Recent years have seen countless claims that gold and silver prices have to head far lower, implying demand is low or supply is high. But the actual data continues to prove this false, showing precious-metals bearishness is rooted in sentiment and not fundamentals. One fascinating microcosm of gold and silver demand comes in the form of the US Mint's sales of its popular American Eagle bullion coins.
When American investors buy physical gold and silver bullion, it's often in the form of these American Eagle 1-ounce coins. They have a really interesting history. Back in the early 1980s, foreign national gold coins led by South Africa's famous Krugerrand were soaring in popularity. The US Congress didn't want the States to be left out of the prestigious national-gold-coin business, so it finally acted in 1985.
American lawmakers crafted the Gold Bullion Coin Act of 1985, which president Ronald Reagan then promptly signed into law. It mandated the US Mint start producing a family of 22-karat gold-bullion coins containing one, one-half, one-quarter, and one-tenth of a troy ounce of fine gold. There were a couple of interesting restrictions, including the origin and age of the gold and the amount of coins to be produced.
The GBCA required all gold-bullion coins to be minted from "gold mined from natural deposits in the United States, or in a territory or possession of the United States, within one year after the month in which the ore from which it is derived was mined." If that source ever proved insufficient, the Mint could "use gold from reserves held by the United States to mint the coins". It makes sense to support American miners.
But far more importantly, this law requires the US Mint to produce these gold-bullion coins "in quantities sufficient to meet public demand". Unfortunately the unaccountable bureaucrats at the US Mint have failed miserably on this front, and should've faced the wrath of Congress. There have been multiple times since the deep secular-bear gold lows of the early 2000s where bullion-coin sales have been suspended.
The most famous was probably in August 2008 heading into that year's stock panic, when demand was growing. The US Mint claimed its suppliers couldn't produce enough planchets, the blank flat disks of 22-karat gold that are ultimately stamped into American Eagle coins. That ignited a firestorm among gold conspiracy theorists, and went mainstream with a major Wall Street Journal story published on page C1.
The US Mint's history of producing sufficient Silver Eagle coins to meet public demand is even worse, with these popular coins rationed for as long as 18 months at a time. This was even a big problem in 2015, where these silver coins' sales were severely restricted for the last 5 months of last year. Because the US Mint has such an ongoing problem meeting demand as mandated, its coin sales don't reflect true demand.
There are additional factors limiting the usefulness of this data for drawing conclusions about broader gold investment demand. It's primarily American investors buying these American Eagle bullion coins, effectively excluding the rest of the world. On top of that, these coins are never destroyed. So the true supply and demand in the marketplace encompasses the entire stockpile of coins minted since 1986.
Nevertheless, the US Mint's sales of newly-minted bullion coins offer a useful peripheral read into American gold and silver investment demand as long as their limitations are kept in mind. This small piece of overall global gold demand is a valuable barometer of American physical investment demand. Trends within these datasets help highlight broader trends in gold investment, which dominates gold's price.
And contrary to Wall Street's assertion that gold and silver demand continue to implode heralding much-lower precious-metals prices, the US Mint says these American Eagle coins are selling like hotcakes. On December 31st it reported that 2015 sales of its gold bullion coins soared 53% above 2014's levels, while silver-bullion-coin sales hit an all-time record! That's impressive considering 2015's poor price action.
Gold and silver dropped 10.3% and 11.9% last year, slumping to brutal 6.1-year and 6.4-year secular lows in mid-December. So naturally sentiment, the consensus outlook on gold and silver prices, was horrendous. But that didn't stop prudent contrarian investors from aggressively snatching up the US Mint's bullion coins at super-low prices. Multiplying wealth requires first buying low before later selling high!
And that strong investment demand exploded in early 2016 as stock markets accelerated their overdue dive towards bear-market territory. On just the first day the new 2016 Eagles were offered, 60k ounces of gold coins were sold. That compares to 81k for all of January 2015. And 2.8m ounces of silver coins sold that opening day, half of the 5.5m ounces seen in all of last January. Demand is incredibly strong!
Despite these bullion-coin sales' inherent limitations, they can be a roughly-representative microcosm of the broader gold and silver investment pictures. So it's definitely worth considering what's going on in American Eagles. These charts include the latest data on the US Mint's bullion-coin sales current to this essay, December 2015's. Actual ounces sold each month are rendered, which are then averaged annually.
American Eagle bullion-coin sales started out low as gold's secular bull began building momentum in the early 2000s. But despite gold surging higher in 2005, 2006, and 2007, they fell on balance. That suggests the investors buying physical bullion coins are real contrarians, preferring to wait to buy until gold is really out of favor. That same higher-gold lower-demand phenomenon happened in 2010 and 2011.
The peak year was actually 2009, when monthly gold-bullion coin sales averaged 119.5k ounces. And that proved an excellent year for gold after the stock panic, with its price surging 24.3% higher. That year's strong gold demand was also crystal-clear in the gold-bullion holdings of the world's leading GLD SPDR Gold Shares gold ETF. Its holdings rocketed 353.4 metric tons higher that year, or 45.3%, on huge demand!
