March 28, 2024

Value Investor Loads Up On Gold Bullion

Panicky investors may be dumping their gold, but one investor with a superb long term track record of value investing is loading up on gold bullion.

In a Fortune interview, Charles de Vaulx, who runs the IVA Worldwide Fund, explains why his $10 billion fund holds over 7% in gold bullion.

At the time of the interview, gold was selling at $1,900 per ounce and de Vaulx was bullish based on a “mistrust of policymakers, be they in the U.S., Europe, Japan, or even China.”  The inability of politicians to arrive at agreements in the face of a looming debt crisis gives gold an inherent value that paper currencies do not possess.  As to why he would still be buying gold after a sevenfold rise since 2001, de Vaulx said that “the paradox with gold is that even though the price has gone up so much, it is still under-owned.” (See Americans Remain Underinvested In Gold.)  The IVA Fund has invested only in gold bullion which is viewed as being “safer and cheaper” than gold mining stocks.

Regarding the U.S. dollar, de Vaulx thinks that over the long term, the U.S. will be forced to solve its massive debt problems through currency debasement and inflation.   Initially, the bursting of a credit bubble causes deflationary problems but ultimately the policies of the Federal Reserve will produce inflation.  Fed policies will accordingly result in poor returns for bond investors who have sought shelter in U.S. treasury securities.

The circumstances under which de Vaulx would reduce his gold positions would be if policy makers are able to institute policies that would encourage sound currencies or if the values of equities become “truly cheap.”

According to Fortune, de Vaulx launched his fund only three years ago.   Based on a long term track record of superior investment returns, de Vaulx was able to quickly attract $10 billion in assets.  Due to the recent panic sell off in the gold market, de Vaulx’s fund has taken a hit, but my bet is that de Vaulx is taking advantage of the situation by scooping up more gold at bargain prices.

US Mint Gold and Silver Bullion Coin Sales By Month

Through the end of April, the United States Mint has now sold 466,000 ounces of gold and 16,375,000 ounces of silver through its bullion coin programs. In both cases the figures are far ahead of the numbers from the comparable year ago period, despite the higher market price per ounce for the bullion.

Last year through the end of April, US Mint gold bullion sales were 388,000 troy ounces, while the price of gold ranged from a low of $1,058.00 to a high of $1,179.25 per ounce. Silver bullion sales during this period were 11,531,000 with the market price ranging from a low of $15.14 to a high of $18.84 per ounce.

US Mint Gold and Silver Bullion Sales (in ounces)

January February March April Total
American Gold Eagle 133,500 92,500 73,500 108,000 407,500
American Gold Buffalo 38,000 20,500 58,500
Total Gold in ounces 133,500 92,500 111,500 128,500 466,000
American Silver Eagle 6,422,000 3,240,000 2,767,000 2,819,000 15,248,000
ATB Silver 1,127,000 1,127,000
Total Silver in ounces 6,422,000 3,240,000 2,767,000 3,946,000 16,375,000

During the latest month of April 2011, the US Mint recorded sales of 128,500 troy ounces of gold bullion, comprised of 108,000 ounces worth of American Gold Eagles and 20,500 ounces worth of American Gold Buffaloes.

Meanwhile, silver bullion sales for the latest month reached 3,946,000 ounces, the second highest level of the year. For three months running, the pace of sales for the American Silver Eagles had remained approximately the same base level, despite indications of higher demand. The restrained sales are presumably the impact of the US Mint’s allocation program, which rations the available number of bullion coins amongst the authorized purchasers.

The boost in silver bullion sales seen in April was due to the release of the 2011-dated America the Beautiful Silver Bullion Coins. These coins each contain five troy ounces of silver and have a diameter of 3 inches. Sales began on April 25, 2011, and authorized purchasers immediately purchased coins accounting for 1,127,000 troy ounces of silver.

Are Gold Stocks Really Underforming Gold Bullion?

