Coin dealers puzzled as paper gold falls amid real gold's scarcity

The New Gold Rush: Supply of Coins Tight at Tucson Stores

By Dan Sorenson
Arizona Daily Star, Tucson
Sunday, November 2, 2008

http://www.azstarnet.com/sn/business/265218.php

The price of futures contracts for gold surged to more than $1,000 per ounce earlier this year, then dropped back before surging again as the financial crisis rocked stock markets in September. Then the price of gold futures started slipping again.

In October, Bloomberg News reported, the price dropped 18 percent, the most it has in a single month since 1980. Gold for December delivery closed at $718.20 an ounce Friday on the New York Mercantile Exchange.

Your college Econ 101 course may not help you understand the latest gold coin rush.

Banks have been on wobbly knees, the stock market has been plunging, and 401(k)s are as deflated and sad as four-day-old party balloons.

But, oddly, gold has been both falling in price and in short supply for those looking for a safe haven during the stock market storm. Some Tucson dealers say gold coins are scarce at best, even as gold -- and silver -- prices are falling.

There is even more complexity within that scenario, local dealers say.

Retail gold coins generally sell for the current price of the metal they contain, plus a "premium" -- the dealer's fee -- on each coin. Of late, the premiums have risen significantly to reflect the shortage of supply of some denominations, the dealers say.

"I get 10 to 20 calls a day, 'Do you have any gold or silver?' We don't have any, and we can't get any," said Peter Spooner, a coin expert at American Stamp & Coin, 7225 N. Oracle Road.

"There are people who are selling their stocks to get into gold and silver because they fear we are going into a tremendous depression," said Spooner. Yet, he noted, the "price of paper (futures contract) gold is dropping while the price of owning actual hold-in-my-hand gold is going up" when the seller's premium is added.

Historically, it would be cheaper to buy an ounce of gold in one coin than to buy an ounce as four quarter-ounce coins. But the price for an ounce of gold is actually cheaper if you buy it as four quarter-ounce coins than in a single 1-ounce coin -- if you could find one, said Brett Sadovnick, owner of Tucson Coin & Autograph, 6470 N. Oracle Road.

In this case, a classical supply-and-demand situation is at work: There's more demand for the 1-ounce coins than the quarter-ounce and other smaller coins, so it's driven up the price of the 1-ounce coins.

... Buyers Might Be Newcomers

Sadovnick isn't quite sure why buyers are fixated on the 1-ounce coins. Gold is gold, purity being equal.

It could be that the buyers driving the demand for the 1-ounce American Eagle coins are newcomers fleeing the wild uncertainty of the stock market for the relative calm of the world's longtime favorite precious metal. Maybe they feel better about owning the hefty full-ounce American Eagle, rather than a handful of smaller gold coins -- half-, quarter-, or tenth-ounce -- that weigh just as much. Sadovnick isn't sure.

"I've been a coin dealer in Tucson since 1998, a professional since 1974. I haven't seen a situation quite like this," said Sadovnick. Not even the crazy precious metals roller-coaster days of early 1980 -- when gold hit $850 an ounce for one day -- compares, Sadovnick said.
And it's not just gold, he said.

"I placed an order a month ago, 1,000 1-ounce silver bars. I paid him spot (the spot price), plus $2.50 an ounce premium," Sadovnick said. That order might not arrive until January.

"Three months ago I could have bought it from them for the price of silver, plus $1.50 an ounce, and I would have had delivery in a few days."

Even Jim Ganem, owner of the venerable Arizona Stamp & Coin, 4668 E. Speedway, is baffled.

The shop is the only Tucson dealer mentioned on the U.S. Mint's Web site as dealers of American Eagle coins, and Ganem says he can't get any Eagles, or anything regularly. He said the U.S. Mint sent out a notice saying it isn't making the coins because even they can't get the gold blanks to stamp.

... 40 Buyers to One Seller

Ganem said hedge funds are dumping billions of dollars worth of gold contracts they hold, driving down the price of gold. But to actually get gold, not just a contract, buyers are having to pay a premium -- a higher premium than he can recall in the past.

Some of those contract holders are asking for the gold they represent, instead of just trading in the paper. But that gold is disappearing in an instant on the spot market, said Ganem. He said he gets a few chances a day to buy gold that becomes available, but that it disappears in a matter of minutes.

"Typically," he said, "we're running 40 buyers to one seller right now coming into the store to purchase. People don't want to be in the stocks, real estate, and they don't trust the banks -- three typical havens for large amounts of money. The other one is metal."

One would think the skidding stock market and real estate decline would be driving up gold and silver prices. And while it did initially, in September, the price of precious-metal futures plunged in October.

An industry expert in Phoenix said the gold market isn't behaving in a traditional manner.

David Henry of Arizona Coin Exchange Inc. in Phoenix is a wholesaler who sells to coin and precious metals retailers. He said most people who buy paper gold, contracts, never physically possess the gold, choosing instead to resell the contracts, hopefully for more than it cost them.

"You can get it, physically, but it's complicated," Henry said.

Physically possessing gold is an entirely different mechanism, Henry said, something that is done for security -- a way to safely hold value, often for a very long time.

Unfortunately, he said, this is an occasion for a "Perfect Storm" scenario.

The price isn't high enough to bring sellers into the front door of coin and precious metal shops, and the main source of new gold, the federal government, can't deliver.
Spooner said the vagaries of the current gold market don't change his view of gold.

"I don't present gold as an investment," said Spooner. "Buying a half- to 1-ounce piece of gold every month is like insurance ... like portfolio insurance. In economic turmoil, it's a flight to safety."

... Decline in Gold Futures

The price of futures contracts for gold surged to more than $1,000 per ounce earlier this year, then dropped back before surging again as the financial crisis rocked stock markets in September. Then the price of gold futures started slipping again.

In October, Bloomberg News reported, the price dropped 18 percent, the most it has in a single month since 1980. Gold for December delivery closed at $718.20 an ounce Friday on the New York Mercantile Exchange.

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