Buyers Willing to Pay Premium for US Gold Coins

Tight supply prompted US Mint to suspend sales in April
May 31, 2013 Updated: May 31, 2013

After the crash of gold prices, demand for physical coins hasn’t let up. The U.S. Mint even had to suspend sales of its 2013 American Eagle one-tenth ounce gold coins in April. While shortages of physical gold certainly play a role, the peculiar production standards for the U.S. Mint play another. 

The one-tenth ounce “proof” coin was available again in mid-May, albeit at a price significantly above the prevailing market price for gold. The coin now sells for $190, implying a price of $1,900 per ounce. With the spot price of gold trading at around $1,400 May 30, this represents a premium of 36 percent. Even the one-ounce coin from the Mint only costs $1,710. Part of the reason is that the “proof” version of the coin has a higher collectible value and better packaging than the “bullion” version, which is available to the public through a network of dealers and distributors. 

The high premium also suggests that demand is big and supply is tight.

A May 28 article on the Zero Hedge website states, “that there were thousands of consumers willing to pay the exorbitant retail premium demanded by the US mint.” 

This analysis seems to be valid when looking at Mint statistics, the U.S. Mint sold 110,000 of the one-tenth ounce American Eagle coin in January, 70,000 in February, 35,000 in March, and the remaining 85,000 in April. After replenishing its stock, the U.S. Mint sold 50,000 in May, a total of 350,000 for 2013. 

Even compared to other bullion dealers, the price seems to be steep. The Blanchard website sells the one-tenth ounce gold American Eagle 2013 bullion version for $161, the Gold Eagle website for only $159.30. Are there other reasons than the difference of “proof” and “bullion” why the Mint running out of stock and charging higher premiums?

Mint Faces Supply and Time Constraints

“The U.S. Mint last failed to produce gold coins in 2009, yet frequently halts sales of some items temporarily due to a low supply of gold,” states an article on the BullionStreet website. One explanation could be the peculiar constraints under which the Mint has to produce its coins. 

The Gold Bullion Coin Act of 1985 stipulates that the U.S. Mint must produce the gold coins from gold supplied by United States mines or gold reserves held by the United States. Secondly, the coins must also be produced within one year from the end of the month in which the gold was mined. 

This puts the Mint at a disadvantage compared to other bullion sites, which buy and sell existing supply and do not have to produce themselves. In April, the low gold price compelled many bargain hunters to buy and the Mint could simply not keep pace with production. It first had to halt sales and then increase the price to reach an equilibrium level. 

Important Considerations for Coin Buyers

Before buying gold coins, investors should do their homework, including checking the cost per ounce of gold at spot prices comparing it to either coins minted for investment (bullion) or collectibles (numismatic). Taking the one-tenth ounce American Eagle as an example, the 36 percent premium over spot seems quite hefty. 

The one-ounce American Eagle coin only carries a 22 percent premium. Usually, the larger the quantity, the lower the premium. 

“Gold bullion coins trade at a small premium over the actual spot gold price because they are minted by sovereign governments that charge a fabrication fee,” said Jeffrey Bernberg, president of the Professional Numismatists Guild (PNG) on the website. 

Investors in gold coins should also understand the difference between bullion and numismatic coins, with the latter being collectable and rare coins, while the bullion coin is priced based on its metal content and production costs. The metal value depends on the spot price and demand for physical bullion, while the collectable is based on the rarity and special features of the coin. In this case, the “proof” coin sold directly by the mint commands a higher premium than the “bullion” version sold through a private dealer network.