03 May 2009

Government Issued Bullion

Tarek Saab, President of GoldandSilverNow, has posted an opinion on investor preference for Government issued bullion over private mints. Tarek favours private mints and discusses some of the arguments put forward for Government coins. As seems to be my habit, I offer come comments:

"If one doubts the integrity of our politicians and the financial system, why demand a coin issued with the full faith of the same architects manipulating it? ... Instead of blindly accepting the markings on any coin, buyers should always be cautious."

I agree with the last sentence, but the rest of the argument can easily be turned on private mints - greedy "private" banks, Enron, etc, there are plenty of examples of privately run companies that have defrauded consumers. The only thing that matters is the test of the market. I would suggest that investor preference for Government coins is probably because of decades of coins that have been of stated purity - can Tarek name one case of underweight or under purity coins? I think this proves that no matter what idiots are running the Government, they have not stooped to interfering with the integrity of their mints.

Of course, this is not to say that debasement cannot happen and investors should be alert to this. I think it is worth noting that the people running Government mints, just like their private counterparts, take their reputation seriously. All of them are part of the Mint Directors Conference and it is a small industry. It is my view that none of them would take kindly to politicians telling them to debase their coins - it would be an affront to their integrity and irreparably damage their reputation and career in the industry. If it was done, I would not be surprised to see whistleblowing, but if not certainly to see resignations, which is what I would suggest investors watch out for.

I think it is also improbable that politicians would bother to debase their precious metal coinage. Considering how little is produced, what would be the amount of money saved? Certainly it would be difficult to underweight the coins as this is easily detected, so reducing the purity would be how it is done but there is a limit to this. Again, this argument can also be turned on private mints - it could be argued that the profit motive provides more temptation to mint owners to save a few bucks by having slightly under purity coins.

In the end, I this the point Tarek is making is a double edged sword. Yes, politicians lie and are hard to trust, but if you are so poisoned by this lack of trust that you question all Government agencies, then I doubt that you will trust a profit seeking private owner of a mint.

"worried about dealers recognizing private-issue bullion"

On this point, Tarek is correct. Any decent bullion dealer should know all the products out there and their reputation. If the private coinage has a good name, a dealer should be willing to buy it back. Some may be conservative and buyback at bit of a discount, but this may also reflect the fact that there are not as many willing buyers. In any case, investors should always consider their exit strategy and on that basis ask those to whom you hope to sell, what they will pay for private issued bullion, then you will have no surprises.

"The face value of these coins is already inconsequential."

True, but I think when someone says a coin is legal tender, it is just a way of saying they are Government issued and guaranteed.

"The availability of government bullion rises and falls dramatically with market conditions."

So, this is because demand rises and falls and the same applies to private mints, probably more so as being profit focused they are less willing to sit on unsold stock. Tarek's statement that dealers were put on waiting lists (and some Mints have moved to rationing instead of extending lead times) also applies to some private mints. I think the problems that Government mint have experienced reflects the fact that investors prefer their product over private mints, hence they have excessive demand. It would be my view that if demand shifted to these private mints then they would also experience availability issues. Northwest Territorial Mint is an example as they have had the same lead time blowouts as Government mints.

"Considering the risk involved with the default of any business in our present economic situation, and beyond that, the risk involved with the default in each business’ bank, I find it mystifying that investors would harbor the risk of floating hard-earned cash for lengthy periods of time."

How is this an argument against Government mints? It is private enterprises that are failing and need Government bailouts. This is more an argument against leaving your money with private mints. Anyway, in this current market, any mint would have to be spectacularly mismanaged to lose money making coins and bars, so I don't really think this is a big risk.

"many customers purchasing U.S. Eagles are now being asked for their social security numbers ... the threat of a 1936 gold confiscation lingers like a bad toothache"

I doubt it is just about whether you are buying US Eagles, anti-money laundering rules would generally require identification of any bullion purchase - bar or coin, Government or private. It is how you buy it, not what you buy that matters. If your worried about confiscation, do it under the reporting threshold for cash and don't have it mailed to you (otherwise records exist at the courier companies). It is also worth noting that is confiscation occurs, whether it is legal tender, privately issued, bars or coins, is not going to matter - they ain't going to leave any loopholes.

One final point. Don't take my comments above as an argument against private mints. The fact is that Government mints are generally conservative organisations and are thus a bit more cautious about making capital expenditure decisions to ramp up production in the face of increased demand. Private mints provide welcome flexibility and are probably more likely to want to take a risk on gearing up to meet demand. This is needed - as I point out in this blog, the industry as a whole was/is not ready for any significant increases in demand for gold coins. If gold ownership is to be more widespread, we need more capacity, and quickly as the rush could come any day if people lose confidence in the modern experiment with fiat currency.