Depending on which gold stock investor you talk to, gold stocks have either been under performing or outperforming gold bullion.

Theoretically, given the earnings leverage associated with gold miners, a big move up in gold bullion should translate into handsome gains for shareholders of gold mining companies as earnings per share increase.  In the real world, however, the cost of exploration and development, mine depletion and the energy intensive process of gold mining and refining can result in costs that exceed the increased revenue from higher gold prices.  Gold mining companies with operations in less developed countries with weak property rights can also wake up one morning and discover that the government has expropriated their mines.

So which is it?  Would it have been better to own gold stocks or simply buy a gold ETF or take physical possession of gold bullion?  Like many things in life, it all depends, and the result reinforces the argument to maintain a well diversified portfolio.

Gold miners that have been able to translate higher gold prices into higher profits have done very well while other gold miners with poor results have significantly lagged the gains seen in gold bullion.   The results have been company specific.  A gold stock investor who was correct in predicting higher gold prices but picked the “wrong” gold stocks fared poorly.

Here’s a sample of the relative performance of some of the largest gold miners compared to the price of gold, using the SPDR Gold Trust (GLD) as a proxy for bullion prices.  Two major gold miners, Newmont Mining Corporation (NEM) and Kinross gold Corporation (KGC), dramatically under performed the GLD, while Goldcorp (GG) tracked the GLD performance.  If you were lucky enough to own Randgold Resources (GOLD), your profits would have been twice the gains on the GLD.

RELATIVE PERFORMANCE STOCKS VS GLD - COURTESY YAHOO FINANCE

The bottom line is that unless an investor has considerable expertise in assessing the gold mining industry and specific company prospects, the better choice was to go with a gold ETF or stash gold bullion in a safe deposit box.  If the biggest gains in gold prices are yet to come, as I believe, an investor with a 100% allocation to individual gold stocks should consider reassessing his portfolio allocation.

The last option that should be mentioned for those seeking higher returns from the leverage of owning gold stocks instead of a gold ETF, would be to invest in a gold mutual fund with a solid track record of investment success.

Tocqueville Gold Fund Performance vs. GLD

The Tocqueville Gold Fund(TGLDX) is a highly regarded mutual fund with solid portfolio managers who have had a very successful track record in picking the right gold stocks.  Over the past two years, the TGLDX has outperformed the GLD and with far less volatility.

Sales of US Mint Gold Bullion Coins Slower on the Week

Gold Eagle Sales Slower, Silver Eagles Little Changed

The number of ounces of gold sold through the US Mint’s bullion programs was slower the past week. Meanwhile, sales of silver bullion rose slightly, although they remain within the same basic range seen over the past several weeks.

The US Mint sold 17,500 troy ounces of gold bullion for the weekly period ending April 13, 2011. This consisted of 13,000 ounces of American Gold Eagles and 4,500 ounces of American Gold Buffalo coins. All gold bullion coins sold during the week were one ounce coins, with no fractional weight coins sold.

This sales level is down from the 32,000 ounces sold in the previous week. The drop may be the impact of seasonality, as precious metals sales tend to be slower around the US individual income tax filing deadline. For the year to date, gold bullion sales have reached 390,000 ounces.

US Mint Bullion Coin Program Sales 4/13/2011 (ounces)

Prior Week Month to Date Year to Date
American Silver Eagle 715,500 1,374,000 13,803,000
American Gold Eagle 13,000 45,000 344,500
America the Beautiful Silver 0 0 0
American Platinum Eagle 0 0 0
American Gold Buffalo 4,500 7,500 45,500

Silver bullion sales for the week reached 715,500 ounces, consisting entirely of the one ounce American Silver Eagle coins. As mentioned in previous reports, these bullion coins continue to be subject to the US Mint’s allocation program. This serves to ration the available supply of coins amongst the authorized purchasers. As such, the weekly sales levels are an indication of the number of coins the US Mint was able to produce and make available, as opposed to the level market demand.

