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Eagles Versus the Unknown
(May 28, 2005) Last month the US Mint announced that in 2006 it will launch a new gold bullion coin of .9999 purity. This has made some holders of the current US gold Eagle nervous. Although the success of the new program is far from certain, the question is: What should gold Eagle owners do now?
(Executive Summary: Do nothing.)

In 2006, the Mint will continue production and sale of the gold bullion Eagle coins that they introduced in 1986, but at some point in the year will bring out a new .9999 gold bullion coin for general distribution. No word is out yet on the design of the coin, although the Citizens Coin Advisory Council met on May 24th to consider, among other topics, some possibilities for design themes.

Two questions come to mind: Does the Mint has a prayer of success on a worldwide basis with this new coin, and what does it mean for the 20-year old gold Eagle market in the US?

Already, we have had calls from present and future clients asking about the fate of their current gold Eagles holdings, in light of the new .9999 coins come out next year.

For instance, one fellow with 5,000 ounces in gold Eagles inquired as to whether I thought he should trade them out into some other bullion coin, since the chances of Eagles maintaining their premiums seemed, to him, pretty slim.

First of all, I hope I talked him out of doing anything. If he made a series of phone calls to bullion dealers, I’m sure that he found many who would be eager to take the commission on a 5,000 ounce trade out of his Eagles and into something more comfortable (for the broker, that is). Since the client was already contemplating the trade, this would not have been a hard sell at all, and a fat fee for the enabling dealer.

The first and simplest reason against such a swap is: What if the upcoming Mint .9999 gold bullion product is a total flop?

Today, the U.S. gold Eagle bullion coin already takes the lion’s share of the domestic gold bullion market. The Mint is introducing this new bullion product with the avowed goal of taking a significant share of the world gold bullion market. But gold is refined and traded worldwide – and in most countries the gold market operates on a per-capita scale that puts our little American market to shame. There is simply no current shortage of widely accepted gold coins and bars out there already meeting the world’s demand.

So did the Mint convene focus groups of foreign bullion consumers, and find among them a heretofore undiscovered desire to “Buy American?

Somehow, at any rate, the Mint decided that there’s a need for another .9999 gold bullion coin in the world markets. Do they really comprehend the challenges that they are up against?

First of all, the big question is what exactly will be the images and emblems on the coins, coin design being a very tricky thing. The everyday coins that you find in your pocket or purse can be mediocre in design, or even ugly, but they will still buy you lunch. On the other hand, gold coins are miniature works of art, and if they’re not appealing to the target audience, they simply won’t sell.

A gold bullion coin aimed at the international market is going to have to be an aesthetic triumph to stand a chance against the choices already out there. A bullion buyer, in whatever country, is looking to choose something beautiful to take home and to keep, perhaps someday to trade, or to pass down to his or her children or grandchildren. And mediocre or culturally inappropriate products just won’t cut it.

Designing a gold bullion coin which is emblematic of American themes while acceptable, even desirable, to a significant share of those buyers in the major world markets (primarily Europe, India, Asia, and the Middle East) is an enormous challenge, one that will involve not only letting sculptors exercise their creative talents, but also making sure that petty political considerations are kept to a minimum. Above all, it’s important to avoid letting the design of a new coin becomes a political football, as it was when political correctness triumphed in 1979 with the striking of the universally reviled Susan B. Anthony dollar.

We can be sure that, even as I write this, a awful lot of awful ideas for the new gold coin are already in the sketching or prototype phase. Can the Mint, with input from outside artists and the Citizens Coinage Advisory Committee, actually come up with truly winning designs? Or will we end up with another case of “art by committee,” that is, not art at all but instead some bureaucratically sanctioned piece of bland nothingness?

Whatever the appearance of this new bullion coin, and whatever the success of the Mint’s marketing strategy for it, the fact is that in the US it will compete with the Mint’s own gold Eagles and the world’s other gold bullion choices such as you see on this very website. And internationally, it will go up against many well-established forms of bullion gold, many of which have decades of acceptance behind them.

Clearly, there is no way at this time to tell if the new US .9999 bullion coins will succeed. But if we think that they will be a huge domestic and global success, would that be a good reason to trade out of your Eagles now?

Just for argument’s sake, let’s assume that the .9999 gold coin is a raging hit everywhere. Let's say it becomes so much of a success, in fact, that the market in the “old” gold Eagles totally collapses. So now what?

The most likely occurrence under this unlikely scenario would be a parallel to the history of the South Africa Krugerrand in America. Starting in 1975, The Krugerrand dominated the US gold bullion market. During the US investor gold rush of the 1970s, millions of Krugerrands were brought over from South Africa. That ended in 1985, when the US banned the importation of all things South African in protest of that country’s apartheid policies.

Events in 1985 were what led to this whole .917 versus .9999 dust-up in the first place, because it was then that Congress passed the original authorization for the U.S. gold Eagle coin, calling for it to be produced in the same sizes and purity (.917, or 22 karat) as the Krugerrand. That decision to produce an American bullion coin containing a troy ounce (31.1 grams) of pure gold, but to alloy (essentially, to dilute) that gold to 91.7% and make the total weight of the coin 33.93 grams, in order to copy the Krugerrand exactly, led to the situation today where the gold Eagle is one of the world's few bullion coins not struck to a .999 or finer standard.

Since the introduction of the gold Eagle in 1986, Krugerrands in this country have traded at a discount to the standard bullion coins. But the discount is modest, with Krugerrands being bought by bullion merchants at an average of only about 2% less than they buy back the standard gold bullion products.

The point is, no matter how unpopular a bullion coin might become, it’s still gold. Popular preferences, fashion, or politics aside, refineries stand ready to melt the things, and the gold market will always absorb gold in any form.

If you trade your Eagles into some other form of gold bullion, it’s definitely going to cost you a few dollars in commissions, and who’s to say that your new choice, in the long run, would prove to be any better than what you already have? Gold is gold, and, in the end, acceptable bullion products are just that - acceptable – now, and probably forever.

So, if you feel like trading out of your gold Eagles, please, give us a call, and we’ll work with you to re-strategize your gold holding. Hey, we're dealers, we're not going to turn down the business. But, if you want our opinion, we refer you to the oft-repeated quote from the intergalactic character Ford Prefect in this summer’s movie, “The Hitchhiker’s Guide to the Galaxy:”

Don’t Panic.”

-Richard Smith


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