Gyroscopic Investing

I plan to buy a good number of gold coins in the coming year, so I've become quite interested in the subject of coin premiums and what drives them.

Has anyone here ever analyzed (or seen an analysis of) gold coin premiums over time and noticed a relationship with spot price or spot price trends? Sometimes premiums seem quite high (like right now), and I wonder how long they may remain high. They always go back down eventually, but I'm not sure how long it typically takes.

The other day I was reviewing some of my old purchase records of gold coins from a local coin dealer from 2007 to 2011. Part of what I recorded for each purchase was the premium over spot, which varied up and down between 1.8% and 8.1% over that period.

Then, out of curiosity I looked up gold's spot price around the date of each purchase to see if there was a noticeable relationship between the premium and either the spot price or the spot price trend (rising/falling/flat). There didn't seem to be one.

That got me thinking about the broader gold market. It seems like there must be two different gold markets: One for large institutions that trade large gold bars (central banks, ETFs, etc.) and one for small traders who trade gold coins and small bars. Let's call them the institutional and retail markets, respectively. And it seems like the supply/demand curves for those two markets are relatively disconnected, at least on short time scales, since (1) the customers are very different, and (2) converting bars into coins or vice versa takes time.

What this seems to mean is that regardless of gold's current spot price or whether it's trending up or down -- which is driven by institutional demand for gold -- retail investors can drive coin premiums way up or down depending on their demand for coins. Like a relatively independent market-within-a-market.

There's just a lot about the bullion coin industry I don't currently understand. For example, what market "signal" is typically sent to government treasuries around the world to let them know they need to convert some bars into coins -- or melt coins back into bars? What businesses or government entities are out there looking at coin and bar supplies and premiums and deciding, "Looks like we need to make more coins!" or "Looks like we need to melt more coins into bars!"

It's all so mysterious to me.

I'll probably write up some thoughts on this later tonight.

New mintage is such a tiny tiny fraction of the market that i don't know if price signals have much to do with the mintage figures for the major mints.

I am certain that premiums on coins and bars rise when the markets get spooked and there is uncertainty and fear about something major. From my observation this is true whether or not spot is rising or falling. In percentage terms though I've noticed the largest increases in gold premiums when spot is falling.

Here's a fun chart:

Okay, so after talking to my local coin dealer and doing some reading, I think I have a slightly better understanding now about how the U.S. Mint knows when to produce more bullion coins.

The Mint has a small handful of "authorized purchasers" (currently 10 in the U.S. and three in other countries) who submit bulk purchase orders. The minimum order size depends on the type of coin; for example, for Gold Eagles it's 1000 oz.

The Mint charges a relatively fixed premium for each type of coin; for example, for 1-oz Gold Eagles it's 3%.

So basically, the Mint produces new bullion coins in response to receiving bulk orders from its authorized purchasers. The authorized purchasers then sell the coins to wholesalers, who then sell to dealers, who then sell to retail investors.

Since the authorized purchasers can obtain the coins for the fixed, relatively low premium (e.g., 3% for 1-oz Gold Eagles), I suspect high premiums at the dealers and wholesalers act as a market signal that motivates the authorized purchasers to place more orders at the Mint since they can pocket the premium difference.

If new mintage is just a tiny fraction of the total number of circulating bullion coins (as SomeDude pointed out), then I suppose it doesn't have a big effect on premiums. But I do think high premiums probably act as a market signal that effectively gets the Mint to produce more bullion coins to fulfill orders placed by its authorized purchasers.

Tortoise wrote: ↑Fri Feb 26, 2021 1:17 pm If new mintage is just a tiny fraction of the total number of circulating bullion coins (as SomeDude pointed out), then I suppose it doesn't have a big effect on premiums. But I do think high premiums probably act as a market signal that effectively gets the Mint to produce more bullion coins to fulfill orders placed by its authorized purchasers.

Nailed it.

And conversely, the new mintage, regardless of how large, is unlikely to put a dent into the premiums.

Browne I think points out in his books that the price of gold is demand driven because supply is fixed and grows at most 1-2% per year. Price changes have almost no influence on mine production because new mines take a long time to come on line. Extended periods of low prices might halt exploration though and lead to reduced supply in years to come, but periods of high prices spur the reverse and it all sort of balances.

Bottom line, the cure for high prices now will not be increased supply, it will be reduced demand.

Thanks, SD.

I’ve purchased two gold coins in the past few weeks, and both of them were freshly minted 2021 coins (a Maple Leaf and a Kangaroo).

I didn’t specifically ask for 2021s; that’s just what the dealer had in stock. If the vast majority of bullion coins in circulation are from previous years, I wonder why I was given a 2021 both times. Just an interesting coincidence, maybe?

Tortoise wrote: ↑Sat Feb 27, 2021 3:07 pm
I didn’t specifically ask for 2021s; that’s just what the dealer had in stock. If the vast majority of bullion coins in circulation are from previous years, I wonder why I was given a 2021 both times. Just an interesting coincidence, maybe?

My first thought was that maybe no one is selling and the only stock available to buy is fresh from the mint.

Mark Leavy wrote: ↑Sat Feb 27, 2021 3:24 pm

Tortoise wrote: ↑Sat Feb 27, 2021 3:07 pm
I didn’t specifically ask for 2021s; that’s just what the dealer had in stock. If the vast majority of bullion coins in circulation are from previous years, I wonder why I was given a 2021 both times. Just an interesting coincidence, maybe?

My first thought was that maybe no one is selling and the only stock available to buy is fresh from the mint.

Or people are not selling to online dealers and instead to their LCS.

If it was Eagles it would be normal since any specific year usually has an extra premium and the current year doesn't. I have never heard of an extra premium on a krugerrand though.

We are in an odd time at the moment. It looks like demand for physical metal is off the charts.