The US Mint has plans to expand the production of Silver Eagles by utilizing the facility at San Francisco, which may be able to strike a few hundred thousand additional coins per week. Test strikes have reportedly begun, and full scale production is expected to begin some time next month. Hopefully, this will alleviate some of the excess demand for silver bullion coins, although it doesn’t seem like it will solve the problem completely.

Ron Paul Links Bullion Coin Shortage To Horrendous Currency Debasement

Rep. Ron Paul, during a Subcommittee hearing on problems at the US Mint, linked the shortage of gold and silver coins to the “huge debasement” of the United States currency.

The remarks came during a hearing by the House Financial Services Subcommittee on Domestic Monetary Policy, entitled “Bullion Coin Programs of the United States Mint: Can They Be Improved?”  Four different coin and previous metals industry experts provided testimony on how to address ongoing problems with coin production and shortages.

After some lengthy discussion by witnesses and committee members regarding shortages of silver coin blanks and marketing and production problems at the US Mint, Rep. Paul focused on what he considered to be the primary reason why the US Mint was, at times, unable to meet public demand for gold and silver coins.

Listed below are highlights of Rep. Paul’s remarks at the Subcommittee hearing.

  1. It is “imperative” that the US Mint should be able to produce an adequate supply of coins to the U.S. public.  According to Rep. Paul, investors are rushing to purchase gold and silver due to quantitative easing by the Federal Reserve.
  2. The US Mint should take the appropriate steps to source enough planchets to meet public demand for gold and silver coins.  People are worried, stated Rep. Paul, and are trying to preserve their wealth through the purchase of gold and silver due to government policies that will lead to inflation and debasement of the currency.  Rep. Paul stated that “If we had a sound currency” there would not be a shortage of gold and silver coins since demand by the public would be a non event.
  3. Rep. Paul detailed the “horrendous huge debasement” that has occurred with the US currency.  In the early 1930’s, when gold was on a fixed exchange rate with the US dollar, the dollar was worth 1/20 ounce of gold.  It was subsequently devalued to 1/35 ounce of gold during the 1940’s, to 1/38 ounce of gold in the early 1970’s and to 1/42 in 1973.  Once it became legal for US citizens to own gold and the dollar was based on market prices, the value of one dollar subsequently dropped to 1/1450 ounce of gold.
  4. Rep. Paul noted that total annual demand during 2011 for Silver Eagle bullion coins should reach 48 million ounces, but that total US silver production would amount to only 40 million ounces.  The US Mint should take all necessary steps to ensure that adequate supplies of silver are available to meet public demand for silver coins.

Although not specifically addressed, the issue of whether the US government is making an effort to limit the sale of gold and silver coin to the public remains an open question.  By law, the US Mint is required to produce coins “in quantities and qualities that the Secretary determines are sufficient to meet public demand”.  There were no US Mint representatives present at the Subcommittee hearing to explain why the US Mint is unable to comply with production mandates specified by law.

US Mint Gold Bullion Coin Sales Shift Back to American Eagles

In the past week, the level of gold bullion sales at the United States Mint rose to a three week high at 35,000 ounces. The level of silver bullion sales remained little changed from recent weeks at 658,500 ounces, as coins continue to be subject to the US Mint’s allocation program.

Buyers shifted their focus back to the American Gold Eagles, which accounted for 32,000 ounces worth of sales. In previous weeks, a larger portion of sales had taken place for the recently released 2011 Gold Buffalo. These one ounce 24 karat gold coins were made available to authorized purchasers starting on March 14. Prior to that date, the coins had last been available from the Mint on September 27, 2010.

