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Gold: Supply Up, Demand Down, Market Thriving
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(March 30, 2010) Gold bullion demand in the US has tapered off in the past few months, and the good news for buyers is that premiums are dropping and the days of product shortages seem long behind us. So, is there a Santa Claus?
“Rationing Stops for Gold Eagles” is the headline of the March 30th Edition of Numismatic News. “The Mint is catching up on demand for one-ounce American Eagle gold bullion coins,” the article begins, “It is no longer rationing the supply through its allocation system.”

Not to quibble with a magazine that has covered the coin collecting hobby for decades, but this hardly qualifies as breaking news. In fact gold Eagles haven’t been in shortage since last Halloween. Production was so great in the 4th quarter that the Mint actually began 2010 with 50,000 2009-dated 1-ounce Eagles still on the shelf. This hoard was finally divested by requiring distributors to take a percentage of 2009-dated coins with every order of the new 2010-dated gold Eagles.

A quick look at gold Eagles mintage figures so far this year tell the story: 85,000 sold in January, 84,000 in February, and only 64,500 in March – yet there are plenty of coins on dealer’s and distributor’s shelves. Over the past few months, retail gold bullion sales have shrunk by 45% or so compared to the buying stampede which began in September 2007, and ended in late fall of 2009, when finally the air seemed to go out of the gold balloon.

Today, with demands on the Mint’s gold Eagle production capacity down so sharply, there is hope that we might see fractional-size Eagles and perhaps even the .9999 fine bullion Buffalo coin being produced before long.

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While we’re on the subject of supply chains, we found this letter to the editor, entitled “Just Asking,” published in the “Barron’s” mailbag of 3/29/10:

“Sellers of gold always tell you that the dollar is going to be worthless. I wonder why they are willing to trade their inventory of gold for our dollars.”

-Warren Hall, Tulsa, OK

We applaud this sophisticated investor magazine for taking a 'time out' from their reality-based reporting to bring us this innocent and touching note from Mr. Hall of Oklahoma. It reminds us of a famous letter published by the New York Sun in 1897:

Dear Editor—

I am 8 years old. Some of my little friends say there is no Santa Claus. Papa says, “If you see it in The Sun, it’s so.” Please tell me the truth, is there a Santa Claus?

Virginia O’Hanlon

You probably have heard the story of how Francis P. Church, an editor at the Sun, took Miss O’Hanlon’s question quite seriously, and penned a full editorial in reply to young Virginia’s concerns. Much of what he wrote also seems appropriate to Mr. Hall’s question.

“Virginia, your little friends are wrong. They have been affected by the skepticism of a skeptical age. They do not believe except they see. They think that nothing can be which is not comprehensible by their little minds. All minds, Virginia, whether they be men’s or children’s, are little.”

Today, we would add the following:

Mr Hall, it is a shame that even in our thoroughly capitalist society, our mercantile system is so often misunderstood. For under our system, when a seller of gold makes a sale, he does so knowing that more gold is but a phone call away, and his inventory is therefore not diminished one bit. This illustrates the seeming paradox of our capitalist world - your grocer sells you food for your table, and by doing so, is able to put food on his own. A realtor sells you a house, but that doesn’t leave her family homeless. You see - capitalism is not a zero-sum game, it is full of miracles!

In his famous editorial of 1897, Francis Church went on to write:

“Yes, Virginia, there is a Santa Claus. He exists as certainly as love and generosity and devotion exist, and you know that they abound and give to your life its highest beauty and joy. Alas! how dreary would be the world if there were no Santa Claus! It would be as dreary as if there were no Virginias. There would be no childlike faith then, no poetry, no romance to make tolerable this existence. We should have no enjoyment, except in sense and sight. The eternal light with which childhood fills the world would be extinguished…”

When Virginia O’Hanlon wrote her letter to the Sun, the United States was on the gold standard, and dollars were legally exchangable for gold at the rate of $20.67 per ounce. 104 years later, in the year 2001, there was no shortage of gold at an average price of $271 per ounce. Today, gold is freely available at about $1100 per ounce. In short, gold’s price may change, but there’s always more gold.

Yes, Mr. Hall, a supply chain brings gold to the market, and dealers provide you an opportunity to buy it. Otherwise, your only chance to buy gold would be if you happened to know someone who, exactly at the moment of your desire, wanted to sell their personal holdings.

To paraphrase a line from Mr. Church’s famous editorial: Alas, how dreary would be the world if there were no capitalist Santa Clauses to serve your needs

 

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