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Chart In Focus

Gold Coins Can Bring a Message

Chart In Focus
May 24, 2013

Have you noticed lately that the gold coin dealers seem to have pulled their ads from TV and radio programs?  They perhaps don't see this as being a fruitful time to convince people to buy gold coins, when the investing public seems to be convinced that gold can only go lower. 

I have just learned recently that the behavior of gold coin dealers can offer us an interesting insight about where gold prices are headed, but perhaps not in a way one might have imagined.  The Wall Street Journal publishes prices for gold coins on its web site every day.  They even offer historical data going back as far as June 2007. 

Not surprisingly, gold coin prices usually follow very closely with what spot gold (Handy & Harman) prices are doing.  But they don't track the spot price perfectly, and sometimes there can be information in that tracking error. 

One interesting insight is contained in the chart above, which shows the varying premium priced into American Eagle gold coins over the spot price.  WSJ says that the source for this data is Manfra, Tordella, & Brookes, a gold coin and bullion dealer located in lower Manhattan.  That location in part explains the big hole in the data in November 2012, when Hurricane Sandy shut down a lot of New York City, including MTB's operations. 

What I discovered when looking at this data on American Eagle pricing is that the average premium over spot is around 4.88%.  But whenever it gets up above 6%, the days which follow nearly always see a rise in gold prices.  That does not necessarily mean that a >6% reading is a bottom for gold prices.  Absolute bottoms or tops are much less important than the direction forward from any given point, and when there is a bullish bias after a certain event, that's really useful information. 

I confess that I am no expert on the inner workings of the gold coin market.  I have never run a gold coin store, never bought and sold multiple gold coins over a protracted period of time.  I just look at what the data say, and what I see in this week's chart seems to show a periodically useful edge in terms of figuring out what gold prices will do, if one is willing to look patiently at gold coin prices every day and wait for those pearls to appear. 

Interestingly, this phenomenon is not confined to just American Eagle gold coins.  Here is the premium over spot prices for Canadian Maple Leaf coins:

Gold Maple Leaf coin premium

The average premium over spot for Maple Leaf coins is 4.6%, and readings above around 5.5% tend to be followed by gold price rallies over the next several days in the same way that this principle works for American Eagle coin pricing. 

It also works for Krugerrands:

Krugerrand coin price premium

When I say it "works", I am referring to this phenomenon of the quoted coin price's premium spiking up well above average, which for Krugerrands seems to be about 3.8%.  Readings above 5.0% over spot tend to be followed by rising gold prices over the next several days.  I don't have a good explanation, though, for why the quoted Krugerrand premium dropped close to zero for 2 months after Hurricane Sandy, and then returned to more normal levels. 

I don't know if this is a case of the smart gold coin dealers sensing that a rally is coming, and thus bumping up their prices to take advantage, or if some other market dynamic is at work.  I just know what I see in the data. 

One potential problem with this data is that it only comes from one source, and we don't know how wide of a survey net they cast when gathering this price data.  But on the positive side, the data are easily available. 

Interestingly, this momentary pricing anomaly for gold coins arrives at the same time that the Commitment of Traders (COT) Report data are showing that gold and silver traders are at historic extremes of sentiment.  In other words, things looks like a bottom for gold prices which should matter not just for a few days to follow, but for weeks or months.  We cover the relevant COT Report data every Friday in our Daily Edition

Tom McClellan
Editor, The McClellan Market Report

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