US Mint Bullion Coin Program Sales 4/6/2011 (ounces)

Prior Week Month to Date Year to Date
American Silver Eagle 658,500 658,500 13,087,500
American Gold Eagle 32,000 32,000 331,500
America the Beautiful Silver 0 0 0
American Platinum Eagle 0 0 0
American Gold Buffalo 3,000 3,000 41,000

The US Mint sold 658,000 ounces of silver bullion in the form of one ounce American Silver Eagles. Since the 2011-dated versions of the coins were first released, the coins have been subject to the Mint’s allocation program. This program serves to ration the available supplies amongst the eleven authorized purchasers. While the rationing is taking place, the level of silver bullion sales represents the number of coins the US Mint has made available, rather than the demand of the market place.

At a House subcommittee hearing on the US Mint’s bullion coin programs held earlier today, one of the witnesses estimated that the US Mint loses about a third of potential bullion sales because they cannot meet full demand.

US Mint Gold and Silver Bullion Coin Sales

The weekly sales levels for the United States Mint’s gold and silver bullion coins were little changed from the levels of the previous period. Across the available options for gold, sales reached 23,000 ounces. Meanwhile total sales of 697,500 ounces of silver bullion were recorded.

The American Silver Eagle bullion coins feature the obverse design from the classic Walking Liberty Half Dollar. These coins were designed by Adolph A. Weinman and issued for circulation from 1916 to 1947. The reverse design features a heraldic eagle designed by John Mercanti specifically for the series. Each coin is struck in .999 fine silver and contains one troy ounce of silver.

Under current law, the US Mint is required to issue the coins “in quantities and qualities that the Secretary determines are sufficient to meet public demand.” Currently, the bullion version of the coins are subject to rationing, as demand exceeds the available supplies. Recent reports indicate that the US Mint will start limited production at the San Francisco Mint to supplement the production at the West Point Mint.

US Mint Bullion Coin Program Sales 3/30/2011 (ounces)

Prior Week Month to Date Year to Date
American Silver Eagle 697,500 2,069,500 12,429,000
American Gold Eagle 17,000 56,500 299,500
America the Beautiful Silver 0 0 0
American Platinum Eagle 0 0 0
American Gold Buffalo 6,000 38,000 38,000

The American Gold Eagle bullion coins feature the obverse design of the Saint Gaudens Double Eagle struck for circulation from 1907 to 1933. The reverse design features an image of a family of eagles designed by Miley Busiek. Coins are struck in 22 karat (.9167 fine) gold and are available in sizes of 1, 1/2, 1/4, and 1/10 troy ounces. These gold bullion coins are not currently subject to rationing.

American Gold Buffalo coins feature the obverse and revers design of the Buffalo Nickel, issued for circulation from 1913 to 1938. These gold bullion coins are struck in 24 karat (.9999 fineness) and come only in one troy ounce size. The US Mint began sales of the 2011-dated versions of the bullion coins on March 14, 2011.

Should I Buy Gold Bullion or Gold Trust Shares?

Gold trusts have probably been a decisive factor in promoting the ownership of gold and expanding the market to investors who would otherwise not participate in the market. Prior to the establishment of the gold trusts, investors had two primary options for investing in gold, both of which had drawbacks. Gold investors could purchase the shares of gold mining companies or physically purchase gold coins or bars.

The problem with investing in gold stocks or gold mutual funds is that the investment returns may under perform the appreciation in gold bullion. Many gold stocks have vastly underperformed the price appreciation of gold bullion due to company specific issues such as ore depletion, foreign expropriation, environmental problems or financial difficulties relating to the huge cost of mine exploration, development and production. Picking the right gold stock was often difficult.

Physically purchasing gold coins or bullion presents another wide array of problems and costs. Finding a conveniently located and reputable gold bullion dealer takes time and usually entails a trip to the dealer for every transaction consummated. Liquidity is an issue as well since the physical gold would have to be physically transported or shipped to a dealer prior to receiving sales proceeds. Transactions costs on each side of the trade can easily exceed 5%.  Physically holding gold is expensive due to security, storage, transportation and insurance costs.   Gold coins or bullion can also be lost or stolen, the ultimate nightmare for an investor.

