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.

13/12/2012: Some thoughts on gold

Tonight's Prime Time program covering gold is undoubtedly one of the rare occurrences that this asset class got some hearing in the Irish mainstream media. Which is the good news.

Not to dispute the issues as raised in the program, here are some of my own thoughts on the question of whether or not gold prices today represent a bubble.

A simple answer to this question, in my opinion, is that we do not know.

Short-term and even medium-term pricing of gold (in any currency) is driven by a number of factors (fundamentals), all of which are hard to capture, model and value.

For example, currency valuations forward suggest that gold is unlikely to experience a sharp and protracted correction in the US dollar terms, if you believe the Fed QE4 is likely to persist over time. In euro terms, potential for devaluation of the euro implies pressure to the upside to the gold price. Yen price is also likely to play longer-term continued devaluation scenario. Things are less certain when it comes to Pound Sterling price… and so on. Here's just one discussion on one of the above effects: http://soberlook.com/2012/12/precious-metals-hit-by-evans-rule.html?utm_source=dlvr.it&utm_medium=twitter

Another example: drivers for prices on demand side that include rather volatile regulatory conditions in the major gold demand growth markets, such as China and India.

In short, things are much more brutally complex than the PrimeTime programme allowed for.

The reason for this complexity is that gold acts simultaneously (as an asset) in several structural ways:
1) as a simple bi-lateral long term hedge for inflation, equities and currency valuations
2) as a medium term (albeit not entirely persistent) hedge for some asset classes (e.g. equities)
3) as a short term speculative instrument to some investors
4) as a backing for numerous and large volume ETFs
5) as a benchmark backing for numerous and relatively large volume synthetic ETFs
6) as a store of value
7) as a risk management tool for complex structured portfolios
8) as a bilateral safe haven against equities and bonds, political and economic risks, systemic financial markets risks, etc.

These relationships can be unstable over time, can require long time horizon for materialization and are 'paid for' by assuming higher short term volatility in the price of gold. That's right - while PrimeTime contributors spoke about gold price 'correcting' or 'bubble bursting' none seemed to be aware of the fact that if you want to get something you want (hedging and safe have properties being desirable to investors), you should be prepared to pay for it (price volatility seems to be a good candidate for such cost of purchase).

No matter what happens in the short- to medium- term, gold is likely to remain the sole vehicle for the store of value and risk hedging over the long-term. It did so over the last 5,000 years or so and it will most likely continue doing so in years ahead. This property of gold is well established in the literature and is hardly controversial.

There is one caveat to it - due to instrumentation via ETFs, there are some early (and for now econometrically fragile) signs emerging that some of gold's hedging properties might be changing. More research on this is needed, however and only time will tell, so in line with PrimeTime, let's stay on the RTE side of Complexity Avoidance Bias on that one.

There is an excellent summary on what we know and what we don't know about gold by Brian M. Lucey available here:  http://ssrn.com/abstract=1908650 .

Last year I gave a presentation at the Science Gallery on some properties of gold, which is posted here: http://trueeconomics.blogspot.ie/2011/08/20082011-yielding-to-fear-or-managing.html .

Not to make this post a lengthy one, let me summarize my own view of gold as an asset class:

1. In my view, gold can be a long-term asset protection from the risk of expropriation, inflation, devaluations, and tail risks on political and economic newsflow side etc.
2. To me, gold is not a speculative (capital gains) instrument for the short-term and it should not be acquired in a concentrated fashion - buying in one go large allocations. Gold should be bought over longer period to allow for price-averaging to reduce exposure to gold price volatility.
3. Gold allocation should be relatively stable as a proportion of invested wealth - different rules apply, but 5-10% is a reasonable one in my view.
4. Of course, any investment portfolio (with or without gold) should strive to deliver maximum diversification across asset classes, assets geographies etc.

Disclosure: I have no financial interest in or any commercial engagement with any organization engaged in selling gold. Until December 1, 2012 I used to be a non-executive member of the investment committee of GoldCore Ltd and was never engaged on their behalf in any marketing or provision of advice to any of their current or potential clients.

19/7/2012: Q2 report from the World Gold Council

Q2 analysis of the trends and drivers for gold prices from the World Gold Council is worth a read (here) for a number of reasons. Here are two, from my point of view:

Point 1: Per Gold Council: "Gold prices declined in most currencies during the second quarter with the exception of the euro, Swiss franc and Indian rupee, in part due to a strong US dollar. Despite a 3.8% decline in Q2 to US$1,598.50/oz on the London PM fix, gold was up 4.4% during the first half of the year. Volatility remained elevated amidst a busy event-risk period. However, gold generally outperformed risk assets."

Chart and table alongside:

Table explaining events in the chart above:

Table summarizing Q/Q performance of gold prices in various currencies.

"Gold’s correlation to equities and other risk assets fell towards long-run average levels in Q2 helping portfolio diversification. Gold’s increased correlation to equities in Q1 was an indirect effect related to a weaker global economy coupled with a stronger US dollar."

Tow charts to compare on the above:

So things are reverting to historical levels - just what I drew as a conclusion from the gold coins markets data.

