16/8/2013: US Mint gold sales: H1 2013

In the previous post I covered July 2013 monthly sales figures for US Mint Gold Coins. As promised, here is a more stable trends analysis using H1 aggregates from 1987 through June 2013.

In H1 2013, US Mint sold 629,000 oz of coinage gold, marking the 5th highest ranked H1 in sales terms since H1 1987. Year on year, H1 2013 sales were up 86.1% and relative to crisis period average, sales were up 22.0%, while relative to the pre-crisis period (2001-2007) H1 2013 coinage gold sales were up 261.5%. For comparison, historical H1 average sales are currently at 336,520 oz.

In H1 2013, US Mint sold 1,088,500 coins, marking the third busiest H1 sales period since 1987. For comparison, historical average sales for H1 are at 592,615 coins.

In terms of average gold volume per coin sold, H1 2013 came it at 0.578 oz/coin, which is relatively moderate, given the historical average of 0.577 oz/coin.

Chart below to illustrate the above:

Chart above shows that both coins sales and oz sales of coinage gold remained in H1 2013 on the upward trend established since 2007 and the overall 2009-2013 activity for H1 period remains at post-1999 highs. There is little indication of any serious long-term slowdown in demand for US Mint coins in the data and H1 2013 strengthened the trend away from such moderation. The correction sustained over 2011-2012 has now been more than reversed and H1 2013 numbers in terms of coins sold is sitting comfortably above previous post-1999 maximum attained in 2010.

At the same time, demand for coinage gold (oz sold), while partially correcting upward in H1 2013 remains below the local maxima set in 2009-2010.

The above is consistent with restricted buying-on-the-dip behaviour, with some upward momentum being sustained by considerations other than price movements. This is further supported by changes in correlations between sales and the spot price of gold (average of closing monthly prices in USD):

• For price vs oz correlation, correlation between H1 1987 - H1 2012 stood at +0.22 and this rose to +0.29 for the period H1 1987 - H1 2013, implying (recall that price fell for H1 2013 to USD1,484.50/oz compared to H1 2012 at USD1,664.00) some limited buying-on-the-dip behaviour.
• For coins sold vs price, correlation H1 1987 - H1 2012 stood at +0.04 and this rose to +0.11 for the period H1 1987 - H1 2013, also implying limited buying-on-the-dip behaviour.

It is worth noting that H1 2013 figures were driven largely by January )month 1 of Q1) and April (month 1 of Q2) sales. This dynamic did not replicate in July (month 1 of Q3), so we should tread cautiously in expecting robust continuation of the H1 sales in H2.

16/8/2013: US Mint gold sales: July 2013

It has been some time since I updated the data on sales of US Mint Gold Coins, so let's take a quick run through the data for July 2013.

• US Mint gold coins sales in July 2013 stood at 50,500 oz, dow 11.4% m/m (though there is little point looking at monthly figures which can be volatile) and up 65.6% y/y. The sales were close to historical average at 57,239 oz and below the crisis period average (since January 2008) of 88,694 oz.
• US mint sales of coins in July 2013 stood at 90,000 coins, down 20.4% m/m and up 97.8% y/y. This compares agains 100,286 coins sold on average per month over historical period and 124,731 coins sold on average per month over the crisis period.
• Average volume of gold sold per coin in July 2013 stood at 0.561 oz/coin, which is 11.2% ahead of June 2013 and 16.3% behind July 2012. In historical comparatives, July sales were behind 0.59 oz/coin monthly average over the historical period and well behind 0.77 oz/coin average for the crisis period.
• 24mo rolling correlation between volume sold (oz) and gold price (end of month spot price) stood at 0.009 in July 2013, up on -0.045 in June 2013 and ahead of -0.09 average rolling correlation for the historical period covered by data, but virtually identical to the 0.01 average rolling correlation for the crisis period. In basic terms, the zero correlation between gold coins sales and gold spot price remained intact in July 2013.

