and GoldMoney only deals in physical metals with allocated, audited storage), I would pay the same small markup as before, based on the current futures price....MORE
*"Think about it a little more and you will agree with me because you're smart and I'm right." --Mr. Munger quoted in "Damn Right: Behind the Scenes with..."