Mint Widens Halt On Gold Coin Sales As Inventories Get Depleted

NEW YORK (Dow Jones) -- Citing extraordinary demand, the U.S. has broadened its freeze on sales of gold bullion coins in another sign that retail investors who are priced out of the futures markets have been piling up their holdings of the metal as a hedge against market uncertainty.

"Due to the extreme fluctuating market conditions for 2008, as well as current market conditions, gold and silver demand is unprecedented and the demand for platinum is unusually high," the U.S. Mint said in a memorandum released to its authorized purchasers.

The Mint added that it's halting the production and sales of several gold and platinum coins while putting a few other coins under allocation sales. The move, announced late Monday, follows a halt on sales of two other coins in September and August.

In times of economic and market turmoil, investors turn to gold as the ultimate tangible asset. Some gold dealers have reported unprecedented demand for coins and bars as the financial crisis around the world has intensified worries about a global slowdown.

Coins for retail investors

While the bulk of the 160,000-ton above-ground gold stock (about 5.1 billion ounces) is used in jewelry and the electronics industry, about 16% is held by investors for pure investment purposes, according to the World Gold Council. The gold investment market, however, is dominated by big institutions, which trade with one another directly in large orders through the opaque over-the-counter markets.

Gold is also traded through futures contracts in New York, Tokyo and a few other places. Futures trading, however, requires quite a bit of capital. One futures contract on the Comex division of the New York Mercantile Exchange, for example, represents 100 ounces of gold, or about $88,000 in current prices.

Gold coins provide an easier channel for retail investors, who can buy coins through dealers online, much like buying a book at Amazon.com. Since the South African Krugerrand became available in 1967, bullion coins have become increasingly popular among retail investors.

"Because of what's happened in the past and what I believe is happening now [ the financial crisis], it is imperative you own some gold, some real gold, gold you can bite down on, gold that clanks," said Dan Ferris, writer for DailyWealth, an investment newsletter.

The U.S. fabricated 22-karat American Eagle coins in 1986. The Mint introduced the American Buffalo gold coin, the first 24-karat gold coin in the U.S., in 2006. Twenty-four karat represents a gold purity of 0.9999.

Mint halts coins

The U.S. Mint said on Sept. 25 that it was temporarily suspending sales of American Buffalo gold 1-ounce bullion coins. "Demand has exceeded supply" for the coin and inventories "have been depleted," the Mint said in a memo sent in September.

Before the Mint suspended sales of the Buffalo coin, it had sold 164,000 of the coins this year, up 54% from the same period a year ago, according to Michael White, a spokesman at the Mint.

The Mint had to temporarily suspend sales of the 1-ounce American Eagle gold coins on Aug. 15. It then announced about a week later that sales of the Eagle coins would resume under an allocation program to designated dealers.

In late Monday's memo, the Mint said the 1-ounce Eagle and Buffalo coins will remain on allocation. But once the remaining inventory of the Buffalo is depleted, no more coins will be produced this year.

The Mint also announced that the inventories of the 1/2-ounce and 1/4-ounce Eagle have been depleted last week and no more coins will be produced this year.

The 1/10-ounce Eagle, the smallest size among the Eagle coins, was also sold out. More coins will be produced based on current blank supplies, but "once that remaining inventory is depleted, no more coins will be produced for 2008," the Mint said.

The Mint, the coin-producing division of the Treasury Department, also said the 1-ounce silver Eagle will be put under allocation, and inventories of all sizes of the platinum Eagle coins were depleted.

"Tightness in the gold market is fairly normal in a time of financial stresses," said DailyWealth's Ferris. "We've seen high demand for gold coins because the news about banks is all bad."

Amid the financial turmoil, gold prices have rallied. The December futures contract gained 5.5% in September on the Comex.

In spot trading, the London gold-fixing price, used as a benchmark for prices of gold for immediate delivery, rose 6% last month. The London fixing stood at $ 876.75 an ounce Tuesday afternoon.

Coin prices track the London gold-fixing prices, with a certain percentage of premiums, as production and distribution costs have to be added.

ETFs or coins?

But holding physical gold isn't the only choice retail investors have when they want to expand their portfolio to gold. The buying patterns of retail investors have shifted recently because more choices have been available, such as gold exchange-traded funds and gold certificates.

"Coins and bars are seen as somewhat higher priced, less safe in terms of storage and transport and less liquid than the custodial alternatives," said Jon Nadler, senior analyst at Kitco Bullion Dealers.

Indeed, investors are increasing their gold ETF holdings. Gold held by the SPDR Gold Trust (GLD), the largest gold ETF, surged 16% in September to 755.26 tons. That would rank the fund as the eighth-largest worldwide in gold holdings. The fund is holding more gold than countries such as China, Russia, and the U.K.

Ferris, however, said he didn't recommend buying ETFs when times are really bad.

"Sooner or later, it'll become clear the ETF is not gold. It's a stock," Ferris said. "When panicking investors need to liquidate securities portfolios, they'll sell the gold ETF with a mouse click. Once your gold is in your hands, you're less likely to sell into that panic."

  (END) Dow Jones Newswires
 10-07-08 1416ET
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