Charts to illustrate:

Overall, analysis above confirms a short-term trend toward increased demand for gold coins, driven by changes in prices. This trend is more directly evident in 6mo sales data (next post). In total coins sales, there is a nice reversion to the up-sloping trend (first chart above), while oz/coin sold remains below the longer-term up-sloping trend line, potentially reflective of speculative purchasing running at more subdued volumes (second chart). Per third chart, there is a clear negative correlation between demand for coinage gold and the price of gold, suggesting some 'buying-on-the-dips', although this correlation is weak (last chart above) and is getting weaker (in absolute terms). There is a long-term trend toward positive (or at least much less-negative) correlation between the price of gold and coins sales.

Tune in for the H1 2013 cumulative data analysis next.

2/4/2013: US Mint Gold Coins vs Gold Prices

In the previous post I covered some Q1 2013 trends in US Mint gold coins sales and mentioned correlations between spot price of gold and volume of coinage gold sold. Here's a bit more beef on the latter.

As charts above clearly show, there is not much of a statistically significant relationship between price of gold and volumes of coinage gold demanded, neither in levels terms, nor growth terms. Which, of course, strongly suggests that the demand for coinage gold is based on longer-term considerations than those underpinned by simple price reactions.

Looking at H1 data over the same time horizon confirms the main observation:

There is zero relationship in smoother data (H1 cumulated) between demand for coinage and price of gold, while there is a relatively weak positive correlation between demand for gold content per coin purchased and the price of gold.

Key point here is that there is absolutely no hard evidence that gold coins demand is bubble-prone or bubble-driven.

2/4/2013: US Mint gold sales: Q1 2013

Q1 2013 data for gold coins sales by US Mint is out and is worth a look. Here are some top trends:

Per chart above, number of US Mint coins sold in March 2013 declined to 103,000 compared to 155,000 in February. Controlling somewhat for seasonal changes, y/y number of coins sold rose 3.52% from 99,500 in sales in March 2012. Looking at Q1 totals, Q1 2013 sales added to 533,500 coins, up 39.3% on Q1 2012, 10.57% on Q1 2011 and 96.86% on Q1 2010. Healthy uplifts against generally flat-trend prices. And, crucially, coins sales do not appear to be tracking 'risk-on' and 'risk-off' signals from equity markets. As I always maintained, coins sales have much more to do with steady risk-averse savers than with speculative buyers.

Chart below details relationship between volumes of gold sold via US Mint coins and price of gold (monthly final). In terms of volumes sold, March 2013 clocked sales of 62,000 oz, down from 80,500 in February 2013, and down 0.8% on March 2012 (62,500 oz). In quarterly totals, Q1 2013 came in at 292,500 oz and this was up 38.95% on Q1 2012, down 2.34% on Q1 2011 and up 7.93% on Q1 2010. In other words, much steadier demand growth in volumes of sales was also broken in 2013.

Meanwhile, price of gold rose 1.21% m/m in March and slipped 3.29% y/y. (More on correlations below).

The following chart details trend in average gold content per coin sold (oz/coin): in March 2013, average gold content stood at 0.602 oz/coin, up on 0.519 oz/coin in February 2013 and not far off from the 0.628 oz/coin in March 2012. However, overall trend remains relatively flat at around 0.65 oz/coin since mid-2006. Longer term trend is gently upward, indicating that over time, investors and savers started to allocated slightly more of their investable savings into coinage gold.

 Chart below shows correlation between volumes of coinage gold sold and gold price:

Two things worth noting in the above:

1. Since approximately Q2 2012 we are experiencing steady upward momentum in 12 months rolling correlations, and these are rising toward +0.5. This trend was confirmed in March 2013 and it is consistent with 24mo rolling correlations, but is still far off on 36mo or 50mo rolling basis.
2. Linear long-term trend is also upward and is now in the positive correlation territory. This can potentially suggest that gradual financialisation of the gold markets in general is having a long term impact on gold's shorter-range hedging properties, since positive correlation is consistent with higher propensity of 'buy-on-dips' and 'book profit' behaviour. However, as 60mo chart shows below, we are still in solid hedging territory for now when it comes to longer investment horizons. Furthermore, correlations trends are negligible in size. So something to watch in the future and to blog on next... stay tuned.

