By Adam Hamilton
Back in late 1985, the US Congress authorized the Gold Bullion Coin Act of 1985 which President Ronald Reagan promptly signed into law. It ordered the US Treasury, through its US Mint branch, to start producing gold bullion coins. This law outlined very specific requirements for these new coins, including that they be produced from gold mined in the United States.

This legislation, partially in response to the soaring popularity of foreign national coins like the famous South African Krugerrand in the early 1980s, ushered in the modern era of American bullion coins. The American Gold Eagles and American Silver Eagles that emerged out of this program have since grown very popular among investors worldwide for several reasons.

As bullion coins (as opposed to numismatic coins), the American Eagles should sell for not much more than the fair-market value of their actual metal content. So for any given amount of capital, an investor can own much more gold or silver in the form of bullion coins than he could in rare numismatic coins which command steep scarcity premiums over gold and silver prices.

In addition, the Eagles are very easy to buy and sell at any coin dealer worldwide. They are universally recognized, their bullion content is certified by the US government, and their primary one-ounce increments are easy to afford for every dealer and almost all investors. They are also very durable, as the Gold Eagles are 22 karat gold (just under 92%) alloyed with silver and copper. While they do still contain a full troy ounce of gold, they are less fragile than soft pure-gold national coins like the Canadian Maple Leaf.

Finally, the Eagles are very beautiful aesthetically. While most of my physical gold and silver investments are hidden away, I always keep a handful of Gold and Silver Eagles floating around on my desk. They are fun to look at and handle, and they anchor the vast ethereal world of electronic gold markets to a tangible physical reality. They are also great to show to potential new gold investors. Once they first hold real physical gold coins in their own hands, they are usually hooked and want some of their own.

While I love the Eagles and can never own enough of them (they are addicting), like most investors I am disappointed with how the US Mint has handled its legal mandate to produce them. The Gold Bullion Coin Act of 1985 explicitly states that these coins must be produced “in quantities sufficient to meet public demand”.

For bullion coins, this means there must be enough of them in the wild to keep them from trading at a significant premium over the spot price beyond a normal bid/ask spread. If you or I want Eagles, we should be able to buy them anytime close to the spot metals prices. For nearly 22 years after the first Gold Eagles were produced in late 1986, this was usually the case. But back in August 2008, the US Mint abruptly stopped selling these popular coins to dealers for the first time.

I discussed this gold bullion shortage in the September 2008 issue of our Zeal Intelligence monthly newsletter. If you are a subscriber, you can download it off our website archives and learn about last year’s fascinating bullion shortages in depth. For our purposes today though, the key point is in August 2008 the Mint gave up all pretenses of trying to meet demand as mandated and started rationing Gold Eagles on a limited basis.

This episode was exceedingly interesting because it betrayed underlying physical-gold demand from investors growing at far higher rates than the futures gold price at the time suggested. I started digging into the Mint’s Eagle sales in September, but then I got sidetracked by the epic Great Stock Panic of 2008. When the flagship S&P 500 stock index plummets 30% in just 3 weeks, it demands our full attention as investors and students of the markets.

Fast-forward to this week when I happened to run across a Financial Times article on record bullion sales in January that rekindled my interest in Mint bullion coin sales. It said US Mint gold coin sales in January 2009 were almost 4x higher than January 2008’s! So I dusted off my pre-panic spreadsheets to take a look at Eagle sales by the Mint over the last decade or so. The raw data is encouraging yet curious in many ways.

The US Mint reports bullion coin sales monthly, so I superimposed this monthly data on top of daily gold and silver prices for comparison. It is denominated in thousands of ounces of gold and millions of ounces of silver per month. In the case of silver, 100% of these sales are 1-ounce Silver Eagles.

But for gold, the Mint produces American Gold Eagles in 1-ounce, half-ounce, quarter-ounce, and tenth-ounce increments. The smaller fractional coins are great for very small investors or to give as gifts to kids to get them interested in precious metals. But most of the Mint’s Gold Eagle production is still in the full-ounce coins. Since 2000, about 3/4ths of the Gold Eagle production by bullion ounces has been in the form of these 1-ounce coins.

