4/12/09 Where Is Supply And Demand And What Do The Tea Leaves Predict

Precious Metals Market Analysis, By Michael Pennington (Copyright 2010 Pennco Coins)

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 buffaloes — just 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 percent 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.”  The Mint promptly thereafter suspended all sales of the popular 1-ounce coins.

To understand the full implications of the Mint’s production problems, two important pieces of information need to be taken into consideration.

First, all the 1-ounce gold blanks purchased by the Mint now come from one refiner in the western United States.

Second, with global refiners already running at capacity, Mint officials’ attempts to line up additional blank manufacturers are likely to be rebuffed.
I expect additional shortages later this year. A recent report on South Africa indicates that their mining industry is producing less than at any time in their history. This is significant. Output dropped 12.8 percent in February from the same month a year ago, Statistics South Africa said on its Web site today.
Metal prices tumbled from records last year as the recession curbed demand and discouraged production. Platinum, mainly produced in South Africa, declined 40 percent in the past year, prompting producers including Lonmin Plc to suspend mines.  This is one of the reasons why it is so difficult to obtain Platinum Eagles (or any Platinum coins for that matter). These same type of global shortages are also seen in gold and silver production. At the same time, mints and refiners are reporting record demand for all types of precious metal coins and bars. This dynamic must in the long term drive prices higher.

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This entry was posted in Federal Reserve, Gold, Gold to Silver Ratio, Palladium, Platinum, Silver and tagged , , , , , , . Bookmark the permalink.

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