Chart with 60mo rolling correlations

7/1/2013: Falling speculative investment interest in gold

In two recent posts I covered US Mint sales data (annual and monthly) for gold coins. The core theme of both was the return to fundamentals in demand as signaled by sales volumes. Such a return, of course, is the flip-side of the retrenchment by speculative investors. Here's a chart from BCA from November 2012 showing just that process working through:

Note: Disclosure in the first link above.

5/1/2013: US Mint December 2012 sales

In the previous post (here), I looked at the annual data for US Mint gold coins sales. Here, let's take a quick look at the shorter-term, monthly trends and dynamics for December 2012.

Following a robust monthly rise in sales of coins by oz (weight) totals to 136,500 oz in November, December sales moderated to 76,000 oz (down 44.32% m/m), still posting a healthy 16.92% increase y/y. Compared to historical average of 56,346 oz the sales are still up, although December 2012 is below 87,717 oz average sales for the crisis period (since January 2008). However, while difference to historical (1987-2012) average is significant statistically, it is not significant relative to crisis period average. Furthermore, 6mo MA is at 68,250 which is well below the December sales levels.

For those thinking of a 'big fall-off in sales', December 2012 marked the highest volume (by weight) of sales since December 2009 and the fourth highest volume since January 2000.

In terms of number of coins sold, December 2012 came in at 82,000, or 52.74% down on November robust sales of 173,500, but monthly sales were up 26.15% y/y. Compared to historical averages, December 2012 sales are statistically indifferent from historical average sales of 98,758 coins per month, and from crisis-period average of 119,642. 6mo MA sales are at 93,500, ahead of December sales, while H1 2012 average sales were at 93,750, also well ahead of December 2012 volumes.

The relative moderation in the number of coins sold compared to the trends in the volume of coinage gold sold (oz) can be explained by the increased oz content of average coin sold. In terms of oz/coin sold, December 2012 sales stood at 0.927, well ahead of 0.787 in November, posting the highest gold content reading for any month since December 2011. Historical average content is at 0.590 oz/coin and crisis period at 0.790 oz/coin, both statistically significantly lower than December 2012 figure.

Charts and dynamics:

As above clearly shows, the historical trend is upward sloping and the current reading is comfortably at the trend levels both in terms of 6mo MA and actual level reading for December 2012.

The chart above shows contemporaneous negative correlation in price of gold v volume of gold coins sales between September 2009 and April 2012, with exception of December 2010 - August 2010. This correlation has now been broken down and turned positive since April 2012 - a new sub-trend that remained consistent since then and was reinforced in December 2012 figures. Chart below illustrates this much more clearly:

A little more statistical 'beef' on these: 12mo dynamic correlation between gold prices and total gold sales via coins (total oz weight of sales) rose to +0.34 in December from +0.28 in November 2012, so declined prices (y/y) have been associated with some increase in demand. Recall that in November-December 2011, gold prices fell from $1,746 to $1,531, while in the same period 2012 they moderated from $1,726 to $1,657.50. December marked 4th consecutive month of positive 12mo dynamic correlations. Historical 12mo dynamic correlation of +0.17. Looking at longer-range correlations, 24mo dynamic correlation in December 2012 stood at -0.23 against the historical average of -0.10 and up (in absolute terms) of -0.19 in November.

Per average coin sold gold content:

As mentioned above, December 2012 sales were characterised by a substantial increase in average gold weight of coins sold which is running well ahead of the historical (upward sloping) trend. More significantly, this year sales fell below the historic trend in 6 months out of 12. Hence, neither trend direction, nor current deviation from the trend are indicative of any severe downward demand pressures.

