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Gold, the US Mint, and Proof Gold Eagles
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(September 20, 2010) Over the past few weeks, gold has taken out its previous high price in nominal dollars, trading over the $1280 mark for the first time. World investor demand is the driving force, but US Mint figures show a recently declining US investor bullion demand.

Once again, higher bullion prices has caused gold to be in the news everywhere. Full-page ads are everywhere for units of the iShares Gold Trust picturing a healthy-sized gold bar in all its yellow glory, financial publications are printing articles about gold, and investors are investigating this timeless store of value as an alternative to shaky stocks, overblown bonds, and fractured real estate.

Barron’s, in its September 20th edition, published Debbie Carlson’s article entitled, “Why You Need to Own Gold.” Its theme is stated in the subtitle: “Not so long ago, this market was for gold bugs and conspiracy theorists. Now, many wealthy investors should think about putting 5% to 10% of their money in gold.”

So we offer a word of thanks to all you conspiracists and gold bugs who have been stubbornly buying the old yellow metal during this decade. Because of you, gold prices have roughly quintupled in the last nine years. In short, the much maligned gold bugs and conspiracists (and you know who you are) who bought when everyone advised against it have, it seems, finally made gold respectable. So respectable, in fact, that Barron’s now says that you can step aside and let wealthy people who read financial magazines take it from here.

Frankly, we hope they do, because despite the raging bull market in gold worldwide, US investor demand lately could use a pick-me-up. Obviously, the world is buying gold, but the US Mint’s output over the past month or so paints a picture of rather slack bullion demand in this country.

In August, sales of bullion gold Eagles slumped to some 39,000 1-ounce coins, compared to this year’s record sales in May of 190,000 pieces. And September’s sales as of today are only 35,000 ounces. And unlike instances in 2008 and early 2009 where the Mint could not keep up with demand, over the past few weeks there has been plenty of product available. It is simply domestic demand which has fallen.

In fact, the Mint is so caught up with bullion gold Eagle production, that on September 1st it announced the upcoming release of the Proof version of 2010-dated gold Eagles in October, with maximum mintage limits totaling over 110,000 ounces of gold. This potential production, if achieved, would exceed the annual output of Proof gold Eagles for any year since 1988.

Where is the demand for so many of these pricey collector versions of gold Eagles going to come from? Oddly enough, these long-ignored collectibles have lately been increasingly sold by telemarketers into individuals' IRA accounts.

Although, by law, numismatic coins are not allowed in precious metals IRAs, through a quirk in the Treasury regulations governing these retirement accounts, not only are bullion items allowed, but also the Proof versions of gold Eagles as well. And there are no regulations in place that limit the markups charged.

This provision has allowed numismatic marketers to sell a highly profitable (for them) item into the IRAs of unsuspecting customers who are looking for an alternative to stocks and bonds in their retirement accounts. Over the past three years, demand for Proof gold Eagles has soared, basically from the surge of interest in precious metals IRAs. The actual wholesale price of these collector version gold coins was over $2,000 per ounce before the Mint’s recent announcement of new production, while retail prices for coins sold into IRAs were routinely in the range of $2,500 to $3,500 per ounce. Now that’s a moneymaker – for the sellers, not the poor IRA holders.

Starting at noon on October 7th, the US Mint will sell these collector products to all comers for approximately $300 per ounce over the market gold price. The announcement by the Mint of the resumption of this program caused an immediate skid in the wholesale price of existing Proof gold Eagles on the market, falling from around $2,000 per ounce, down to around $1,600 (more or less the Mint's new retail price) as of this writing.

The real collector demand for this product is small, and most dyed-in-the-wool US collectors buy their Proof gold Eagles directly from the Mint. Therefore, the only possible market for this oversize production will be precious metals IRAs, which have already absorbed tens of thousands of ounces of the floating supply of Proof gold Eagles over the past few years.

We may soon hear some interesting reactions from American investors who have been persuaded to pay from $2500 to $3500 per ounce of their hard-earned IRA money for these not-so-rare treasures. Imagine their surprise next month, when anybody will be able to buy the same quality coins online at the US Mint’s website (www.usmint.gov) for about $1600 per ounce – and even use a credit card to pay for their purchase!

The original intent behind precious metals IRAs was to allow US investors a chance to hold a time-tested inflation hedge to help augment their retirement. The expectation was that commissions on purchasing bullion commissions are traditionally pretty reasonable, making bullion a safe choice for an individual's IRA.

Unfortunately, allowing Proof versions of gold Eagles to be placed into those accounts opened the door for aggressive marketers to push over-priced and inappropriate investment material. And push they did over the past few years, mostly to buyers who didn’t understand the risks and markups involved.

The sad truth is that many investors who have Proof gold Eagles in their IRA won’t even know where they stand (if it can be called 'standing' when you are underwater) until such time as they retire and attempt to liquidate some of their holdings.

Unless the price of gold triples before then, investors who so trustingly added these semi-collectibles to their retirement holdings are going to be in for a rude financial awakening.


 

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