I'm a firm believer in free and fair competition and certainly some Government mints could do with it and some will fear it, too bad. Let me close with a plug for the Perth Mint. Of all of them, the Perth Mint is probably best placed because while it is owned by a Government, is not subsidised and does not have a circulating currency business to help with cross-subsidising its products. Therefore it has had to survive by competing with private and Government mints and so is ready for the challenge.

4 comments:

Mark Herpel said...

Great post Bron, and a balanced intelligent response to Tarek's statements. It's probably important to also note that the web site GoldandSilvernow was taken down by the FBI recently though no fault of their own. Another company was selling pirated software or films from a 100% separate web hosting account. The gov. agents were extremely rude, disruptive and hostile which caused his business an enormous amount of down time and problems. So that may also factor into Tarek's mistrust of government anything and I tend to agree with Tarek on that matter. Also silver bullion whether it is private or gov. it's all the same to me but I look at gold much differently.

Mark

Tarek said...

Dear Mr. Suchecki,

Thank you for reading my article and for commenting at length. Mark sent me your response, which is well-articulated. Allow me, if I may, to clarify several points and perhaps offer a rebuttal:

In reading your response, I fail to understand your argument favoring government coins over reputable private issue coins. Perhaps I have misunderstood your position? Even if you disagree with my opinion about the advantages to selecting a private mint, perhaps we can agree to the equivalent nature of govt vs private-issue coins, which at the very least disqualifies the argument that consumers somehow benefit by choosing government coins.

BRON: (Regarding the full faith argument) "The argument can easily be turned on private mints - greedy “private” banks, Enron, etc, there are plenty of examples of privately run companies that have defrauded consumers."
RESPONSE: Yes, and most of our politicians come directly from the private sector - Bush, Geithner, Paulson, etc etc. Nevertheless, I think you have misstated my position. I am not arguing that private mints are necessarily more ethical than government mints; rather, I am arguing that government mints should not automatically be honored as being more ethical than private mints. They haven't earned the pride of place, and therefore paying an additional premium for a government backed coin is not a warranted use of capital. You asked "Can Tarek name one case of underweight or under purity (government) coins?" The answer is: no, I cannot, but then again, I am not the person to ask. Can you name one case of underweight or under purity coins from The Sunshine Mint, Johnson Matthey, Silvertowne, or Lydian? Assuming the answer is no, what is the argument in favor of the government mint? At best, we are comparing equals, which is precisely my point. I thought Jason Hommel's e-mail from Friday was an excellent testimony:

JASON HOMMEL, FRIDAY MAY 1ST:
"We are also selling the Lydian Mint's new 1/4 oz. gold pieces at the rocklincoinshop.com. So since we are selling them, we tested their purity this morning . .

There are four tests that will verify without a shadow of a doubt that a gold coin is real:

Weight, acid score, acid rub, and the ultimate test -- cutting it in half. To prove that our stock of Lydian Gold Coins were good, we took a random coin from the stock. The coin weighed out at exactly 7.775 Grams, exactly ¼ Troy Ounce, as indicated on the coin. Next, we made a small score on the edge of the coin, and placed a drop of nitric acid on it. Nitric acid will not affect gold, and did not affect the area of the coin that was scored. This verifies that the coin is not plated. The acid rub test is a standard jeweler's test, and verifies the karat weight of the coin. In this case, the coin tested at 24 Karat, or .9999 fine, as indicated on the coin. To conduct the final, ultimate test, we cut the coin completely in half to completely verify that the coin was indeed pure “all through.”

BRON: (Regarding availability) "So, this is because demand rises and falls and the same applies to private mints, probably more so as being profit focused they are less willing to sit on unsold stock."
RESPONSE: The US Mint owns a monopoly on the "legal tender" bullion market in the US, so its profitability is less impacted by competition than private mints, which must compete against a slew of "non-legal tender" mints. Because of the competition, most private mints run on very thin margins. As any dealer will confirm, there exists markets within the gold/silver market, and although demand rises and falls in the metals market in general, these fluctuations vary considerably amongst individual types of coins. It is a fact, not an opinion, that during the recent major shortage in October '08 demand for government issue coins far exceeded that of private mints, like the Sunshine Mint, for the very reasons I am arguing against in my article. All mints were affected, but some far more so than others. My point is simply that privately minted coins are always the last to become unavailable, and therefore lead times are very often more favorable for consumers.