Overall, sales dynamics show that since February 2012, volumes of sales in oz have recovered nicely back to their historical trend (upward sloping) and are currently running above the January 2000-July 2008 averages.

Note:
Historical, long-term relationship between gold prices and demand:

While December 2012 observation is to the downside of the trend, it is clear from the picture overall that changes in gold prices during a given month have statistically no discernable relation to the demand for gold via US Mint coins sales. This simply confirms the nature of fundamentals driving demand for coins as discussed in my previous posts on the issue (see previous post linked above for one such link).

5/1/2012: US Mint Gold Coins Sales: 1986-2012 data

The readers of this blog would be familiar with the exclusive time series on US Mint sales of Gold coins that I have maintained for some years now. With December 2012 sales finalised, it is time to update the annual and monthly data analysis on these.

Here is the analysis for January 2012 - to open the year - that predicted 'return to fundamentals' theme for coin sales. And here is my article for Globe & Mail on what fundamentals relate to gold coins sales.

I am happy to note that my prediction of moderating trend in speculative buying and restoration of stronger link to long-term behavioural demand and savings fundamentals has been confirmed through 2012.

Looking at annual data for 2012 (note: subsequent post will provide more shorter-term dynamics analysis for December data), first in weight terms:

• In 2012 the US Mint sold 747,500 oz of gold in form of coins, down 25.25% y/y, with demand for coinage gold declining below 2008 levels of 860,500, but well-ahead of the 2005-2009 average annual sales of 640,800 oz per annum.
• In terms of longer-term averages, 1990-1994 average was at 384,050 oz, 1995-1999 average at 1,047,800 oz, 2000-2004 average run at 386,550 oz, 2005-2009 average at 640,800 oz per annum and 2010-2012 average is currently at 989,333 oz per annum. 
• 2012 was the 10th highest demand year in history in terms of volume of gold coins sold in oz of gold, with series covering 1986-2012 period. In other words, 2012 was not a good year for Gold Bears and for Gold Speculators alike. This doesn't make it a great year for Gold Bulls, but, given that the average annual gold price in 2012 stood at $1,678/oz - ahead of any on the record and up  7.0% on 2011 - it does appear to have been another year when fundamentals seemed to triumph over shorter-term psychosis. 
• My annual forecast for sales in 2012 was 694,050, which means that simple dynamic trend of moderating sales expectations based on previous years' price effects was bearish.

In terms of number of coins sold:

• US Mint sold 1,123,500 coins in total in 2012, down 21.27% on 2011. The demand for actual coins was at the levels compatible with 2008 when the Mint sold 1,172,000 coins and well ahead of all annual sales in 2000-2007 period.
• In terms of longer-term averages, 1990-1994 average was at 637,620 coins, 1995-1999 average at 2,246,300 coins, 2000-2004 average run at 738,700 coins, 2005-2009 average at 955,800 coins per annum and 2010-2012 average is currently at 1,397,167 coins per annum. In other terms, current sales are annually bang on at the annual average for the last 8 years.
• 2012 ranks as the 10th most successful year for coins sales in terms of the number of coins sold, confirming my view in the third bullet point above regarding sales of coinage gold in oz.
• My forecast for 2012 sales was at 1,21,223 coins - a much closer call than on oz of gold sold via coinage, suggesting that the demand remains closely driven by long-term dynamics.

In terms of both - sales in coins numbers (1,123,500 coins) and oz (747,500 oz), 2012 results stand in close comparative to the historical averages. Historical average (1986-2012) for coins sold is 1,261,170 and for oz of gold sold through US Mint coins is at 717,343 oz.

In terms of average gold content of coins sold:

• 2012 average coin sold by the US Mint contained 0.665 oz of gold per coin, down slightly on 0.701 oz/coin in 2011 and well-ahead of the historical average of 0.574 oz/coin.
• 2012 ranks as the fifth highest year on record in terms of average oz/coin sales.

