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The World Gold Council just put out Q2 2010 Trends.

Highlights:

- Jewelry Sales: “5% decrease in jewelry sales over the prior year. On this date last year, gold closed at $950… which is $286 below where it trades as I write. In other words, a 30% rise in price has resulted in a decrease of just 5% in jewelry sales.”

- Physical gold: “Demand in Q2 rose by a whopping 36%. More tellingly, the increase was 77% when you take into account the dollar value of the ounces purchased.”

- “As you’ve already figured out, the bulk of the physical demand is coming from investment – with the amount of gold held by *ETFs growing 414% over the previous year.”

- Gold Mining Stocks: “In previous recent stock market corrections, people thought of gold stocks more in terms of being stocks and overlooked their direct connection to gold. That appears to be changing, with a divergence between gold stocks and the broader markets. The leverage in gold stocks to gold bullion could make them especially attractive.”

Original Article Source – Casey Research

Original Data Source – World Gold Council Q2 Presentation

Definitions:

ETF – (also known as Exchange-Traded Product (ETP)) is an investment fund traded on stock exchanges, much like stocks.[1] An ETF holds assets such as stocks or bonds and trades at approximately the same price as the net asset value of its underlying assets over the course of the trading day. Most ETFs track an index, such as the S&P 500 or MSCI EAFE. ETFs may be attractive as investments because of their low costs, tax efficiency, and stock-like features.

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I will let the original source tell the story, but this again shows how much gold is in demand if people are willing to take risky bets on where they buy it in such large quantities.

“Add this one to the wtf files: a headline in Emirates 24/7 is sufficient to demonstrate what ridiculous proportions goldmania has reached in various parts of the world: "Tons of gold imports turn to dust on arrival. Gold imported into the UAE by traders and investors turned out to be fake on closer inspection." Thank god for "closer inspection." The total impact of such fake gold in the UAE alone: "over $200 million."And the scariest bit: "Recent media reports suggested that several million dollars worth of gold with the Ethiopian Central Bank turned out to be fake. These bars of gold turned out to be gold plated steel bars." In other news, gold everywhere else is safe until proven to be gold-plated tungsten… pending closer inspection.…………….”

Original Source -ZeroHedge

This quote at the bottom of the article is funny, but not really. There certainly would be hell to pay if certain Kruggerands turn out to be fake! However, that likelihood is probably very low given the fake that they are so small. If you are going to fake something, you are going to do it with bars.

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That is to say “Proof” coins. Proof coins are another way to buy a bullion coin with collector value, that unless you are a collector you should stay away from and don’t let a dealer coax you into buying one! As mentioned in a previous post “First Strike” coins are another way. 

Here is an explanation from the U.S. Mint on proof coins.

“The United States Mint produces proof versions of American Eagle Bullion coins for collectors.  American Eagle Proof Coins undergo a specialized minting process, which begins by manually feeding burnished coin blanks into presses fitted with special dies. The coin is struck multiple times so the softly frosted, yet detailed images seem to float above a mirror-like field. After scrutiny by white gloved inspectors, each American Eagle Gold and Silver Proof Coin is sealed in a protective plastic capsule and mounted in a handsome satin-lined velvet presentation case with its own official Certificate of Authenticity.  American Eagle Platinum Proof Coins are packaged in a custom-designed portfolio presentation case.”

Basically, it is more of a manual process for minting, inspecting, and packaging U.S. Mint bullion coins. These are going to go for a higher premium over the gold spot price than regular bullion coins.

American Eagle Gold Proof Coin

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There has been a lot of talk about the U.S. experiencing continued deflation for several years with the current economic crisis and inflation is of no real concern. Those who often have this view refer to Japan in the 1990’s, which they say was in a few similar situation when they had their “lost decade” and experienced deflation. However, there are real differences between the state of Japan upon their entrance into that recession/depression and upon us entering ours.

