Retail investors seek haven in gold coins amid crisis
By Moming Zhou, MarketWatch
NEW
YORK (MarketWatch) -- As the crisis on Wall Street deepens, retail
investors, who can't afford the high cost of trading in the futures
markets, have been increasing their holdings of gold coins as a safe
haven.
The U.S. Mint said last week it was temporarily suspending sales of
American Buffalo gold 1-ounce bullion coins after soaring demand
depleted inventories. The Mint had previously halted sales of American
Eagle 1-ounce gold coin in August.
"Tightness in the gold
market is fairly normal in a time of financial stresses," said Dan
Ferris, writer for DailyWealth, an investment newsletter. "We've seen
high demand for gold coins because the news about banks is all bad."
Investors tend to snap
up gold as the final tangible asset when the economy falls into
turmoil. Some gold dealers said they have seen unprecedented demand for
coins and bars as the financial crisis on Wall Street and Europe
intensified worries about a global slowdown.
While the bulk of the 160,000-ton above-ground gold stocks (about 5.1
billion ounces) is used in jewelry and the electronics industry, about
16% is held by investors for pure investment purpose, according to the
World Gold Council. The gold investment market, however, is dominated
by big institutions, which trade with each other directly in large
orders through the opaque over-the-counter markets.
Gold is also traded
through futures contracts in New York, Tokyo and a few other places.
Futures trading, however, requires quite a bit of capital. One futures
contract on the Comex division of the New York Mercantile Exchange, for
example, represents 100 ounces of gold, or about $88,000 in current
prices.
Gold coins provide an
easier channel for retail investors, who can buy coins through dealers
online, much like buying a book at Amazon.com. Since the South African
Krugerrand became available in 1967, bullion coins have become
increasingly popular among retailer investors.
'It is imperative you own some gold, some real gold, gold you can bite down on, gold that clanks.'
"Because of what's happened in the past and what I believe is happening
now [financial crisis], it is imperative you own some gold, some real
gold, gold you can bite down on, gold that clanks," Ferris wrote in a
September newsletter.
The U.S. fabricated
American Eagle coins in 1986. The Mint introduced the American Buffalo
gold coin, the first 24-karat gold coin in the U.S., in 2006.
Twenty-four karat represents a gold purity of 0.9999.
At Kitco Bullion
Dealers, the American Eagle 22-karat 1-ounce coin was sold for $929.03
Wednesday, while the 1/10 ounce Eagle, the smallest size among Eagle
coins, was sold for $118.88. Coins are priced higher than their gold
content as production and distribution costs have to be added.
Amid the financial
turmoil and surging demand for gold, gold prices have rallied. The
December futures contract gained 5.5% in September on the Comex. In
spot trading, the London gold-fixing price, used as a benchmark for
prices of gold for immediate delivery, rose 6% last month. The London
fixing stood at $880 an ounce Wednesday afternoon. See Metals Stocks.
Coin prices track the London gold-fixing prices, with a certain percentage of premiums.
Waiting to buy money
Kitco has seen rising demand for gold coins and has put some clients on
the waiting list. "Times such as these result in higher gold demand,"
said Jon Nadler, senior analyst at Kitco.
"The mints are
fabricating products as we speak, and supplies will improve across the
board in coming weeks," he added.
In a memo sent to
American Buffalo's authorized dealers last Thursday, the Mint said
"demand has exceeded supply" for the coin and inventories "have been
depleted." The Mint also said it's building up inventories and sales
could be resumed shortly.
Before the Mint
suspended sales of the Buffalo coin on Sept. 25, it had sold 164,000 of
the coins this year, up 54% from the same period a year ago.
The Mint had to
temporarily suspend sales of the American Eagle gold coins on Aug. 15.
It announced about a week later that sales of the Eagle coins would
resume under an allocation program to designated dealers.
Sales of bullion coins
at Gold and Silver Investments were more than four times higher in the
third quarter, compared with a year ago, according to Mark O'Byrne, the
company's Dublin-based executive director.
"We have small
inventories of bullion coins and bars but could be cleaned out by one
very large order, and we are not able to replenish our inventories for
the foreseeable future," he said.
To calm investors, the
Royal Canadian Mint said last week that it's not suspending sales of
gold bullion coins and is able to meet rising investor demand. The
Canadian Mint fabricates, among other coins, the Canadian Gold Maple
Leaf, a popular 24-karat gold coin.
Range of choices
But holding physical gold isn't the only choice retail investors have
when they want to expand their portfolio to gold. The buying patterns
of retail investors have shifted recently because more choices have
been available, such as gold exchange-traded funds and gold
certificates.
"Coins and bars are
seen as somewhat higher-priced, less safe in terms of storage and
transport and less liquid than the custodial alternatives," said
Nadler.
Indeed, investors are increasing their gold ETF holdings. Gold held by the SPDR Gold Trust (GLD:
spdr gold trust gold shs
the largest gold ETF, surged 16% in September to 755.26 tons. That
would rank the fund as the eighth-largest worldwide in gold holdings.
The U.S. government, the biggest gold holder, has 8,134 tons in
reserves as of September, according to the WGC.
ailyWealth's Ferris, however, said he didn't recommend buying ETFs when times are really bad.
"Sooner or later, it'll become clear the ETF is not gold. It's a
stock," Ferris said. "When panicking investors need to liquidate
securities portfolios, they'll sell the gold ETF with a mouse click.
Once your gold is in your hands, you're less likely to sell into that
panic." [Blockierte Grafik: http://i.mktw.net/mw3/News/greendot.gif]
Moming Zhou is a MarketWatch reporter, based in San Francisco.