Thursday, February 2, 2012

2/2/2012: US Mint Sales for January - signaling return to fundamentals-driven demand?

January data is out for US Mint sales and time to update my semi-regular analysis. Here's the note. I am putting a disclaimer below - so the Irish stuffbrokers' community that somehow gets their facts wrong when no one is around to correct them breaths easier. Everything you read below is my personal opinion informed by my analysis of the official data from the US Mint.




January data from the US Mint on sales of gold coins presents an interesting picture, both in terms of seasonality and overall demand for the asset class.

Some background to start with. 

Gold prices have been moving sideways with some relatively moderate volatility in recent months. Between August 2011 - the monthly peak in US Dollar-quoted price and January 2012, price has fallen 4.55%, but in the last month, monthly move was 10.82% and year on year prices are up 30.4%. Crisis-period average price is now at USD1,154/oz and the standard deviation in prices is around 337 against the historical (1987-present) standard deviation of 330. In 2011 standard deviation for monthly prices stood at (small sample-adjusted) 144, well below historical volatility, due to a relatively established trend through August 2011. However, prices returned to elevated volatility in August 2011-January 2012.

These price dynamics would normally suggest rising caution and buyer demand reductions over time. And to some extent, this sub-trend was traceable in the data for US Mint sales in some recent months too. For example, unadjusted for seasonal variation, August 2011 sales of Mint coins peaked at 112,000 oz with relatively moderate 0.67 oz/coin sold gold content. By November 2011, sales slowed down to a relative trickle of 41,000 oz at 0.71 oz/coin sold. December sales came in at 65,000 oz with gold content on average of 1 oz per coin sold. Much media hullabaloo ensued with calls for catastrophic fall off in demand, the renewed claims that a gold bubble is now in action and the decline is coinage sales as evidence of that.

In reality, there was very little surprising in the sales trends overall.

Chart 1 below shows US Mint sales in terms of the number of coins sold. Care to spot any dramatic bubble-formation or bubble-deflation here? Not really. There is a gentle historical upward trend since January 1987. There is volatility around that trend in 2010 and far less of it in 2011. There is seasonality around the trend with Q1 sales uplifts in January, some Christmas season buying supports in early Q4 etc. There is also a slightly elevated sub-trend starting from early 2009 and continuing through today. More interestingly, the sub-trend is mean-reverting (heading down) which is - dynamically-speaking stabilizing, rather than 'bubble-expanding' or 'bubble-deflating'.

Chart 1
Source: US Mint and author own analysis

Now, January sales are strong in the historical context and within the sub-trend since 2009. January 2012 sales of US Mint coins came in at 127,000 oz with relatively low 0.50 oz/coin sales. So coinage sales in terms of oz weight are 95.4% up on December, but 4.9% down on January 2011. For comparison, 2011 average monthly sales were 83,292 and crisis-period average monthly sales were 94,745 all at least 0.5 standard deviations below January 2012 sales. As chart above clearly shows, sales are now well ahead of historical averages and above 6 months moving average.

However, as chart below shows, sales in January were well below the trend line for average coin weight for sold coins: oz per coin sold is down 50.5% mom and down 43.1% year on year. Significantly, smaller coins were sold in January this year than in 2011. 2011 average oz/coin sold was 1.0 and the latest sales are closer to 0.59 oz/coin historical average.

Chart 2
Source: Author own data and analysis based on underlying data from the US Mint


There is no panic in the overall trends in demand for coins when set against the price changes, with negative general trend in correlations between demand and gold price established in mid-2009 continuing unabated, as shown in Chart 3

CHART 3

 Source: US Mint, World Gold Council and author own analysis


However, when we look closer at the 12 months rolling correlations and 24 months rolling correlations, the picture that emerges for January is consistent with gentle negative correlation that has been present since the beginning of 2011. See Chart 4 below. January 2012 12mo rolling correlation between gold price and volume of gold sold via US Mint coins is +0.02, having reverted to the positive from -0.42 in December 2011. This is the first positive (albeit extremely low) monthly 12mo rolling correlation reading since July 2010. 24 mo rolling correlation in January 2012 stood at benign -0.30, slightly up on -0.34 in December 2012. Again, resilience if present in the longer term series and at shorter horizon there are no huge surprises either. Of course, in general, one can make a case, based on the recent data, that investors are simply turning back to the specific instrument after gold price corrected sufficiently enough. In this light, latest US Mint data would be consistent with fundamentals-supported firming of demand. But crucially, there is no evidence of either panic buying or selling.

CHART 4
Source: Author own analysis based on the data from US Mint


Lastly, let's take a look at seasonally-neutral like-for-like January sales. Chart below shows data for January sales, suppressing the huge spike at 1999. Clearly, sales are booming in terms of coins numbers sold. But recall that coins sold in January 2012 are smaller in gold content, so overall gold sold via US Mint coinage is marginally down on January 2011, making January 2012 sales the fourth highest on record.

CHART 5
 Source: Author own analysis based on the data from US Mint


The Table below shows summary of US Mint coins sales for 3 months November-January covering holidays periods sales, including the Chinese New Year sales. While January 2012 period shows healthy sales across all three parameters, there is still no sign of any panic buying by small retail investors anywhere in sight here. Sales are ticking nicely, in 2011 and 2012, well ahead of 2001-2008 levels (confirming lack of evidence that sustained price appreciation over the last 18 months has provided a signal to dampen retail demand), but behind 2009-2010 spikes (further supporting the view that 2011-2012 dynamics are those of potential moderation in the precautionary and flight-to-safety motives for demand, and more buying on long-term gold fundamentals).

TABLE: US Mint sales – 3 months through January
 Source: Author own analysis based on the data from US Mint

Welcome back to ‘normalcy’ in US Mint sales.



Disclaimer:

1) I am a non-executive member of the GoldCore Investment Committee
2) I am a Director and Head of Research with St.Columbanus AG, where we do not invest in any specific individual commodity
3) I am long gold in fixed amount over at least the last 5 years with my allocation being extremely moderate. I hold no assets linked to gold mining or processing companies.
4) I have done and am continuing doing academic work on gold as an asset class, but also on other asset classes. You can see my research on my ssrn page the link to which is provided on this blog front page.
5) Yes, you can find points (1)-(3) disclosed properly and permanently on my public profiles. 
6) I receive no compensation for anything that appears on this blog. Never did and not planning to start now either. Everything your read here is my own personal opinion and not the opinion of any of my employers, current, past or future.
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