Gold Eagle Premiums - Dealers add about $33

The cost of purchasing gold American Eagles from an internet dealer is about $33 per coin more than purchasing directly from the US Mint.  The $33 premium covers shipping, handling and volume.  The US Mint has a 1,000 ounce minimum purchase order quantity for gold and prices are f.o.b. West Point, NY.  The US Mint also requires its customers to have a letter of credit and audited financial statements.  

Note: it is not 100% clear whether the US Mint charges a premium on the gold content (0.9167 ounces) as the analysis above assumes or on the total weight of the coin (1.000 ounces).  If the later is indeed the case it would add $4 to the US Mint cost (roughly 3% on 8%).

The 'Coin Dealer' cost data is from a popular internet dealer.  Dealer commissions vary and are known to change over time.

From the US Mint:

http://www.usmint.gov/consumer/index.cfm?action=AmericanEagles

American Eagle Gold Bullion Coins

Public Law 99-185, enacted December 17, 1985, directs the United States Mint to mint and issue legal tender gold bullion coins. The coins are .9167 fine gold (22 karat), with the following weights and face values:  Weight – troy oz. Face value  of fine gold (denomination) 1 oz. $50  1/2 oz. $25  1/4 oz. $10  1/10 oz. $5 (In addition to the .9167 gold, the coins are composed of .0300 silver and .0533 copper.)

For the Gold Eagles, we charge 3%, 5%, 7% and 9% premiums for the one, one-half, one-quarter and one-tenth ounce coins respectively. Minimum ordering requirements are 1000 ounces.

The pricing of the precious metal content is established at the time of the sale: The London P.M. (second) Gold Fix on the date following the day of the order, excluding federal government holidays. The fixed premiums are a percentage of the gold price: 3 percent, 5 percent, 7 percent and 9 percent for the 1, 1/2, 1/4 and 1/10 ounce coins, respectively.

Purchased coins are authorized for release after receipt of payment is confirmed. All United States Mint gold bullion coins must be picked up freight-on-board (F.O.B.) at the United States Mint at West Point (West Point, New York). 

Gold Miners - No Growth in Production

The chart below show the trends for 7 large gold mining companies.  Gold production is down 2% CAGR from 2010 to 2013E despite dramatic increases in capital spending and cash cost.  Cash costs are increasing because miners are processing ore with lower yields and that is more difficult to mine (e.g. deeper in the earth).

Capital expenditures includes both sustaining and exploratory.  Exploratory capital investment will take longer than 3 years to pay back in this long cycle industry.  However some of these investments should be paying off now. Some of these investments must be paying off as increased production.  However, its seems that old reserves are being depleted at the same rate since total production is slowly declining.

The estimates for 2013 come from management reports and presentations made at the beginning of this year.  A couple of the miners commented that production growth in 2013 is partly due to strikes in south Africa that depressed production in 2012 and will, presumably not hamper 2013.

Source: company reports and presentations.  Gold includes gold equivalent ounces for companies that report GEO.

As a gold bull it is reassuring to see that supply is limited.  Historically gold has been a good deposit of value because supply growth was limited.  That remains the case even with 21st century technology.

Companies that can grow production earn a premium valuation, in an industry with slow growth.  My current research efforts are focused on identifying gold miners that are growing production.

Senator Warren re: HSBC money laundering and 'to big to jail'

Senator Warren summarizes HSBC's money laundering and 'to big to jail'.  At the end of 2012, HSBC was fined over $1.9B for laundering money for drug cartels and other criminals. 
http://online.wsj.com/article/SB10001424127887324478304578171650887467568.html
HSBC is the world's third largest bank.  HSBC's profit before tax in 2012 was $20.7B.  The fine for funding murders was equal to about one month of profits.  And no employees were prosecuted.

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The blog-o-sphere is full of comments about how Senator Warren is grandstanding.  Grandstanding or not at least she is shining some sun light on our corrupt financial system.  As they say sun light is the best disinfectant.  Let us hope that more of our representatives perceive that reforming the financial system is the best way to serve and get re-elected.

Gold: high volume + large buyers = flat prices??

This link is to an interview with Eric Sprott.  He is the leader of Sprott Asset Management which runs several precious metals funds among other things.  He is in a good position to see the physical gold and silver markets because his funds have been buying physical for many years.  

Interview with Eric Sprott: Central Bankers are Gaming Gold

Eric believes that the world's central banks are manipulating the price of gold down.  Of course he cannot prove this.  However, there are some strong indications:
- the volume of gold that trades on the COMEX.  Some days the volume is close to the entire annual physical gold supply.  Such large volume must be mostly 'paper gold' or contracts to buy/sell gold.  There is not enough physical gold available to satisfy all contract holders if they demand physical gold at the same time.  The speculation is that central banks are supplying bullion banks who are on the sell side when necessary to meet the demands of contract holders.
- the volume of gold buying by China and India.  Eric supposes that some of that gold must be coming from other countries' central banks

The only way that gold prices could have been stable over the last 2 years while the markets trade huge volumes and China and India acquire more and more physical is if central banks supply some gold or at least promises (contracts) of physical gold.  

