There’s Really No Rush to Buy Gold Coins

Americans are scrambling to pay around $450 for the $50 American Eagle coin because it’s gold. Those overachievers the Japanese are lining up to buy a 100,000-yen (about $640) coin that contains gold worth 40,000 yen ($256). All told, sales in the world gold coin market could balloon this year to 12 million ounces--worth around $5 billion, or 780 billion yen.

You don’t need an economist to see what is happening: More people than was previously believed want to own a little gold. The U.S. Mint realized as soon as it began issuing American Eagles on Monday that its plan to mint 2 million ounces was too modest. “We’ll meet the demand, and undoubtedly that will be more than 2 million ounces,” said a spokesman for the Mint after its initial allocation to coin dealers was oversubscribed. In Japan, the government is selling 6.4 million ounces of the Emperor Hirohito commemorative coin.

In each country, there are particular reasons for the coin buyers’ enthusiasm--patriotism, novelty, tax considerations in Japan--but the overriding explanation is that people are voting with their pocketbooks for something of value in changing, uncertain times. And the worldwide demand for the American Eagle indicates that many people would have bought gold earlier if it had been available in convenient form.

Time-Honored Practice

A global market in coins already existed, of course, but it was smaller. Last year, 4.2 million ounces of gold coins were sold, with the Canadian Maple Leaf having displaced the politically damaged South African Krugerrand at the head of a market that also included Chinese Panda coins, Mexican pesos and British sovereigns. Also, buying gold bullion is a time-honored practice among many of the world’s peoples. But coins make gold handy and cheaper (lower storage charges) for the mass-market customer. And safer, too, because the issuing governments attest to the gold content of their coins.

Evidently, that makes a difference: Americans have had the right to buy gold since 1975, but relatively few did so until the minting of the Eagle.

Why do people buy gold? Because it is thought to hold its purchasing power over time while paper money is destroyed by inflation.

Murray Church, a marketing representative of the Canadian Mint, says one rule of thumb is that an ounce of gold (currently around $425) will keep pace with the rising price of a good suit of men’s clothes. Such claims are hard to validate, however, because timing seems so crucial. For example, gold hit $875 an ounce in 1980. It is less than half that now. If you bought in 1980, has gold held its purchasing power?

Panic Buying Is Unwise

Not a fair comparison, counter the gold experts; look to the long term. The $100 you had in 1965 is worth only $28 now, says one gold authority, citing inflation’s erosion of paper money’s purchasing power. Yes, but money invested at compound interest holds its purchasing power. That 1965 $100 invested at 5.5% would be more than $300 now, roughly offsetting the intervening inflation.

But why quibble? If people want to buy coins, it’s their money. They should be aware, though, that the present panic buying is unnecessary and unwise. George Parola, vice president of Deak International in New York, says customers are offering to pay any premium to get the Eagle; Security Pacific Bank in Los Angeles reports the same urgency.

Those customers should know that 5% to 6% over the price of gold is the normal premium covering costs of minting and wholesale and retail distribution. And there is no need to pay a further premium for scarcity--the U.S. Mint will produce as many Eagles as necessary, and there is certainly no shortage of gold in the world. World production was 50 million ounces last year, according to the Gold Institute, a Washington trade organization, and if that is not enough, the world’s governments hold 1.2 billion ounces in their central banks--263 million by the United States.

In any event, supply and demand have little to do with the price of gold; international political and economic stability and direction do. Gold stayed at $35 an ounce from 1933, when the United States set that price, until the late 1960s, when U.S. economic dominance and the strength of the dollar began to unravel. Gold was stable, too, throughout the 19th Century because Britain provided world economic leadership.

Today no government, including our own, is exercising leadership in the world economy. Rather, currency relationships are changing dramatically, nations appear only to be bickering with each other, and inflation (back to 3.6% in the latest report) is at least getting warm again. And people everywhere are buying gold coins. Who can argue with them?