Silver Eagle buyers sitting on stockpiles of coins
Published: Jul 12, 2016, 11 AM
The United States Mint's inventory of unsold American Eagle silver bullion coins continues to climb as authorized purchasers trim orders because of their own rising inventories.
The authorized purchasers who buy the bullion coins from the Mint also sell and buy back the coins on the secondary market. Some have recently purchased significant numbers on the secondary market, as investors dump the coins to take profits with the spot price climbing over $20 an ounce, where it remains.
Authorized purchasers have been presented with weekly allocations from the Mint for well over a year. What portion is available to a given purchasing company from the total allotment is based on the firm's previous purchase history.
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Allocations? Authorized Purchasers? How About a Quick Explainer?
The bullion coin market operates in a tier system structured something like a pyramid, with the issuing authority like the U.S. Mint at the top. The issuing government produces and then distributes the coins in large quantity through a narrow system of large distributors. Distributors in turn sell to wholesalers, who sell to a network of retailers, who then sell to the public.
Governments sell coins into the pipeline but will not buy them back. Selling the bullion coins through a network of private dealers enables a ready two-way market.
The authorized purchasers buy the coins from the U.S. Mint based on the closing London PM spot price of the metal per troy ounce on a given day plus a $2 premium per coin. The coins are then distributed for a small premium to other dealers, collectors and investors.
OK, now what about those allocations?
For the last year or so, the Mint has been making available to its authorized bullion purchasers a weekly allocation of American Eagle silver bullion coins because it has been unable to acquire sufficient supplies of planchets as demand skyrocketed to record levels in 2014, 2015 and 2016.
The allocation restricts the pool of available American Eagle silver bullion coins weekly, with distribution based on previous ordering patterns by the individual authorized purchasers.
The earlier problem in meeting consumer demand for the coins has not been the result of lack of production capacity at the West Point Mint, but instead derived from the inability of planchet suppliers to meet the demands of mints worldwide, although the U.S. Mint says that has changed.
Until recently, the Mint's allocations have sold out after only a couple of days. In recent weeks, however, as the price of silver has gone up, the allocations have not sold out and the Mint is carrying over inventory from week to week.
For most of 2016, the overall weekly allocation has been 1 million coins, with the exception of the first allocation of 4 million coins Jan. 11, which sold out in four days.
Any coins that remain unsold from any given week are carried over and added to the subsequent week's allocation. Over the past two months, coins have remained unsold from each weekly allocation. As a result, the weekly allocation announced July 11 was 3,649,500 coins, and orders were placed for only 175,000 coins that day.
2016 cumulative sales through July 11 reached 26,675,500 coins.
Despite a rising inventory from unsold coins, the U.S. Mint is not yet ready to modify its weekly allotment system, according to Tom Jurkowsky, director of the U.S. Mint's Office of Corporate Communications.
"We continue to assess the demand for silver bullion; however, it would be inappropriate to speculate on when the Mint would lift its silver allocation," Jurkowsky said July 11. Jurkowsky said the Mint is not experiencing any problem in securing planchets from its suppliers.
What are the authorized purchasers saying about the silver bullion situation?
Terry Hanlon, president of the Dillon Gage Metals Division in Addison, Texas, says there are a lot of sellers into the market with silver prices rising. There have also been a lot of sellers of gold into the market as well, he said.
Hanlon said distributors have been stockpiling American Eagles and other silver bullion issues, to enable immediate delivery to the customers that order them, after several were running behind in delivery earlier in the year.
APs and other major distributors have loaded their inventories with bullion issues preferred by investors, so as not to be caught without sufficient supply to meet anticipated demand, Hanlon said, but now "most APs are ordering less because they have inventory that they don't need right away."
Josh Wagoner, general manager of the The Gold Center in Springfield, Ill., says with the spot price of silver rising, his firm, too, has witnessed increasing selling, not buying, by investors. With the rising prices, some larger secondary market buyers and distributors have also reduced their buying, so as not to be caught with a lot of inventory at the top of the market.
Wagoner said he's seen the drop in investment buying over the past 45 to 60 days.
Last fall, when silver was $13 or $14 an ounce, Wagoner said, it didn't make much difference how high the premium was. Investors wanted the product, which was not easily available.
"I don't think the demand will catch up with what the Mint is putting out," Wagoner said concerning the Mint's American Eagle silver bullion coin inventory. "Something has to give to be able to handle the supply the Mint has available."
The U.S. Mint's sales to authorized purchasers are not necessarily indicative of investor demand, says Ken Lewis, chief executive officer of APMEX in Oklahoma City.
“Overall, silver sales have been somewhat softer during these early summer months compared to last year when silver was selling at an unprecedented level," says Lewis. "Despite this softer period, we continue to see the silver American Eagle perform extremely well and even gain share within our business year-over-year and especially over the last few weeks.
"Oftentimes, U.S. Mint production numbers are not necessarily reflective of current retail demand and market conditions, as many Authorized Purchasers order above actual demand and build up inventory throughout the year until they can no longer absorb the full product available from the Mint.”
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