The question now is when.  When will the central banks stop selling their gold?  And how will markets and traders with paper promises react?  Will governments outlaw gold ownership and buying or selling gold before that day?  It is difficult to guess because the central banks are so opaque.  Central banks are not audited so even their current holdings of precious metals are unknown.

US Gov't Ineptitude - even when they get one right

Jesse summarizes and links to an incredible story.  The US Federal Energy Regulatory Commission won a verdict for a $30M fine against a former natural gas trader at Amaranth Advisors for manipulating the gas market.  And now, incredibly another US government agency the US Commodity Futures Trading Commission (CFTC) is backing a suit asking a Federal appeals court to overturn the fine.  

The US government has become so corrupt and inept that they are working against each other - let alone for 99.9% of its people.  I wonder how many consulting contracts or promises of future employment the CTFC commissioners have received from Amaranth and this trader.

http://jessescrossroadscafe.blogspot.com/2013/02/gold-daily-and-silver-weekly-charts_7.html

Rik Green's Investors Forum Growth Portfolio down 3.9% in February

Rik Green's growth portfolio <Port-faux-lio> lost 3.9% in February and the S&P500 was up 1.1%.  CVX was up 1.7% and continues to outpaced the S&P500.  The precious metals funds were down about 8% and GG was down 7.8% in February.

Year to date the growth portfolio is down 1.8% while the S&P is up 6.2%.  This volatility is tough to stomach!  Deep breath.  Anyone investing in precious metals must be prepared to weather some storms.  But it still hurts to think that an investment in the S&P index would have out performed my carefully selected investments.  We're only in the first inning.

From an earlier post you can see that I believe the recent decline in metal prices to be a buying opportunity.
http://rikgreeninvestorforum.blogspot.com/2013/02/gold-prices-down-another-2-make-for.html

Gold mine investors have gotten the shaft

As I wrote several days ago the gold miners have barely been able to increase production despite increased investment and higher gold sales prices over the last several years.  The 7 mining companies that I reviewed estimate that gold production in 2013 will increase only 2.3% from 2012.  http://rikgreeninvestorforum.blogspot.com/2013/02/miners-estimate-23-gold-production.html

Bloomberg published a nice summary of the situation.  
bloomberg.com: gold-miners-come-clean-on-costs-after-lost-6-years

Some comments on the Bloomberg article:

The article focuses on cost which should be viewed together with production or sales.  The most damning aspect of gold miner leadership is that their investments have not achieved increased production.  If ABX and GG were producing more gold, the investments would have a much better return since their all-in sustaining cost is currently $941 per ounce.  At this cost level continuing operating margins are over 40% assuming a gold sales price of $1,600 per ounce.  As an investor in gold mining companies I would be satisfied with lower margins (in percentage) as long as total operating profit (in dollars) is growing.

Barrick Gold Corp. (ABX) and Goldcorp Inc. (G), the two biggest producers by market value, have begun reporting “all-in sustaining costs” for the first time. The new measure averaged $941 an ounce between the two companies in the fourth quarter. That’s 50 percent higher than the $626 average so-called cash cost they disclosed in the preceding three months

The average cash cost of 10 of the biggest gold miners was $694 an ounce in the third quarter, 49 percent higher than in the same period two years earlier, according to data compiled by Bloomberg. The average gold price rose 35 percent in the same comparison.

Cash cost has been increasing mostly due to lower yields and partly from "pressure from rising prices for labor, equipment and raw materials".   New mines starting production have lower yields than the old mines that have been depleted.  And, ongoing mines are also seeing lower yields.  Lower  yields means that more fill must be excavated and more tons of ore milled to produce the same amount of precious metals.  At an underground mine it means that more and usually deeper and therefore more expensive tunneling is necessary just to reach ore deposits.

With an average cash cost of $694 per ounce the miners should be producing as much as possible - and I think they are.  There is a lot of room for production at lower yields if you sell something that cost $649 for $1,600.  Miner that can grow production will carry a premium valuation.

What exactly is cash cost and all-in sustaining cost?  Cash cost typically refers to cash cost by-product.  However, many mining companies also report cash cost co-product.  

Cash Costs by-product exclude depreciation and depletion and include:
- the cost of labor, equipment, spare parts and utilities
- the cost of royalties
- the cost of treatment and refining charges
- the benefit of by product sales, such as silver, copper, lead and zinc sales

Cash Cost co-product includes the same types of costs as for by-product.  The costs are allocated to each product (gold, silver, copper, lead, etc) separately.  In this way no profit on silver, copper, lead and zinc is included or benefits the co-product cost of gold production.  

All-in sustaining cost is defined as:
- cash cost by-product 
- sustaining capital
- exclcudes capital for new mines not yet in production
- corporate general and administrative
- exploration expense
- excludes reclamation and closure costs

The industry is currently working on standard definitions for all-in sustaining cost.  Many of the publicly traded mining companies have started reporting their own version of all-in sustaining cost.  All-in sustaining cost is a better measure of total profitability because it includes sustaining capital and G&A.