Charts:

Historical dynamics:

As charts above illustrate, all time series have shown convergence to the long-term upward trend:

• There is, so far, no overshooting of the trend to the downside - something that could have been expected if demand for gold coins was showing speculative bubble deflation dynamics or post-bubble correction, although, of course, we cannot say with 100% accuracy that this is not going to materialize with some lag.
• There is no acceleration in the convergence trend in 2012 or since convergence began in 2009.
• This episode of convergence is shallower (in terms of annual speed to target) than in 1997-2002 period and 1986-1991 period.

Historical correlations:

• In terms of historical correlations, the following matrix holds, showing overall zero to low level negative correlations between prices and demand for coins and coinage gold:

The above, of course, implies that given moderating price increases in gold (+7% for annual monthly average in 2012 compared to 22.21% rise in 2011, 25.61% in 2010, 11.44% in 2009 and so on), we can expect a slowdown in overall oz and coins volume demand, which can lag price changes. This is exactly what appears to have taken place in 2012.

As before, I remain comfortable with the 2012 trend and am looking forward toward more stabilised demand dynamics in 2013, with volume of sales declining in 2013 to ca 500,000 marker in oz terms and 850,000 in coins numbers terms, assuming no major volatility in gold price and in line with continued stabilisation in the world economy.

Disclaimer:
1) I am a non-executive member of the Heinz GAM Investment Committee, with no allocations to any specific individual commodities
2) 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 or gold ETFs.

3) I receive no compensation for anything that appears on this blog. Everything your read here is my own personal opinion and not the opinion of any of my employers, current, past or future.

1/7/2012: H1 2012 US Mint data: demand for gold coins

Based on data from the US Mint we can now update H1 2012 figures for sales of the US-minted gold coins. As the background - new coins issued by the US Mint, in my opinion, represent a much more fundamentals-linked asset as the demand for these coins differs, if only subtly, from the demand for gold as an asset:

• Coins are purchased by long-hold collectors;
• Coins are easier to purchase and store than gold bars, attracting more demand from savers, rather than speculative investors; and
• Coins are used frequently to store inter-generational wealth and start family savings schemes

All of this means that correlations between demand for coins and gold price should be less pronounced and that is exactly what we observe throughout the historical and current data:

So with that in mind, what should we expect from the gold coins sales. Price of gold has been trending side-ways with some correlation over the 20-day averages since April 2011 ranging between USD1505.5 low in June 2011 to the high of USD1813.5 in August 2011 and into USD1570 in June 2012. With this, we should expect some moderation in demand for gold coins coming from the reduced speculative demand. Since this speculative demand forms a smaller component of overall coins demand, we should expect moderation in demand for coins to bring us down toward historical averages for the crisis period. 

At the same time, outside the euro area, global crisis has entered a stage of stabilization (not growth, yet), which means that demand for gold as safe haven (rather than a hedge) should be moderating as well. This can be expected to have a more modest impact on coins sales than on gold sales and especially ETFs-instrumented gold sales.

In other words, fundamentals (inflation expectations, longer-term savings and investment objectives) should be driving current demand for gold coins.

And, this is exactly what we are seeing. In June 2012, the US Mint sold 54,500oz of coinage gold, up on 53,000 in May 2012. Total for H1 2012, US Mint sales of gold coins in terms of total weight sold are down 41.3% on H1 2011 and it is down 49.8% on H1 2010 and 50.3% on H1 2009. Dramatic? Sure, when one disregards consideration of drivers for 2009-2011 demand for coins being coincident with extreme risks in other markets. 

Total H1 2012 demand was at 338,000oz still well ahead of H1 average demand for 2000-2007 period when it was 165,679oz, but down on 531,750oz average for H1 2008-2011 crisis period.

Exactly the same picture - return to fundamentals - is seen in the number of coins sold. 

Consistent with still robust demand drivers, H1 2012 average coin sold contained 0.60 oz, while H1 2000-2007 period average was 0.51oz and H1 2008-2011 period average was 0.76oz.

