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September 2015

Dealing with the Chaos of the U.S. Gold Market

     One of the most difficult aspects of the Gold market to understand is how physical demand can be so strong yet the price of bullion swings back and forth with no apparent charted course. We have watched Gold fall over the last several months to well under $1,100 an ounce. Despite this downturn, there have been many reports on the increase in the demand for Gold and other metals as they are being purchased because of weakening or failed world economies. In addition, every time the U.S. Mint offers a new product, whether it is Gold, Silver, or Platinum, there has been tremendous demand with sell outs and back orders. Even if you ascribe to the theory that so-called big banks control the direction of the metals, in the long run, we all believe that we need a certain portion of our assets to be Gold, Silver, or Platinum.

     Ten years ago Gold bullion was in the $410 to $500 range. For the next decade, we watched it climb toward the $2,000 mark. Although it did not quite reach that high, according to the London Gold fix, it did close as high as $1,895 on September 5, 2011.

     We can all agree that demand is much stronger today than it was back in 2005. But let’s take a look at various U.S. Gold coin prices comparing the FMV at the beginning of 2005 against today’s FMV. In January 2005 the price of Gold was $425. The chart below shows the FMV prices for a common $2 ½ Liberty in various grades.

Generic $2 ½ LibertyMS60MS63MS64MS65
FMV January 2005$280$840$1,090$2,150
FMV September 2015$401$600$760$1,230

     Over the last ten years the MS60 has gained $121, yet the price of Gold increased over $600 using today’s price of $1,132.50. A look at the MS65 shows a downturn of $920 over this timeframe. The chart below for the $2 ½ Gold Indian reveals similar results, only more dramatic. The MS65 has lost $4,780 in ten years and the MS64 is down $1,300. Most of our comparisons for generic U.S. Gold coins are about the same; so what has caused this erosion in the face of higher Gold bullion?

     The simple answer may be that there has been a sharp increase in the number of coins certified in each grade over the last ten years. Looking at the PCGS population for the 1926 $2 ½ Gold Indian in MS65 shows there were 429 coins graded in October 2005 and today there are 702. That is an increase of just over 63%. Another example, in the $10 Liberty series, is the 1901 S in MS65 where we found 627 coins certified by PCGS in 2005, while today there are 1,004; a 60% increase.

     As you can see from the comparisons of the other series below, most of them follow the same format. The exceptions are in the Ten and Twenty Dollar Gold series, where the bullion value of the lower Mint State coins has increased enough to advance the FMV; higher premiums forced FMV prices to higher levels as well. The $20 St. Gaudens is the only one of all the denominations to advance in MS65; all the rest have declined.

Generic $2 ½ IndianMS60MS63MS64MS65
FMV January 2005$250$1,380$2,200$6,690
FMV September 2015$384$630$900$1,910
Generic $5 LibertyMS60MS63MS64MS65
FMV January 2005$210$810$1,720$4,220
FMV September 2015$496$555$970$3,130
Generic $5 IndianMS60MS63MS64MS65
FMV January 2005$330$1,800$3,910$15,940
FMV September 2015$525$1,120$2,520$9,750
Generic $10 LibertyMS60MS63MS64MS65
FMV January 2005$325$1,000$2,040$4,860
FMV September 2015$830$1,090$1,740$3,440
Generic $10 IndianMS60MS63MS64MS65
FMV January 2005$445$950$1,930$4,690
FMV September 2015$860$1,180$1,590$3,530
Generic $20 LibertyMS60MS63MS64MS65
FMV January 2005$595$840$1,690$5,130
FMV September 2015$1,520$1,770$2,020$4,170
Generic $20 St GaudensMS60MS63MS64MS65
FMV January 2005$610$700$820$1,440
FMV September 2015$1,530$1,630$1,730$2,230

     Although we pointed to an increase in the number of coins certified by grade as the main reason for the fall in FMV prices over the last ten years, there is more to it than that. The lack of demand at the higher levels has led to the drop in values. One reason that stands out is the fact that the U.S. Mint has produced so much Gold product during this time frame that collectors have turned their interests toward lower premium modern coins rather than the more collectable classic U.S. Gold coins. Millions of dollars that could have been spent on earlier U.S. Gold has been spent to purchase no less than 200+ different varieties of modern Gold coins from the U.S. Mint. By the way, the U.S. Mint has a virtual unlimited budget for advertising with which coin dealers cannot compete.

     Whether it is a lack of demand or money shifting to modern Gold coins, eventually dealers and collectors will come to the realization that nearly all the modern coins have large quantities available in the marketplace while the older U.S. Gold pops have been rather static for a long period of time. This should lead to a shift back toward U.S. Gold coins, and FMV prices for these classics will rise again.

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