Investment in gold share trusts eliminates all of the problems associated with stock selection and physically holding gold. Shares representing an interest in gold can be sold at any time throughout the trading day at market prices.   Investor ownership of gold trust shares represents an undivided, fractional interest in physical gold held by the trust.

Gold share trusts have become extremely popular with investors due to the advantages of owning gold via gold trust shares.  Investors have poured over $57 billion into two of the largest gold share trusts, the SPDR Gold Shares Trust (GLD) and the Sprott Physical Gold Trust (PHYS).

As gold prices continue to increase, the gold share trusts are likely to be the investment of choice for many investors seeking to establish or increase an investment in gold.

US Mint Silver Eagle Bullion Coin Sales Jump

The pace of United States Mint gold and silver bullion coin sales picked up in the prior week. The US Mint currently has available one ounce American Silver Eagles in allocated quantities and unrestricted quantities of American Gold Eagles.

The latest available statistics show an increase of 1,509,500 ounces of silver bullion sales. In the previous two weeks, the US Mint had sold 908,000 and 833,500. Although sales show a big increase, it could be higher if not for the US Mint’s allocation program. Authorized purchasers are currently limited in the number of coins that they can order, which means sales are not an indication of the full demand for silver bullion.

American Gold Eagle sales increased by 37,000 ounces since the last report. This compares to sales of 28,000 and 31,500 in the prior two weekly periods. The increased demand comes as the price of gold recently reached a new all time high above $1,440 per ounce. For the past several years the rising price of gold has been accompanied by strong demand for physical gold.

US Mint Bullion Coin Program Sales 3/2/2011 (ounces)

Prior Week Month to Date Year to Date
American Silver Eagle 1,509,500 0 9,662,000
American Gold Eagle 37,000 6,000 232,000
America the Beautiful Silver 0 0 0
American Platinum Eagle 0 0 0
American Gold Buffalo 0 0 0

Year to date US Mint bullion coin sales have now reached 9,662,000 ounces of silver and 232,000 ounces of gold. Both figures represent an increase from the average pace of sales experienced in the prior year.

During 2010, the average monthly sales level for Silver Eagles was 2,888,541 ounces, while the average monthly sales of Gold Eagles was 101,708 ounces.

US Mint Gold and Silver Eagle Bullion Coin Sales

Sales of the United States Mint’s gold and silver bullion coins remained on a relatively steady pace with recent weeks. Sales of 908,000 ounces worth of American Silver Eagle coins were recorded, along with 28,000 ounces worth of American Gold Eagles.

In the previous week, the Mint had recorded bullion sales of 833,500 ounces of silver and 31,500 ounces of gold.

The US Mint utilizes a network of authorized purchasers (AP’s) to distribute bullion products to the public. This small group of private sector businesses are allowed to purchase bullion coins from the Mint in bulk quantities, and in turn resell them to the public. The price charged to the APs is based on the market price of the metal plus a mark up.

The mark up for Silver Eagles is currently $2.00 per coin. The mark up for Gold Eagles varies based on the size of the coin. The premium levels are 3%, 5%, 7%, and 9%, for one ounce, one-half ounce, one-quarter ounce, and one-tenth ounce sized coins, respectively.

US Mint Bullion Coin Program Sales 2/23/2011 (ounces)

Prior Week Month to Date Year to Date
American Silver Eagle 908,000 2,638,500 8,152,500
American Gold Eagle 28,000 83,500 189,000
America the Beautiful Silver 0 0 0
American Platinum Eagle 0 0 0
American Gold Buffalo 0 0 0

For the year to date, the US Mint has sold 8,152,500 ounces of silver bullion and 189,000 ounces of gold bullion. All sales have taken place for the American Eagle coins. Later in the year, 24 karat Gold Buffalo bullion coins and 5 ounce America the Beautiful Silver Coins are expected to be made available.