The coin and bullion market during 2013 was one of the most interesting in recent memory, with wild swings in the availability, premiums, and price of gold and silver. At the time of this writing, gold and silver are on pace for their worst performance in 32 years, with estimated annual losses of 28% and 36%, respectively. While gold and silver were one of the biggest losers in the commodities futures market, demand for physical bullion was anything but, with widespread shortages and premiums approaching record highs. In this piece, we’ll address some of the highlights (and lowlights) in the coin and bullion market during the year and what we predict for 2014 as we head into the New Year.
As we entered 2013, gold was at $1,674 an ounce, and while off its highs set in late 2011 of $1,920 an ounce, was still in relatively high demand. As the year progressed, the price of gold dropped in part due to an improving job market, an increase in GDP, a rising stock market, and a strengthening dollar. While domestic demand was strong earlier in the year, it waned as the year progressed. Even though the price of gold was at levels not seen for a few years, by the end of 2013, gold bullion coins were selling at premiums in line with the historical average. While domestic demand was lukewarm as we finished out the year, demand in the Far East, and in particular, China and India, was nearly unprecedented. Numerous articles were published during the year discussing the shift in demand from the West to the East, including the following article from Bloomberg.
While we saw varying levels of demand for gold in 2013, demand for physical silver remained strong throughout the year. In fact, we saw nearly unprecedented demand and premiums earlier in the year, with shortages reported throughout the nation. At its peak, common date American silver eagles were selling at premiums of $10 or more per coin, 90% silver coins were selling at premiums of 18% – 25%, and Morgan silver dollars were selling for almost 50% above the melt value of the coins. At one point, 100 ounce silver bars from well known private refiners, such as Engelhard and Johnson Matthey were nearly impossible to come by. While prices have moderated for most of the coins highlighted above, premiums are still slightly above their historical average.
Numismatic or collectible coins had a strong year despite a poor year in the gold and silver markets, with the one exception being coins that are more closely correlated to the price of gold, such as St. Gaudens and $20 Liberty Head gold coins. Some of the historically popular numismatic coins, such as Carson City silver dollars, low mintage Morgan silver dollars, and high end examples of rare coins did quite well. In fact, 2013 was a record year for a number of “trophy” coins, as Yahoo Finance highlighted in a recent article. It’s not uncommon for numismatic coins and collectibles to perform well in a year where we’ve experienced higher asset prices, such as in the stock market and real estate market, and 2013 was no exception.
Thus far, we’ve highlighted the 2013 performance of the three primary coin and bullion markets, and wanted to take a moment to look ahead as to what we might experience in 2014.
We believe that the gold and silver markets will bounce back during 2014 for three primary reasons. The current price of gold and silver are below mining costs, which will put a significant strain on supply and will result in mine closings if we don’t see an improving market. The following article from Seeking Alpha estimates that the all-in mining costs for the largest mining companies during the third quarter was $1,244, which is approximately 4% higher than the current price of gold. Another article from Silverstrategies.com, estimates that the third quarter cost of production for the 12 primary silver mining companies, was $21.39, which is approximately 10% above the current price of silver.
In addition to mining costs, we believe that a declining dollar will help to lift the precious metals market. While the Federal Reserve has recently announced a tapering of their bond buying program from approximately $1 trillion a year to $900 billion a year, the level at which the Fed is expanding their monetary base is still nearly unprecedented. We should continue to see a weakening dollar versus other major currencies until the Fed reverses course.
Last but not least, fears of inflation will increase if the stock market and economy continue to improve, as the hyperinflationary rate at which the Federal Reserve has expanded its monetary base could translate into high levels of inflation if and/or when the velocity of money increases. This is further exacerbated by the fractional reserve banking system, which only requires banks to maintain 10% of reserves on hand. At the moment, banks are sitting on trillions of dollars of excess reserves. Once lending increases, the threat of inflation becomes a very real possibility.
In summary, 2013 was the worst performing year for the gold and silver markets in 32 years, but there’s reason to be optimistic for a rebound in the precious metals market as we head into 2014 for the reasons stated above. While holders of bullion coins lost a significant portion of their investment, the numismatic coin market did quite well, and by some accounts, had a record setting year. If asset prices drop during 2014, we could see a down year for the numismatic coin market, as in theory there will be less discretionary income available; however, the best investment approach may be to have a diversified portfolio consisting of bullion and collectible coins to help moderate volatility in your holdings. Be sure to regularly monitor our blog throughout the year for the latest news and trends affecting the industry.