Government Issued Bullion

Tarek Saab, President of GoldandSilverNow, has posted an opinion on investor preference for Government issued bullion over private mints. Tarek favours private mints and discusses some of the arguments put forward for Government coins. As seems to be my habit, I offer come comments:

“If one doubts the integrity of our politicians and the financial system, why demand a coin issued with the full faith of the same architects manipulating it? … Instead of blindly accepting the markings on any coin, buyers should always be cautious.”

I agree with the last sentence, but the rest of the argument can easily be turned on private mints – greedy “private” banks, Enron, etc, there are plenty of examples of privately run companies that have defrauded consumers. The only thing that matters is the test of the market. I would suggest that investor preference for Government coins is probably because of decades of coins that have been of stated purity – can Tarek name one case of underweight or under purity coins? I think this proves that no matter what idiots are running the Government, they have not stooped to interfering with the integrity of their mints.

Of course, this is not to say that debasement cannot happen and investors should be alert to this. I think it is worth noting that the people running Government mints, just like their private counterparts, take their reputation seriously. All of them are part of the Mint Directors Conference and it is a small industry. It is my view that none of them would take kindly to politicians telling them to debase their coins – it would be an affront to their integrity and irreparably damage their reputation and career in the industry. If it was done, I would not be surprised to see whistleblowing, but if not certainly to see resignations, which is what I would suggest investors watch out for.

I think it is also improbable that politicians would bother to debase their precious metal coinage. Considering how little is produced, what would be the amount of money saved? Certainly it would be difficult to underweight the coins as this is easily detected, so reducing the purity would be how it is done but there is a limit to this. Again, this argument can also be turned on private mints – it could be argued that the profit motive provides more temptation to mint owners to save a few bucks by having slightly under purity coins.

In the end, I this the point Tarek is making is a double edged sword. Yes, politicians lie and are hard to trust, but if you are so poisoned by this lack of trust that you question all Government agencies, then I doubt that you will trust a profit seeking private owner of a mint.

“worried about dealers recognizing private-issue bullion”

On this point, Tarek is correct. Any decent bullion dealer should know all the products out there and their reputation. If the private coinage has a good name, a dealer should be willing to buy it back. Some may be conservative and buyback at bit of a discount, but this may also reflect the fact that there are not as many willing buyers. In any case, investors should always consider their exit strategy and on that basis ask those to whom you hope to sell, what they will pay for private issued bullion, then you will have no surprises.

“The face value of these coins is already inconsequential.”

True, but I think when someone says a coin is legal tender, it is just a way of saying they are Government issued and guaranteed.

“The availability of government bullion rises and falls dramatically with market conditions.”

So, this is because demand rises and falls and the same applies to private mints, probably more so as being profit focused they are less willing to sit on unsold stock. Tarek’s statement that dealers were put on waiting lists (and some Mints have moved to rationing instead of extending lead times) also applies to some private mints. I think the problems that Government mint have experienced reflects the fact that investors prefer their product over private mints, hence they have excessive demand. It would be my view that if demand shifted to these private mints then they would also experience availability issues. Northwest Territorial Mint is an example as they have had the same lead time blowouts as Government mints.

“Considering the risk involved with the default of any business in our present economic situation, and beyond that, the risk involved with the default in each business’ bank, I find it mystifying that investors would harbor the risk of floating hard-earned cash for lengthy periods of time.”

How is this an argument against Government mints? It is private enterprises that are failing and need Government bailouts. This is more an argument against leaving your money with private mints. Anyway, in this current market, any mint would have to be spectacularly mismanaged to lose money making coins and bars, so I don’t really think this is a big risk.

“many customers purchasing U.S. Eagles are now being asked for their social security numbers … the threat of a 1936 gold confiscation lingers like a bad toothache”

I doubt it is just about whether you are buying US Eagles, anti-money laundering rules would generally require identification of any bullion purchase – bar or coin, Government or private. It is how you buy it, not what you buy that matters. If your worried about confiscation, do it under the reporting threshold for cash and don’t have it mailed to you (otherwise records exist at the courier companies). It is also worth noting that is confiscation occurs, whether it is legal tender, privately issued, bars or coins, is not going to matter – they ain’t going to leave any loopholes.

One final point. Don’t take my comments above as an argument against private mints. The fact is that Government mints are generally conservative organisations and are thus a bit more cautious about making capital expenditure decisions to ramp up production in the face of increased demand. Private mints provide welcome flexibility and are probably more likely to want to take a risk on gearing up to meet demand. This is needed – as I point out in this blog, the industry as a whole was/is not ready for any significant increases in demand for gold coins. If gold ownership is to be more widespread, we need more capacity, and quickly as the rush could come any day if people lose confidence in the modern experiment with fiat currency.

I’m a firm believer in free and fair competition and certainly some Government mints could do with it and some will fear it, too bad. Let me close with a plug for the Perth Mint. Of all of them, the Perth Mint is probably best placed because while it is owned by a Government, is not subsidised and does not have a circulating currency business to help with cross-subsidising its products. Therefore it has had to survive by competing with private and Government mints and so is ready for the challenge.

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