February 8, 1999 – Several months ago I put forward a very simple proposition. In Letter #233 (“Grist for the Conspiracy Theorists”, October 26, 1998), I first speculated that central banks are attempting to control the Gold price, and then explained analytically the reasons why they may be pursuing such an activity. I also provided some meaningful evidence to support this conclusion. However, I did not stop there.
In that Letter I went on to say that my conclusion about central bank activity would be proven correct or incorrect in the months ahead, regardless whether or not central banks admitted to their attempted manipulations of the Gold price. How would this price manipulation be proven? By the market itself.
If the central banks are manipulating the Gold price, their action is geared to one purpose. Their objective is to control the price of Gold, so I postulated that the market process would indisputably prove one way or the other whether my conclusion about the aim of the central banks was correct or not.
There is now mounting evidence from the market that I was right – that central banks are indeed controlling the Gold price. This stack of emerging evidence suggests that the Gold price today is not the result of unfettered freemarket forces. Rather, it is the result of contrived schemes to keep the Gold price artificially low, and below its natural level. As a consequence, the demand for Gold at the current price far exceeds the available supply.
While there are many disagreements among economists because of the various theories under which they operate, one economic principle is nearly universally accepted by all economists regardless of the theoretical bent they brandish in their pronouncements. Namely, both theory and history show that any type of wage or price control leads to consequences that are predictable. And one of these consequences is that as certain as the sun rises each morning, price controls lead to artificially created shortages.
As I noted in Letter #233: “If a government controls the price of a good at a level below which the freemarket would discover a price that balances supply and demand, the good disappears from store shelves.” We have seen this principle at work in countless Third World countries when a government controls prices while trying to force into circulation the inferior and debased currency it creates. Moreover, we have all seen this principle at work here in the United States.
Long lines appeared at gasoline stations in the 1970’s when gasoline prices were not permitted by the US government to rise to that natural level at which supply and demand would be balanced. Demand for gasoline at the controlled and artificially low price far outstripped supply.
Similarly, and more to the point regarding the matter at hand, the supply of Gold and Silver coins is rapidly disappearing. In fact, much like that process which occurred behind the scenes when those long lines at gasoline stations were forming twenty years ago, rationing has begun!
A recent memorandum from the US Mint to the distributors of American Eagle Gold and Silver bullion coins tells the whole story. To prepare their distributors for the bad news about rationing coming later in the memorandum, it starts out with a few statistics to justify their statement that the demand for coins is “unprecedented”. The memorandum states that: “During the first six months of calendar year 1998, average monthly sales of American Eagle Gold Bullion coins were in the range of 96,500 ounces per month. The second half of the year, sales climbed to an average of 210,000 ounces per month. Sales in January 1999 alone were 266,500 ounces.”
Demand for all denominations of American Eagle Gold coins is very strong. For example, more tenth-ounce coins have been sold so far in 1999 than were minted in all of 1997. Further, “January 1999 sales of one-quarter ounce coins are up 57% over 1998 monthly averages, and over 60% of December 1998 sales.“
The same unprecedented sales growth is occurring with American Eagle Silver bullion coins. Compared to the first six months of 1998, monthly sales of these coins in the second half “more than doubled to an average of 485,000 ounces per month, with October alone posting record sales of over 900,000 ounces“.
The memorandum goes on to warn ominously about the shortage of blanks, the one ounce Silver disks stamped into coins by the Mint. “The rapid demand placed on our blank suppliers could not be met.” So what to do?
“Until our supply of American Eagle Gold and Silver coins exceeds the demand, we regret that we will need to go to an allocation system.” Call it what you will, that means rationing. Coins will only be given to distributors based on previous sales, not what the market – through the distributor – is demanding the Mint to produce.
For example, if Distributor XYZ has historically sold 10% of the American Eagle coins produced, then it will now receive 10% of whatever coins are minted. This process of rationing is now the official policy of the Mint, regardless of how many coins a distributor may want, regardless of how many coins a distributor can sell, and this rationing of supply will remain the policy of the Mint for the foreseeable future!
For good measure, the memorandum adds another warning. No doubt to prevent the distributors from complaining that they were not forewarned: “At this time, we do not plan to allocate platinum, but, should the demand outstrip the supply, we will have to apply this policy [i.e., rationing of supply]to platinum as well.”
In October I advised: “If you are planning to buy American Eagles, secure your source of supply now.” If you haven’t done so, forget about buying Eagles now because even if you can get them, the fabrication premium over bullion content is too high. Don’t sell these coins here though because I expect the premiums over bullion content on all denominations will continue rising as Y2K approaches.
A two-tiered Gold market is rapidly developing. At the lower tier, the Gold price is wallowing because of central bank manipulation and speculator short sales. At the higher tier newly developing, the price of coins and small fabricated bars are commanding handsome premiums over bullion content.
This two-tiered Gold market now requires a change in tactics. If you still want to buy pure bullion of 99.99% fineness, my recommendation is to trade up into larger bars, like the 100-gram bars and on up to the kilobar because the premiums are still reasonable. While the supply of these larger bars is tight, they are still available. But these too will eventually disappear from dealer shelves and command huge premiums over bullion content if the price of Gold remains controlled and artificially below the natural level needed to bring supply and demand back into balance.
If prices remain controlled, I expect it will be hard to find anything but the 400 ounce bars now being fed into the market by the short-selling speculators and the central banks.