Here's a summary of H1 changes and a chart highlighting dynamics:

All three parameters (coins sold, oz total sold and oz/coin) are showing that H1 2012 was continuing moderation in demand away from short-term safe haven considerations toward fundamentals-driven consideration and basics of long-term hold demand. All three also show that current demand dynamics for gold coins remain ahead of historical averages. There is neither a panic buying, nor a panic selling and should demand stabilize at around 10% upside to the historical average ex-1999 spike, and recall that this is NEW demand, we will be in the comfortable longer term range that can take us well into global economic growth cycle once it resumes.

PS: This continues to confirm my long-term view on gold coins as more fundamentals-driven and fundamentals-reverting instrument.

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 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.

2/4/2012: Q1 2012 US Mint Gold coins sales

Time to update the data for Q1 2012 US Mint gold coins sales - something I have been doing as a sort of an ongoing project.

As before, there is much volatility sloshing around, and as before, there is less drama when one takes a closer look at the data.

Q1 2012 volume of sales (oz) of US Mint coins fell 29.7% year on year, and 22.3% on 2010. The demand is also down 38.5% on 2009. Total volume of sales stood at 210,500 oz in Q1 2012, 17% below the average demand for Q1 over 2008-2011 period, but much stronger (+89%) on pre-crisis average for 2000-2007.

Much of the downside to the demand was driven by February sales, which run 21,000 oz against March sales of 62,500 oz.

Chart below illustrates:

Note that stabilization of the price trend along the flat line above US$1,660/oz since H2 2011 is not associated with establishment of a similarly flat trend for volume of US Mint sales. More on this below, but in basic terms this confirms that the demand for gold coins has little to do with the price in general. In other words, no hysteria and no bubble here. Something other than price movements drives demand for coins. 

It is worth noting, that, as consistent with the above observations 6mo MA for volume demand is now at 95,083 oz which is below the March demand of 99,500. Again, no drama - rather mean reversion in the short run.

On the side of coinage sold, demand for coins fell 20.6% in Q1 2012 compared to Q1 2011, but it up 41.3% on Q1 2010 and 12.0% on Q1 2009. Total demand was 383,000 coins in Q1 2012 of which 256,500 came in January. Compared to this, 2000-2007 Q1 average is 216,929 and 2008-present Q1 average is 313,000. So current first quarter is well ahead of the historical averages, but on a moderate side compared to 2011.

 Looking at the two charts above, it is clear that while volume demand is following a pronounced down-sloping trend, coinage demand is relatively flat. Which is consistent with a decrease in average gold content per coin sold. In Q1 2012, average oz/coin sold fell to 0.63 from 0.82 average for Q1 2008-2011. Average weight per coin is down 0.1% in Q1 2012 year on year, and down 37% on Q1 2010 and Q1 2009 (in both of these years, average oz/coin content of US Mint coins sold was 1.0). However, this decline has itself been mean-reverting as the chart below clearly shows.

One point to be made in addition to the above is the increased volatility in the series since the mid-2007 through 2010 that is now abating since the beginning of 2011. This reinforces the general historical trend established since 1987.

As mentioned above, correlations between price and volume of gold demanded (via US Mint coinage sales) are now running consistently below the historical trend for some time - primarily since H2 2010. This continues today. The 12mo rolling correlation is negative on-average since July 2010 and this remains the case for Q1 2012. However, Q1 2012 negative correlation is moderate - averaging just -0.05, which is statistically indistinguishable from the Q1 2011 (+0.1) and more moderate than -0.4 correlation for Q1 2010. The average for 12mo rolling correlations for Q1 period over 2000-2007 was +0.18 and during the crisis period it fell to +0.03. With standard deviation of 0.36 none of these correlations suggest any dramatic departures in price-demand relationship from a stable long-term zero correlation trend. Chart below illustrates:

The point that the above adata suggests is best glimpsed by directly relating the levels and the rates of change in gold price and the overall demand for gold via US Mint coins. Both exercises are illustrated below:

And guess what: historically - that is since 1987 - gold price has virtually nothing to do with demand for US Mint coins (in terms of volume of gold sold via coins) neither in terms of levels of price effect on levels of demand for gold, nor in terms of rate of change in price effect on rates of change in demand.

