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August 25, 2008

Eagle Rationing: Where there's Smoke, there's Fire
by John Lee

The U.S. Mint announced Monday that it would resume taking orders of American Eagle coins on a limited basis after last week's sales suspension. At this very moment in time, orders on gold coins are taking weeks or even months to fill. From Reuters' report (available here):

U.S. Mint resumes gold coin orders on limited basis

Mon Aug 25, 2008 12:08pm EDT

NEW YORK (Reuters) - The U.S. Mint said it must allocate the American Eagle bullion coins among dealers to cope with overwhelming demand as it resumed taking orders for the popular coins on Monday. "The unprecedented demand for American Eagle gold one-ounce bullion coins necessitates our allocating these coins among the authorized purchasers on a weekly basis until we are able to meet demand..." Last week, soaring demand forced the U.S. Mint to suspend temporarily sales of the American Eagles, creating a shortage... The buying spree and the subsequent shortage of the Eagles have improved momentum in gold as market participants interpret it as a sign of increasing retail investor interest in gold and other precious metals...

A quick trip down memory lane is in order. Back in 1933, President Roosevelt signed Executive Order 6102 and made it illegal for anyone to own more than $100 worth of gold (5 ounces by 1933 prices). Citizens had to turn in all excess gold to the Federal Reserve in exchange for paper money. The gold coins were melted down into bars by the U.S. Treasury department. This was done to keep the U.S. dollar afloat and avoid panic in the overseas market. The tactic worked. Gold prices hovered around the fixed price of $35/oz until 1971 when President Nixon closed the gold window; when President Gerald Ford lifted the ownership ban in 1974, open-market gold was trading at nearly four times the fixed price.

If a law restricting gold ownership is impractical today, I suppose the next best thing would be to restrict the supply of gold, while shorting COMEX gold futures to suppress the gold price. If my speculation on this turns out to be correct, the scheme can't last for more than a few months as foreigners will smell this rat and begin to corner gold by massively hoarding the metals and eventually causing the gold ceiling to explode upwards.

If the physical supply constraint persists, we might indeed see that behind all this smoke, there's fire (i.e., the US government has run out of gold with which it's willing to part). Time (months, not years) will tell, quite soon.

John Lee, CFA
www.maucapital.com

John Lee is the founder and principal of Mau Capital Management and the portfolio manager of a mining equity hedge fund. He is a CFA charter holder and has degrees in Economics and Engineering from Rice University. Mr. Lee has a keen interest in the history of money and economics, and has previously studied under Mr. James Turk, a renowned authority on the gold market.

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