BRON: (Regarding Default) "How is this an argument against Government mints? It is private enterprises that are failing and need Government bailouts. This is more an argument against leaving your money with private mints. Anyway, in this current market, any mint would have to be spectacularly mismanaged to lose money making coins and bars, so I don’t really think this is a big risk."
RESPONSE: Bear in mind that I am addressing the consumer market. The major dealers selling government coins ARE private companies, along with 4,000 other localized dealers in the US. They purchase from the mints in order to resell. When buying from a dealer, if given the option to wait 4 months for a US Eagle order or take delivery of a Sunshine Mint order immediately, why should a buyer wait? Even if the dealer is the most reputable company in the world, consider this: 36 banks have failed in the past year. What is the advantage to risking it? Why wait for a government coin if a private coin is readily available?

BRON: "Anti-money laundering rules would generally require identification of any bullion purchase."
RESPONSE: Not true in the U.S., though I am not sure about other countries.

Thank you again for your response. I appreciate your feedback, and I hope I have answered your questions.

All the best,
Tarek Saab
www.goldandsilvernow.com

Bron said...

Tarek,

As I say towards the end of my post, I don't have any problem with private mints and I am not really trying to make a case for Government mints, rather just countering your points against Government and for private.

Your statement "equivalent nature" is actually the crux of the issue and interests me particularly from a buisness strategy/marketing point of view.

I would agree that physically, as exemplified by your Jason Hommel quote, Government and private coins are "equivalent". This is to say that they are equal in purity and weight. However, this is only half the story, or half the value proposition to consumers.

Why do people buy gold? Because they don't trust fiat currencies, because they don't trust conventional products to store/protect their wealth. I therefore believe that when you are selling gold you are selling trust and peace of mind. Reputation is crucial to generating trust. So the second half of the value proposition is trust in the brand.

What is a simple marker/indicator of reputation - time. The fact is that consumers do not see, for example, equivalence between the Perth Mint which has been making coins for 110 years and someone established for 10 years. That is why I would not agree with your statement that "They haven't earned the pride of place."

This is proven by the facts you mention - premiums, willingness to wait, willingness to expose their money to a dealer while waiting (I did miss your point there). Indeed, it is no better demonstrated by the fact that the Sunshine Mint makes the blanks for the US Mint out of which Eagles are made, so logically Sunshine Mint product should trade at a premium to the US Mint, as they are the source!

I understand you frustration, but then is not the consumer always right? Having said that, I have worked in retail so know it is not always the case. My point is that this demonstrated consumer behaviour, this preference, is strong. You can't fight it with appeals to logic - you have to fight fire with fire, or brand with brand, that is, marketing. I think it is a lot easier to convince rather than change the consumer.

Out of curiosity, I checked out Lydian and Silvertowne websites. What a contrast. I didn't know how long Lydian had been in business and I still don't - its website has no mention of its establishment date or company history. The site is factual/logical and few images.

Compare to Silvertowne. In the header it says "since 1949" and in big capitals on the first page "OVER 50 YEARS". The images are all of a substantial physical building and showroom. This guy knows it is all about establishing trust.

I would be interested to know if Silvertowne products trade at a premium to Lydian - I'll probably be proven wrong :)

Anyway, for me, being a logical type person, there is only one criteria that matters and that is the buy/sell spread. There is no point buying a good quality coin at a cheap premium if bullion dealers are going to buy it back at 10% under spot. You want to check that there is product recognition and a resale market. One key marketing job of a private mint is therefore to make sure the bullion dealer community knows about your product and will accept it. Marketing to the distribution network, not just the end consumer is part of the game.

Tarek said...

Hi Bron,

Your response is quite true: "I therefore believe that when you are selling gold you are selling trust and peace of mind. Reputation is crucial to generating trust. So the second half of the value proposition is trust in the brand."

Reputation is a huge piece of the equation. All things being equal, it makes sense that one would select Perth or the US Mint over a competitor. No doubt. The reality is that not all things are equal, especially price, so the choice is quite often a difficult one for many consumers.

Your point about the spread is quite right, though the advent of eBay, SeekBullion, Gold&SilverNow, and other online vehicles are changing the marketplace by eliminating the middleman - the dealer. I think it will be interesting to see if a serious, prolonged shortage changes the retail landscape dramatically.

Pleasure discussing this with you, and best wishes in your business!

Tarek