Gary North's REALITY CHECK Issue No. 36 February 5, 1999

THE RATIONING OF U.S. GOLD COINS

This week, the U.S. Mint stopped selling gold coins for a day. Then it announced an allocation system. This means rationing if demand continues to accelerate. It means standing in line and not being able to buy all you want at the official price.

This demand is Y2K-driven. Gold bullion has gone down. But the coins are going out the door. More tenth- ounce gold eagles were sold last month than in the first seven months of 1998.

In the first six months of 1998, the Mint sold 96,000 ounces a month of all gold coins. In the second six months, it sold 210,000 ounces a month. In January, it sold 268,000 ounces.

There is greater demand than supply at the Mint's prices. Instead of raising their prices to reduce demand, The Mint will begin allocating coins. Dealers will not be able to buy all of the coins that they have orders for unless they raise their prices (the premium over gold). Some of them already have done this.

Within a month, wholesalers' existing inventories (if any) of the smaller coins will be depleted. At that point, prices will rise or else you will be put on a waiting list. My point is this: the supply of U.S. gold coins, especially the smaller ones, will begin to get very tight very soon.

SMALLER IS BETTER

As you may know, I have been recommending the purchase of tenth-ounce American eagles. My main reason for recommending smaller coins is liquidity in a social breakdown: more transactions per ounce. The one-ounce coins are best for buying to sell later for electronic money, but for those who are trying to get out of electronic money and into a marketable commodity during a banking crisis, the tenth-ounce coins are better.

These coins command a higher premium over bullion value than the one-ounce coins. You don't get something for nothing. Ten tenth-ounce coins this week cost about $335. A one-ounce coin was around $300. To compare prices, click through:

http://www.msnbc.com/modules/commerce/gold2.asp

Until this year, the Mint's percentage of one-ounce gold coins was over 70% of total gold coin production. These are the preferred coins for conventional investors who hope to sell these coins later for money. These are people who evaluate the success of an investment in terms of how much electronic money they receive when they sell.

The tenth-ounce buyer thinks differently. He is thinking of permanently transferring his wealth out of electronic money and into purchasing power. The rise in the sale of tenth-ounce coins is an aspect of the re- monetization of gold. We are seeing a great reversal. Since 1933, and really since the turn of the century, people have not used gold coins in the United States. This is going to change in the next decade.

This means that the Mint bet on the wrong horse for 1999. It geared up for one-ounce sales, but buyers are now after the smaller coins. This is because Y2K is changing the reasons for buying gold.

It is happening in the silver coin field, too. Consider silver bullion, which was $7.00 an ounce on Feb.4, 1998: a nine-year high. A bag of 90% U.S. silver coins sold for about $5,100. There was no premium over bullion value, or very little. Silver fell to $5.00 an ounce by January, 1999, and a bag of coins (715 fine ounces) sold for over $5,400. This is a premium of 50% over bullion value. This is the re-monetization process in action. We are at the beginning of this process. Y2K will accelerate it next year on a scale not yet understood even by Y2K pessimists.

Re-monetization will happen to gold coins, especially the smaller ones. This will push up their premium above the bullion price. Why? Because the coins cannot be produced fast enough at bullion's price to meet demand today, let alone in late 1999, when the Y2K panic will appear.

You are not going to order a 100-oz. bar of silver, are you? Not at $29,000 today, and more if gold's price rises. You will surely not buy a 400-oz. bar that central banks use to settle with each other. What could you do with it in a breakdown? And who would give you change?

That's why tenth-ounce coins are good: you don't have to get change when you buy an inexpensive item. There are more of these items to buy. What can you buy with a 100- oz. bar? Buy a house in 2002?

Until I started recommending tenth-ounce coins last year, demand was pretty low. I told people to buy them irrespective of the price of bullion. Bullion is for speculators and very rich people who are moving large amounts of electronic money into gold. The small investor who worries about Y2K should be buying tenth-ounce coins.

That's why they are disappearing. They are being sold out of inventories. They will be in short supply because the Mint is not set up to produce them: "no blanks." Meanwhile, demand is rising.

CONCLUSION

I will say it one more time: you had better act when you can. Buy when an item is available. Buy the "cottage industry" items now. You can buy mass-produced items later in the year.

There are two firms that I know of that will sell tenth-ounce coins at $35 per coin or less if you order in units of 50. They are:

Camino Co., 800-348-8001 FAX: 650-401-5530

Little Mountain (Franklin Sanders), 901-853-6136 FAX: 901-854-5138

In 30 days, I think coin rationing will begin in earnest. If you don't want to stand in line, order coins now.

Think "Aladdin lamps." You didn't buy enough of them, did you? Now you can't buy them.

Think "silver coin bags." They are being rationed by dealers to their best customers, one bag at a time, and they command a 50% premium above bullion value. You cannot get delivery of ten bags today.

Talk it over this weekend. Then on Monday, make your decision.

I would have saved this recommendation for REMNANT REVIEW, but it was mailed today. The shortage will have become visible by March. My advice: don't dawdle. Make up your mind. (And expect busy signals for a few days.)

-- a (a@a.a), February 06, 1999

Answers

a, Thanks for the post. See; www.centralfund.com for an alternative.

-- Watchful (seethesea@msn.com), February 06, 1999.

Beofre one assumes it's a case of gold rationing about to begin, remember that the number of gold coins struck by the mint is regulated by law. Without a special act of Congress, the mint simply can't make any more of the things. If demand goes up (as it has) the mint then has two choices, either let the supply be exhausted early and shut some people out or try to string out the supply over time and give more people a shot at getting some coins.

When toy stores did the same thing with Furbys nobody said anything about conspiracies and unfair practices. It really isn't that much different, especially when you consider that the majority of people who have bought gold coins over the last 40 years have done so as collectors, not people trying to shift liquid assests into a safer medium.

-- Paul Neuhardt (neuhardt@ultranet.com), February 06, 1999.

Watchman

If the stage doesn't go to Central Fund, then what good does it do to have a stash there?

-- dave (wootendave@hotmail.com), February 06, 1999.

I must have missed the part about conspiracies and unfair practices. Let's see, now, Paul sees little difference between Furby shortages and gold shortages. Hey Paul! If you've got some gold, I've got some Furbys. Let's do a deal.

-- Vic (Roadrunner@compliant.com), February 06, 1999.

"the number of gold coins struck by the mint is regulated by law. Without a special act of Congress, the mint simply can't make any more of the things."

Good point. This is why coin collectors pay attention to whether the mint for a particular had a high or low volume.

-- Shelia (shelia@active-stream.com), February 06, 1999.