Gold Coin Shortage Likely To Become Chronic

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"When coin supply and demand get out of kilter, rising premiums are the mechanism that restores balance."

Is the U.S. Mint's production problem long-term or short-term? What will be the effect on gold coin prices?

In 1999, at the height of the Y2K crisis and under the strain of record gold demand, the U.S. Mint produced 2,055,000 1-ounce gold American eagles.

In 2008, with the world embroiled in an unprecedented economic crisis and once again under the strain of record gold demand, the U.S. Mint produced only 710,000 1-ounce American eagles and 189,500 1-ounce American gold buffaloesójust under half its 1999 production.

The Mint's ability to keep up with demand in the ramp-up to Y2K played a key role in suppressing premiums on bullion gold coins. The Mint's inability to keep up with demand in 2008 drove premiums to the double digits at one point and helped add 2% to the baseline cost of gold coin acquisitions in 2009.

When the American eagle shortages first cropped up in August 2008, the Mint blamed the problem on its vendors, saying they were "not able to supply enough 1-ounce gold bullion blanks to meet the unprecedented demand we are experiencing." The Mint promptly thereafter suspended all sales of the popular 1-ounce coins.

Consider the following two points to understand the full implications of the Mint's production problems:
  1. All the 1-ounce gold blanks purchased by the Mint now come from one refiner in the western United States.
  2. With global refiners already running at capacity, Mint officials' attempts to line up additional blank manufacturers are likely to be rebuffed.
The prognosis under the circumstance is not a good one: The problem appears chronic and unlikely to resolve itself any time soon. The current strong demand is the result of a secular gold bull market deepened by the worldwide economic crisis. As such, this is a whole new ball game for the gold market.

When coin supply and demand get out of kilter, rising premiums are the mechanism that restores balance. If the mints are indeed boxed in by the blanks problem, and it appears they are, there will be no easy way to keep those base premiums in check over the long run. It appears that the bullion gold coin shortage has become a chronic problem and something gold owners and accumulators will need to keep an eye on in the months to come.

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