Trough bullion-coin sales in recent years occurred in 2014 at a monthly average of just 43.7k ounces. That was a disappointing year for gold, with the metal edging 2.0% lower instead of bouncing strongly after it had plummeted 27.9% in 2013. That was the fateful year the Fed's QE3 campaign ramped up to full steam levitating the US stock markets, which sucked demand away from all other investments including gold.
So it's fascinating to see average monthly US Mint gold bullion-coin sales soar over 53% higher in 2015 despite the miserable gold conditions intensifying. Gold's $1159 average price last year was 8.4% lower than 2014's average of $1266. American physical investors clearly didn't believe the bearish hype that gold was doomed to spiral lower as the Fed started hiking interest rates, a myth history has proven false.
Provocatively these surging gold bullion-coin sales could prove a very bullish leading indicator for gold. The last time the US Mint's gold American Eagle sales soared dramatically year-over-year was in 2009, paving the way for gold's awesome 29.7% gain in 2010. It's gold investment demand that sets gold prices at the margin, since it is so volatile. And rising gold investment demand heralds a major gold upleg in 2016.
Interestingly we can cross-check that 50%+ surge in gold American Eagle sales last year with a much bigger dataset, to see if it is indeed representative of broader investment-demand trends. The venerable World Gold Council collects the best global gold supply-and-demand data in the world, and publishes its findings quarterly in its outstanding Gold Demand Trends reports. They are required reading for all gold investors!
The WGC divides gold investment demand into several major categories including physical-bar demand, official-coin demand, and ETF demand. Even though central banks effectively invest in gold, they are excluded from investment demand in their own separate category. As the latest Q4'15 GDT hasn't been published yet, the best 2014-to-2015 comparison now available encompasses each year's first three quarters.
During that span, official-coin demand worldwide only grew 6.7% to 159.7 tonnes. The US Mint's gold American Eagle sales totaled 670k ounces in 2015's first 9 months, which was a staggering 77% above the 379k ounces sold in 2014's comparable span. 670k ounces works out to 20.8t, so the US Mint's sales of new gold bullion coins only accounted for about 1/8th of global official-coin demand. They weren't representative.
Overall global gold investment demand per the WGC rose a similar 5.3% during the first 9 months of 2015 to 684.0t, which makes the soaring gold Eagle sales look even more anomalous. But again due to US Mint production limitations and rationing, as well as the vastly larger market for past-produced gold Eagles as opposed to brand-new ones, we can't draw many broader conclusions from the US Mint's sales data.
Nevertheless, the big surge in 2015 gold Eagle sales is very impressive within its own US-Mint-sales dataset. The US Mint doesn't sell directly to investors, only dealers. And dealers certainly wouldn't have purchased so many more gold Eagles in 2015 compared to 2014 without similar end demand from their investor customers. The dealers couldn't satisfy that demand with past-produced coins, they needed lots more.
This strong physical gold demand from American investors last year is a sharp contrast to the record selling by American futures speculators that forced gold to its recent secular lows. Because of the high costs and inefficiencies of buying physical gold, investors who purchase coins are very strong hands. They are investing for the long haul, and certainly aren't going to be shaken out by any gold-price volatility.
This contrasts with the speculators shorting gold futures, which are the weakest of hands. They need to effectively borrow gold futures they don't own to sell them, at extreme leverage to the gold price. These contracts soon have to be repurchased to close out their hyper-risky positions and effectively pay back their debts. So last year's secular gold lows driven by futures shorting were totally artificial and unsustainable.
Gold-futures speculators are only trying to game near-term gold-price action, they couldn't care less about fundamentals and only follow technical momentum. So gold-price action based on their whims of sentiment is ultimately noise, with little bearing on gold's long-term potential. It is physical gold's buy-and-hold investors that drive gold investment demand, which is surging according to the US Mint's sales.
And interestingly, its silver bullion-coin sales last year confirm American precious-metals investment demand is really growing. Silver is slaved to gold's fortunes, it's effectively a gold sentiment gauge. Investors only get really interested in buying silver when gold is rallying. Yet the enormous appetite for Silver Eagles last year, despite silver's secular-low woes and US Mint limitations, betrays fast-growing demand.
2015 saw record Silver Eagle demand according to US Mint sales averaging 3.9m ounces per month! This is very surprising given silver investment demand's dominance by gold's price action. In a year where gold was despised and grinding ever lower, American investors flocked to physical silver. And demand was actually even higher than the US Mint's sales indicate, as it couldn't keep up with demand.
By early July 2015, the US Mint had run out of 2015 Silver Eagles! It was yet again failing its mandate in the Gold Bullion Coin Act of producing "quantities sufficient to meet public demand". But the US Mint kept on stamping new coins, and resumed sales on a limited basis by August. But because of supply constraints, these coins were limited to weekly allocations of roughly 1m ounces for the rest of the year.
So the record year of Silver Eagle demand occurred despite 5 months of rationed sales! They would've been considerably if not much higher if the US Mint took its Congressional mandate seriously and spun up enough capacity to meet demand. But despite the record demand in terms of silver volume, 2015 was nowhere close to being a record in terms of dollars invested. Silver's price levels were dismal last year.