This video’s helps to describe some of those. It should at least make you ask more questions and do further research if you feel think deflation and the US Dollar will reign as king for some time instead of Gold.

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I always have to take a step back when I see this. This is from the Fed Reserve itself. Below is the amount of surplus or deficit the country was in every year.

Looks like we were hitting our budget up until 1970. After that we start accumulating deficits and WHAM very recently. Scary isn’t it.

US Government: Surplus or Deficit each year.

Source: St. Louis Fed

Gold Price Trends:

**NOTICE A CORRELATION???**

Buy Gold!

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So for the average investor when you are looking to buy gold bullion, the more subjectivity you take out of the price of the gold coin you purchase, the better.

And a good way to avoid subjectivity is to avoid collectible coins, but even some of the most popular traded bullion coins, like the American Eagle, can have collectible valuable depending if they were the first in a series of coins. This is commonly referred to as “First Strike”.

Below is the definition here from PCGS which is America’s most well renown coin grading service.

“PCGS began designating coins packaged and delivered by the U.S. Mint in the 30 day period following the initial sales date of a new product as First Strike®. For instance, new American Silver Eagles typically go on sale each January 1st, thus any coin packaged or delivered and submitted to PCGS for certification between January 1 and January 31 qualifies for the First Strike® designation.”

I have to tell you that out of all the reasons to own a collectible coin, this has to be the dumbest one.  Just because a 2010 Silver Eagle was one of the coins sold by Jan. 31st, gives it additional collectible value! I don’t need to say more.

American Silver Eagle Coin: 2010 First Strike

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Okay, so we are half way through the summer and gold is about $80 off (~6% down) from the all time high and YTD high of ~$1,260. First, remember that gold has shown to be typically soft in the summer. See my previous post here.

Based on this little dip I am hearing more people talk about how this could be it for gold and it is down hill from here. While we could see it go down from here a bit, I think we are no where near a top and here are a few simple reasons why.

#1 Inflation adjusted gold price:

Everybody talks about when gold had it’s last great run up in the 1970s and hit an all time high at that time of ~$850. If you use the government’s own numbers, for gold to hit $850 today, adjusted for inflation, the gold price would have to be ~$2,200

Source: http://www.bls.gov/data/inflation_calculator.htm

#2 Money Supply:

‘”Global money supply, known as M3, is now in dollar terms about 10 times what it was in 1980. The total gold supply has also increased to some 170,000 tonnes from 110,000 tonnes over the same period as more of the metal has been mined.”

Therefore increasing the gold price by the money supply and deflating by the gold supply, the 1980 peak price would be equivalent to about $5,500 an ounce today.

Source: Reuters

#3 “We buy Gold!”

If gold were in a bubble you would be seeing the opposite of the “We Buy Gold” and “Cash For Gold” signs you have seeing around your neighbor. You would be seeing “We Sell Gold”!

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- America’s most popular silver bullion coin, the American Eagle Silver coin, is breaking sales records and the maker of these coins, the U.S. Mint, is having troubling filling orders.

- In 2009 the US Mint produced about 28 million ounces of gold and silver bullion and of that 22 million was of silver, which was a record.

The director of the U.S. Mint stated, “This was a record amount for us, which made the U.S. Mint the largest producer of bullion coins in the world, and we still could not keep up with the worldwide demand!”

The U.S. Mint creates silver collectible coins also, but last year they had to make a tough decision to cancel many of these programs to meet bullion demand because they did not have enough silver blanks. The U.S. Mint directory stated, “Legislation requires us to satisfy the demand for bullion related coinage before the collector’s version, but it was a tough mandate to have to follow. If there are conflicting priorities which arise, we first have a responsibility to produce coins to satisfy the public’s demand, which is why they were created. Second, we have to also supply the demand for bullion coins to financial investors and then lastly, if there is any left-over capacity, that capacity goes to collector or numismatic products.”

See the full article.

- Also, it is interesting to look at the dollar figures behind last year’s bullion sales.