Which means that at least in the case of the US Mint sales, there is no hype, and no madness. What there is instead, is a rather volatile demand with gentle upward slope imposed against a robustly positive exponential relationship in gold price:

The fact that in recent months demand for gold has been oscillating around the historic trend (as opposed to resting above that trend in August 2008-August 2011 period) is the good news - the current levels of demand are historically sustainable, trend reversion-consistent and show neither hype, nor panic buying.

As I have noted in January post (here): "Welcome back to ‘normalcy’ in US Mint sales." Yep, still holds.




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.

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.

11/09/2011: What gold coins sales tell us about the 'bubble'

Here is the extended version of the article published by Globe & Mail on the topic of US Mint sales of gold coins.

Of all asset classes in today's markets, gold is unique. And for a number of reasons(i).

Firstly it acts as a long-term hedge and a short-term flight to safety instrument against virtually all other asset classes.ii Secondly, it supports a wide range of instruments, including physical delivery (bullions, coins and jewellery), gold-linked legal tender, gold-based savings accounts, plain vanilla and synthetic ETFs, derivatives and producers-linked equities and funds. All of these are subject to diverse behavioural drivers of demand. Thirdly, gold is psychologically and analytically divisive, with media coverage oscillating between those who see gold as either a long-term risk management tool, or a speculative investment, a "barbaric relic" prone to "bubble"-formation.

In the latter context, it is interesting to look closer at the less-publicised instrument - gold coins, traditionally held by retail investors as portable units to store wealth. Due to this, plus demand from collectors, gold coins are less liquid and represent more of a pure 'store of value' than a speculative instrument. Lower liquidity of coins is not driven by shallow demand, but by reluctance of owners to sell them when prices change. Gold coins are economically-speaking "sticky" on the downside of prices - when price of gold falls, holders of coins are not usually rush-prone to sell as they perceive their coins holdings to be 'long-term accumulations', rather than speculative (or yield-sensitive) investments. They are also "sticky" on the upside of prices - while demand is impacted by price effects (with generally higher gold prices acting to discourage new accumulation of coins), holders of coins are not quick to sell to realize capital gains, again due to entirely different timing to the holdings motives. Think of a person setting aside few thousand dollars worth in gold coins to save for child's college fund.

In general markets, classical bubbles begin to arise when speculative motives (bets on continued and accelerating price appreciation) exceed fundamentals-driven motives for opening new long positions in the instrument. Bubbles blow up when these tendencies acquire wide-based support amongst retail investors.

In late stages of the bubble, we should, therefore, expect demand for gold coins to falter compared to the demand for financially instrumented gold (ETFs shares and options). In the mid-period of bubble evolution, however, as retail investors just begin to rush into the asset, we can expect demand for coins to rise in line with demand for jewellery and smaller bullion. But we do not expect a flood of gold coins into the secondary market (and hence a collapse in gold coins sales) until literally past the turn of the fundamentals-driven prices toward the stage of mid-cycle "bubble" collapse.

The US Mint data on sales of gold coins suggests that we are not in the last days of the "bubble". But there are warning signs to watch into the future.

August sales by the US Mint were up a whooping 170% year on year in terms of total number of coins sold, while the weight of coins sold is up 194%. On the surface, this gives some support to the theory of gold becoming short-term overbought by retail investors (see chart below), but it also contradicts longer-term view that gold coins sales should fall around bubble peak.

Source: US Mint and author own analysis

In part, monthly comparatives reflect huge degree of volatility in US Mint sales. Looking at the longer term horizon, since January 2008, US Mint sales volumes averaged 97,011 oz with average coin sold carrying 0.82 oz of gold, the standard deviation of these sales was 45,196 oz and 0.19 oz/coin, implying that August results comfortably fit within the statistical bounds of +/- 1/2 STDEV of the mean for the crisis period. Equally importantly, August results fit within +/-1 STDEV band of the historical mean since 1986 through today. In other words, current gold coinage sales do not even represent a 1-sigma event for the entire history of gold coins sales supplied by the US Mint and are within 0.5-sigma risk weighting for the crisis period since January 2008.