Silver averaged just $15.68 in 2015 as it slumped to major secular lows, weighed down by the record gold-futures short selling by American speculators. So the 47.0m ounces of Silver Eagles sold by the US Mint last year were worth about $737m. Back in 2011 when silver's powerful secular bull peaked in sheer euphoria, silver's average price was 125% higher at $35.29. Silver Eagle sales that year ran 39.9m ounces.
That works out to about $1408m spent on new US Mint Silver Eagles by American investors, which is almost twice as much. So overall silver bullion-coin demand from the US Mint last year was still far lower than in 2011 straddling silver's peak. Nevertheless, the record Silver Eagle demand in volume terms is still very impressive considering the epically-bearish psychology plaguing gold and silver all of last year.
Unfortunately there's no ready way to attempt to square the US Mint's silver bullion-coin sales with the larger global silver market. The Silver Institute is silver's definitive fundamental-research organization, and it doesn't break out its supply-and-demand data quarterly like the World Gold Council does for gold. On top of that, coins and bars are lumped into one category. So there's no way to compare apples to apples.
Per the Silver Institute, global silver coin-and-bar demand in 2014 (the latest data available) ran up at 196.0m ounces. That year the US Mint sold 44.0m ounces of Silver Eagles, representing just over 1/5th of global silver investment demand. So the US Mint's slice of the silver-investment pie simply isn't big enough to draw many broader conclusions about overall silver demand either. But it's still very interesting.
If American investors' demand for physical silver bullion was that strong last year when silver was totally hated and despised, imagine how much demand will soar as silver recovers and mean reverts higher with gold in 2016. Both the US Mint's gold- and silver-bullion-coin demand last year make it appear like investors are chomping at the bit to migrate back into the precious metals in a big way as prices recover.
And they sure should be. Gold and therefore silver are very unique assets in that they move counter to the stock markets. So as the stock markets inevitably roll over into their overdue Fed-delayed bear this year, American investors' demand for gold and silver to diversify their stock-heavy portfolios is set to skyrocket! I really doubt the US Mint will rise to the occasion to sufficiently meet public demand this year either.
For many centuries if not millennia, the great majority of the wisest and most-successful investors have advocated having at least 5% of every portfolio invested in gold. That way if the rest of one's portfolio tanks with stock markets, the surging gold price offsets a sizable portion of those losses. Gold acts as the ultimate portfolio insurance. And silver fills that role too, although it has always been much more speculative.
But despite the resurgent American Eagle demand last year, Americans remain radically underinvested in gold. One empirical way to illustrate this is by looking at the value of that GLD gold ETF's bullion holdings compared to the market capitalization of the benchmark S&P 500 component stocks The ratio of the value of GLD's bullion to the S&P 500's market cap was merely 0.115% as 2015 waned, vanishingly small.
In other words, American stock investors had just 0.1% of their portfolios invested in gold. That is a far cry from the 5.0% minimum recommended! But it's even extremely light by recent years' standards. In the last normal years of 2009 to 2012, this GLD/SPX value ratio averaged 0.475%. So American stock investors alone would have to more than quadruple their gold holdings merely to mean revert to normal levels!
Given how untrustworthy and predatory our government has become, I've always believed physical gold and silver bullion in your own immediate possession is vastly superior as portfolio insurance than just owning paper gold and silver ETF shares. That opinion is becoming more widespread, aided by far too many scandals like the Obama Administration using the dreaded Internal Revenue Service to attack conservatives.
So precious-metals physical-bullion demand among American investors should only grow as gold and silver mean revert higher this year and beyond. There's no doubt the US Mint will be able to sell every last American Eagle coin it produces. Since the US Mint has to buy this gold and silver from American miners, all this bullion-coin demand will certainly contribute to driving gold and silver prices higher as well.
If you've never bought gold and silver bullion coins, it's a fantastic time to get started and stockpiling with gold and silver prices so darned low. All you have to do is find a reputable local coin dealer who's been in business a long time and stop by to chat. He'll help you understand what kinds of coins are available, and the premiums they command. Buy your coins, take them home, hide them, and forget about them.
At Zeal we've always advocated physical-bullion foundations for every investment portfolio. I started to recommend gold-bullion coins to our subscribers in May 2001 when gold traded near $264, and silver-bullion coins in November 2001 when silver traded at $4.20. These long-term investments trounced the S&P 500 ever since, with gains still in the hundreds of percent even with gold and silver languishing today!
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The bottom line is US Mint bullion-coin sales surged in 2015 despite the dismal new secular lows gold and silver carved. Even though the US Mint again failed in its Congressional mandate to produce enough to meet demand, gold Eagle sales soared over 50% from 2014's levels while Silver Eagle sales hit an all-time record in volume terms. Such strong demand in such hostile market conditions is very bullish.
And it's only going to grow as gold and silver mean revert dramatically higher as the Fed's stock-market levitation continues collapsing into a major new bear market. Investors will remember the wisdom of prudent portfolio diversification with precious metals, and rush to buy gold and silver in all their various forms. The really wise ones will accumulate physical gold and silver bullion held in their own immediate possession.