“In FY 2009 (October 1, 2008 – September 1, 2009), the US Mint recorded bullion sales of $1.69 billion dollars, which smashed through the FY 2008 record level of $948.8 million by an astonishing 78.6%. In the troubled economy, investors were turning to precious metals and the Mint was forced to respond accordingly.”

"In FY 2008, bullion accounted for 34 percent of our total sales revenue. In FY 2009, it was 58 percent," states US Mint Director Ed Moy.

See the full article.

- Recently the U.S. Mint was interviewed again and mentioned that…

“Although bullion coin demand seemed to be subsiding earlier this year, in May, the Mint experienced an increase in orders for silver bullion coins to over 3.6 million coins.”

If that pace were kept up each month and each of those coins was at least an ounce, that would greatly exceed 2009’s record amount of silver ounces that year (22 million).

See the full article.

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So you may have heard about a Santa Monica, CA based Gold Dealer called Gold Line. They are endorsed by television and radio personality Glenn Beck. They are currently under investigation by California authorities for overcharging their customers and selling them collectible coins, when they wanted bullion. See the ABC Nightline interview this week below.

I am not sure if Gold Line is doing something illegal, but I wanted to clear up a few things from this video.

1) Gold bullion does come in coin form. In this video they interviewed one individual who bought from GoldLine, who was looking for gold bullion and was suckered into buying coins. That makes no sense when gold bullion does come in coin form. In fact, the most popularly traded gold bullion in America is the American Eagle coin minted by the US government!

2) However, you do generally want to stay away from gold collectible coins (often referred to as numismatics), if you are simply looking to own bullion. The reason I say so is because the price on a collectible coin is more subjective, simply because it also has a collectible value added to it.  If you are paying more than 10% over the current gold spot price, for your 1 oz gold bullion coin, then you can easily get a better deal  somewhere else or are actually buying a collectible coin.

3) The government did confiscate U.S. citizen’s gold in 1933.  Tough to say if they will do it again with less people owning gold today and the fact that we are no longer on a gold standard.  Below are a couple articles referencing the confiscation.  The question you should ask yourself is why did they do that? What was so valuable about gold?

http://www.blanchardonline.com/beru/confiscation_1933.php

http://en.wikipedia.org/wiki/Executive_Order_6102

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Don’t worry there are several options when investing in gold coins. Yes, the most commonly traded gold coins do come in 1 oz form,  but there are other options. First, before I get  into gold options, remember silver is gold’s baby brother and is currently around $18 an ounce. Not a bad buy!

1 oz, 1/2 oz, 1/4 oz, & 1/10 oz  American Eagle Coins:

Though not as common, it is easy to pick up gold coins in 1/2, 1/4, and 1/10 oz sizes, as shown above, in most of the major government minted coins like the American Eagle, the Canadian Maple Leaf, and South African Kruggerand. These coins are often referred to as “fractional” coins. You can also find some of these coins in 1/20 oz sizes like the Canadian Maple Leaf, but that is a little harder to find.  If you are buying for the first time I recommend sticking with the popular coins here in America, which are the American Eagle coins.

Okay, so maybe now you are considering purchasing some fractional American Eagle coins and are wondering how much they are going to cost you? Don’t I just take the current gold price per ounce divide by 10 and I get the price of a 1/10 oz coin!? Not so fast. Remember when you buy a gold coin, any gold coin, there is a premium that is attached to it over the spot price of gold. Depending on the coin these premiums can run anywhere from about 4 to 10% for a 1oz coin. However, with the smaller sizes the premium can range up to 20%, for example, for a 1/10 oz coin. The reason for this is very clear, when you buy in smaller quantities, in any industry, you usually pay more per item. It takes more effort to make 10 1/10 oz coins than it does to make one 1 oz coin. Don’t get worried though, because if you ever decide to sell your fractional coin, you are going to be able to sell it back for a higher amount per ounce than you would a 1oz coin. Basically, it all works out.

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