Point 2: More importantly, the theme is that of the 'depletion of traditional safe havens': 

"Over the past year, two national bond markets have provided shelter from turbulence in global risk assets: US Treasuries and German Bunds. Additionally, the US dollar, the Japanese yen and the Swiss franc have benefited from de-risking flows... However, being an asset of last resort is not without consequences. In particular, the investors seeking more “safe” assets must also recognise that the ever-increasing supply of both currency and debt deplete the value of these assets. Furthermore, as declining yields approach zero, they create very skewed pay-off structures with much more downside risk."

In other words, these risk-free returns for safe havens start to look like return-free risks once price upside is virtually exhausted either by persistent policy interventions or by natural exhaustion of the asymptotic valuations (in the case of US Treasuries - zero yield bound on prices).

Good luck fitting zero yields into pricing equation for Treasuries, folks...

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

24/08/2011: Few thoughts on today's Gold price correction

Following a dramatic rise over the recent weeks, gold registered a correction today. At this moment in time, gold for December 2011 delivery is down 5.76% on the day and is priced at USD 1,754.00 / oz. Here's a snapshot:
Of course, one day movement can be many things:

• A sustained correction (with market settling at lower levels and running along a flat trend)
• A short-term correction (with a return to, perhaps more sustainable, upward trend)
• A bear trap (with relatively prolonged period of downward corrections followed by a return to positive trend) and so on

While it is extremely hazardous to profess any explanations for specific daily (and generally high frequency) changes, here are some of the reasons that are being advanced by various analysts as to the possible drivers of today's correction:

1. The margins theory (see zerohedge comment here): CME raised margins on gold for the second time in the month, having hiked them first 22% and now raising them 27% again (new account margins are now at USD9,450 and maintenance accounts at USD5,500). This second rise follows 26% hike on margins by the Shanghai Gold Exchange (+26%) on Monday to 12%. In theory, margins increases should symmetrically rise costs for short and long positions on gold futures. Which can lead to closing of some positions. In practice, however, two things occur. Firstly, short positions face lower margin exposures than long positions - the difference being small, alas. Secondly, margins increases themselves might be dramatic, but on absolute terms they are still small, unless you are opening highly levered new accounts. The margins theory, in my view, helps explain the physical move in prices, but not the behavioral drivers for investors' reaction. More likely, in my view, is the possibility that two consecutive, short-spread margin hikes signal to the investors that CME is actively trying to prevent gold going parabolic, to contain speculative momentum. If so, current correction is welcome, as it triggers retrenchment of speculative leveraged investors.
2. The talk about Euro area demands for the collateral on Greek (and Portuguese and Irish... and may be Italian and Sapnish...) loans from EFSF/ESM/alphabet soup. FtAlphaville speculates on this (here). There can be indeed a push for such a move, though I doubt it will result in actual sales of gold reserves. Even if the sales were to take place, European peripheral gold will most likely be placed 'discretely' to other central banks and treasuries, plus the IMF in fear of destabilizing official reserves elsewhere. The last thing Europe will want to do is to dent its own (German, French & UK) wealth and anger a bunch of governments in Asia, plus the US & IMF - all of which are deeply into gold holdings.

Incidentally, couple of days ago I commented on twitter that CME margins increases are long-term positive for gold, if they are successful in cooling off speculative leveraged investors.

My guess - and I stress that this is a guess - is that the current correction can turn out to be relatively deep, but it will not alter long term (9-12 months) upward trend for gold. The reason is simple: US, UK, Japan and Europe are poised to print money. In part, this is already factored into previous highs for gold. In part, the uncertainty about the quantities of QE to be deployed, are offering both the upside and the downside scenarios for the gold price relative to peak.

If, however, the global QE does not materialize, stock markets and corporate debt markets will likely to slip into serious bear sentiment. Which will push gold back onto near-parabolic trend up.

As far as today's short-term correction goes, my view is that it was 'helped' by the shifts of liquidity into equities with markets posting another day of strong upsides.

For a longer-term lesson to be learned: today's correction shows clearly the perils (for ordinary investors) of rushing into an asset with a single large-scale purchase. Instead, gold should be treated as a long-term allocation aimed at real wealth preservation and hedging. Such allocation should be built over time, with sustained - volatility-reducing - strategic long positions. Not with attempts to 'time' the market or based on impulsive buy-ins based on expected capital gains.

And, of course, the volatility shown by today's gold price movement, as well as an even more dramatic volatility in equities and fixed income shown over recent months, highlight the need for conservative, long-term investment strategy based on proper risk management and diversification.

20/08/2011: Yielding to Fear or Managing Wealth

Here's a copy of my presentation from August 18th in the Science Gallery covering some of my views on gold (announcement here). All disclosures were made in the announcement and at the beginning of my presentation - do not accept this as either an advice to take any investment action - as usual. You can click on individual slides to enlarge.

27/01/2011: Gold - an interesting chart

Few interesting charts on gold for 2010 - all courtesy of the GoldCore.

The above, of course, highlights the relative power of gold as risk-diversification instrument. Gold price volatility was 16% on an annualised basis in 2010 which is consistent with long-term trend. At the same time, volatility on S&P GSCI daily returns was 21% annualized. Given that GSCI is a broad commodities index, 's worth taking a look at relative returns: Gold price rose by 29% in 2010, S&P GSCI rose 20%, S&P 500 +13%, MSCI World ex US Index +6% in USD terms, Barclays US Treasuries Agg +6%. Now, note that the only less volatile commodity instrument is non-storable livestock.

If you want an in-depth view of hedging and flight-to-safety properties of gold - go here. Alternatively, for a more popular view: see the video here.