Neither is the current monthly increases in demand represent a significant uptick on previous months or years demand. At 112,000 oz of gold coins sold, August 2011 is only the 19th busiest month is sales since January 2008. It ranks as the 34th month in terms of the gold content per coin sold. Again, not dramatic by any possible metrics. Since January 1988 there were 87 months in which average gold content per coin exceeded August 2011 average and on 38 occasions, volumes of gold sold in the form of coins by the US Mint exceeded last month's volume.

Again, not dramatic by any possible metrics, especially once we recognize that in terms of risk-related fundamentals, August was an impressive month with US and EU debt crises boiling up and economic growth slowdown weighing on global equities markets.

Charts below illustrate these points.
Source: US Mint and author own analysis
Source: Author own calculations based on the US Mint data
Source: Author own calculations based on the US Mint data

The data also shows that physical demand for coins is largely independent of the spot price of gold. Historically, since 1986, average 12-months rolling correlation between the spot price of gold and the volumes of gold sold in US Mint coins is negative at -0.09. Since January 2008, the average correlation is -0.2. And over the last 3 years, the trend direction of gold spot price (up) and the volumes of gold sold in coinage (down) have actually diverged (see chart). The latter is, of course, concerning and will require closer tracking in months to come. The correlation between price of gold and volumes of gold sales through US Mint coins is now negative or zero for 13 consecutive months.

Source: Author own calculations based on the US Mint data

Source: Author own calculations based on the US Mint data

The chart above also highlights the fact that the current trend levels of US Mint sales are significantly elevated on previous periods, with exception of 1986-1987 and 1998-1999 demand spikes. Since the global economic crisis began, annual coinage sales rose 7-fold from just under 200,000 oz in 2007 to 1,435,000 oz in 2009, before falling back to 1,220,500 oz in 2010. Using data through August, I expect 2011 sales to remain at around 1,275,000 oz. This implies that the 2008-2011 average annual sales of US Mint coinage gold are likely run at slightly above 2 times the average annual rate of sales of coinage gold in the period 1988-2007.

Given the state of the US and other advanced economies around the world since January 2008, this is hardly a sign of dramatic over-buying of gold by masses of retail investors. Instead, we are witnessing two core divergent trends emerging from the coins markets:

1. Since, roughly-speaking, 2009, the trend in coins sales is moving counter to the trend in spot price for gold, implying that retail investors are not rushing into gold, as one would expect were gold to be a bubble, and
2. The levels of sales of US Mint coins remain elevated, on average, since the crisis began, implying that high demand for coins, relative to historic trends, is most likely being driven by fundamentals-underpinned demand for safety.
   

In short, there is no indication, in the data reviewed, of the bubble beginning to inflate (sharp rises in gold coins demand along the trend with prices) or close to deflating (sharp pull-back in demand for gold coins).

Of course, the evidence above does not imply any definitive conclusions as to whether gold is or is not a "bubble". Instead, it points to one particular aspect of demand for gold - the behaviorally anchored, longer-term demand for gold coins as wealth preservation tool for smaller retail investors. Given the state of the US and other advanced economies around the world since January 2008, US Mint data does not appear to support the view of a dramatic over-buying of gold by the fabled speculatively crazed retail investors that some media commentators are seeing nowdays.


Disclosure: I am long physical gold and hold no long or short positions in other gold instruments.


i These and other facts about gold are summarized in my recent presentation available at http://trueeconomics.blogspot.com/2011/08/20082011-yielding-to-fear-or-managing.html.

ii As shown in the recent research paper by Profs Brian Lucey, Cetin Ciner, and myself, covering the period of 1985-2009: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1679243