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Tim Geithner – Please Read This
(January 5, 2009) 2008 was a terrible year for most every financial asset, but gold’s return of 4.31% beat most of the alternatives. Unfortunately, 2008’s unprecedented surge in bullion demand was not met with adequate supply for the average US investor.

Burying gold in your backyard wasn’t the worst thing to do with your money in 2008. Demand for physical gold skyrocketed as the search for a safe haven became everyone’s concern. But glitches in the gold bullion supply chain emerged, and it became a commonplace that some monkey business was going on.

“Everyone wants the same thing: To buy gold! But there’s a problem. A big problem. For the past several weeks, bullion dealers around the world, including myself, have been restricted in how much gold we can order from our distributors.”

So far, he makes a good point. Production of small investment coins and bars did not keep up with the tremendous demand of the last few months of 2008. In the third quarter alone, investment demand for gold was over 1,100 tonnes according to the World Gold Council. That figure represents about half of the amount of gold mined worldwide in twelve months. Further, it wasn’t until October, November, and December of 2008 that demand really went ballistic. Fourth quarter gold investment demand figures are likely to reflect an even greater increase.

And it’s not like you can open up a few new gold mines in short order, and start cranking the stuff out. Mining is a long-term, capital-intensive enterprise, and the easy gold pickings around the world have already been found over the past few millennia. Yet the physical gold being taken off the market has to come from somewhere, and at some price.

Thus, we are bullish on gold. We were bullish back in 1999 when we launched this website. Back then, times were good, equities were booming, and gold sold for a few hundred dollars per ounce. Today, things have changed, to say the least. And even though gold has more than tripled from turn-of-the-century levels, it still sells for only a few hundred dollars per ounce. So we remain bullish.

But back to Mr. McCoach, who we interrupted mid-statement. He goes on to say:

“The distributors are allocating gold orders to dealers because the mints have had to cut back on – and even completely halt – production of gold bars and coins due to boisterous demand and the shortage of supplies that I just mentioned.”

Let’s examine that “cut back” and “halt” supposition. Start with China, which produced over 200,000 of its 1-ounce gold Panda coins. And when gold bullion demand accelerated in late 2008, the Royal Canadian Mint abandoned production of many numismatic products and fractional coins to concentrate on the production of one-ounce gold Maple Leafs. The Perth Mint in Australia likewise suspended most of its numismatic production to make way for record production of its bullion Kangaroo gold coins. The Pamp Suisse Company, a Swiss refiner of gold and provider of bullion the world over, shattered all previous production records in keeping the US and the world supplied with its .9999 pure gold bars in various sizes. And for the first time in years, tens of thousands of new Krugerrands were brought to the US from the South Africa Mint.

Our own US Mint more than quintupled its production of gold Eagles, turning out 794,000 1-ounce pieces versus 2007’s mintage of 147,500. Also, US Mint production of silver Eagles in 2008 was the highest number since the program began in 1986.

However, those numbers fell decidedly short of demand.

No doubt there will soon be a Treasury ceremony at which Mint officials will receive commendations and bonuses for increasing production of bullion coins in 2008, even though about half as many gold Eagles were made last year than in 1998 or 1999. But in the real world, where ordinary American citizens attempt to buy our country’s most trusted form of gold coins, their efforts were simply inadequate.

The issue goes deeper than simple inconvenience for bullion buyers, and, yes, bullion dealers. The persistent shortages of silver Eagles for most of 2008, and gold Eagles for the final four months of 2008, engendered a mind-set among the precious metals crowd that supply was simply not available while precious metals prices were tumbling. In short, they saw conspiracy, manipulation, and reasons to question even the legitimacy of the US Comex market itself.

Increasingly, the perception grew that there are two markets – the ‘paper’ market, wherein prices were cheap, and the physical market, where tight supplies and outrageous markups meant that the ‘little guy,’ defined as anyone lacking the means to buy gold or silver bars by the truckload, found that the forms of gold and silver that he or she could afford cost excessively more than ‘paper’ prices.

This sort of thinking, that there is a dichotomy in the gold/dollar markets, is anathema to the Treasury’s role in defending the dollar against all enemies. People simply have less faith in dollars if they cannot be spent on US Treasury-produced gold and silver coins at reasonable premiums over spot market prices.

Providing convertibility of dollars to gold was once the main job of the United States Treasury. Today, the dollar is no longer convertible to gold at a fixed rate as it was during the days of the gold standard, but putting obstacles in people’s paths as they try to convert dollars to gold at near the prevailing market rate leads to distrust of the whole system of money itself. Mr. McCoach’s confused statement about supply chains and demand factors is typical, and many Internet commentaries and talk forums on the subject of gold show even less familiarity with market realities. But people read them, and often believe.

A free flow of gold and silver bullion coins from our Mint would do much to allay those public fears and confusion.

As Tim Geithner prepares to take the helm at Treasury, we hope that he considers the importance of the Congressionally mandated role of the US gold Eagle programs to provide bullion choices for the US public “in quantities sufficient to meet public demand.”

Any excuses from the Mint for its failure to meet that demand are simply not acceptable. Our understanding is that the outside vendors providing silver and gold blanks for the Eagle programs find the physical specifications (issues other than their authorized weight and fineness) for those blanks to be unnecessarily finicky for what is, after all, only a bullion coin. Production, particularly of silver Eagles, has consequently been constricted for nearly a year now. The Mint has also cited a shortage of acceptable blanks as the cause of gold Eagles being allocated to its distributors over the past few months. This must end.

Mr. Geithner will start his new job with a lot of challenges before him, but this one is relatively simple. It should be dealt with swiftly and decisively.


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