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Gold proofs can skyrocket – or not

When the 2010 proof gold American Eagle coins are sold by the U.S. Mint starting Oct. 7, how much of the demand for the coins will come from collectors and how much will come from investors and/or their retirement account custodians?

If it were just collectors alone, I would say that too many coins are being offered. If my back of the envelope calculations are correct, if you add up the various sales options possible you arrive at a figure of 111,350 troy ounces of precious metal being sold.

At today’s gold price of roughly $1,280 a troy ounce, you get $142,528,000 base value for the gold. Tacking on a numismatic premium, you will probably be in the neighborhood of $165-$175 million. That’s a lot of money given the present size of numismatics.

However, compared to the multiple trillions of dollars in retirement accounts, it is a pittance.

In the long run, if investors buy the bulk of the coins, they will form an overhang on the market that when it comes time to sell could easily reduce the coins’ value to little more than gold value.

If collectors buy the bulk of the coins, there really isn’t much good news there either. The supply becomes an overhang eventually. However, strong hobby ownership could keep prices higher for longer, but the numbers are so large that the coins easily can end up trading as the 1986 Statue of Liberty $5 gold coin did. Then collectors starved for gold bid the coins up by a factor of three on the secondary market before they crashed down to gold value.

Will we see a similar skyrocket path?

If you have been finding yourself checking your bank balance in preparation for the proof gold American Eagle offer, chances are others are too and the skyrocket becomes more likely.