The most fascinating aspect is the huge surge in Gold Eagle sales during the panic months in the second half of last year. In August GE sales soared to 86k ounces, nearly a bull high (January 2003 had 96k). In September they surged again to 113k, and then stayed high near 122k in October and 117k in November. In December they rocketed again to 176k ounces, a massive new bull-to-date high.

Futures-driven gold price was actually falling until mid-November. Gold was getting weaker, which usually retards investment demand, yet GE sales were still soaring. The extreme fear billowing out of the stock panic led to great physical-gold-coin demand. This episode is a perfect example of the flowing and ebbing disconnect between physical gold and futures gold. I discussed this disconnect in depth in the 9/08 Zeal Intelligence.

Soaring physical-gold demand for Gold Eagles is very bullish. As this gold bull continues maturing, more investors are becoming aware or gold’s dazzling fundamentals and great potential. The panic really drove home this message to non-traditional gold investors. While the S&P 500 plummeted a gut-wrenching 38.5% in 2008, gold actually rallied 5.7% last year. The more investors who ultimately deploy capital in gold, and every investor should have a core physical-gold position, the bigger this gold bull will ultimately grow.

So record Gold Eagle sales in late 2008 are a very bullish omen for gold, its investment market is expanding. It was investors so aggressively buying these bullion coins that led to August’s Gold Eagle rationing. I hope the US Mint lives up to its Congressional mandate to “mint and issue the gold coins … in quantities sufficient to meet public demand” and ramps production in response to this incredible gold-demand renaissance.

Speaking of production, I am amazed at how erratic these monthly Gold Eagle sales are. It is true these numbers are sales, not production, yet still production and sales should be directly related. Bullion coins have to be minted before they can be sold. The Mint has some finite capacity to produce Gold Eagles and I wonder what its capacity-utilization numbers look like over the long term. In a Wall Street Journal article last August, the Mint said it was “working diligently to build up our inventory”. But during a secular gold bull, shouldn’t the mint actually anticipate increasing gold investment demand and produce accordingly?

This erratic sales data masks a somewhat-disturbing trend. For each calendar year, I averaged the monthly sales figures and plotted them in yellow above. Between 2000 and 2004, monthly average Gold Eagle sales gradually grew from under 14k ounces to nearly 45k. But in 2005, 2006, and 2007, they seriously retreated. By 2007, amazingly the average monthly GE sales contracted to nearly 2000’s levels which reflected low demand near the end of gold’s last secular bear. Why?

I don’t know the answer. No matter how many gold coins I buy, how many coin dealers I talk with, how much research I do, the gold-coin world remains murky, secretive, and fragmented. Was physical-gold coin demand lower in 2007 despite gold surging to bull-record highs in the second half of that year? Was there a glut of Gold Eagles on the market relative to demand so the Mint had to scale back sales? Was it still producing at a higher rate than it was selling the Eagles?

One way to help illuminate these questions would be to get a rock-solid daily dataset of the premium of Gold Eagles specifically relative to the spot gold price. The rise and fall of premiums on these coins would make much clear that the Mint sales data does not. I have tried for years to get such a dataset, but to no avail. If any coin dealers want to share daily Gold Eagle premium data with me since 2000, I will gladly give you full credit (and fantastic marketing exposure for your business) in a future essay exploring your dataset. If I am lucky enough to get multiple datasets, the cleanest and most complete one will win.

In the absence of this daily premium data, the declining average Mint GE sales in 2005, 2006, and 2007 will have to remain unexplained. Nevertheless, the huge surge to bull-record levels in late 2008 is very bullish and encouraging. This surge was so darned massive that a mathematical best-fit line drawn through this entire dataset is rising nicely solely because of late 2008.

While the Mint’s Gold Eagle sales seem pretty erratic to me, its Silver Eagle sales make GE’s data look like the paragon of stability. Sales volume here can literally fluctuate by an order of magnitude from month to month! A prime example is November and December of 2002. The 2.5m Silver Eagles sold by the Mint to dealers in the latter month ran 14x the sales volume of 0.18m in the former month!

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