The Mint will raise the price of its silver American Eagle bullion coins on Feb. 9. Authorized purchasers are able to acquire the coins for the cost of an ounce of silver plus $1.40 per coin presently. The premium will rise to $1.50.
I imagine the Mint will be criticized, but it shouldn’t be. Any other business that had a hot product that trades for a price so much higher on the secondary market than on the primary market would be aggressively raising prices. The $1.50 would be more like $2 or $2.25.
That would not be popular among the online pundit class, but it is how business works.
Instead, we continue to see shortages of these coins on the market and a rationing system in place to apportion coins to the current buyers.
Bullion investment advisors point to this shortage of American Eagles and other bullion coins worldwide as a indicator that the price of the underlying ounce of silver itself should be far higher.
This has a ring of plausibility to it, and sounds better than the reality of a production bottleneck at blank producers. (The Mint does not produce its own blanks.)
When demand for physical coins rises so far beyond ordinary demand from prior years, it is not surprising that the physical plant and equipment necessary to fabricate blanks can’t meet demand.
Businesses don’t spend large sums of money to keep large amounts of idle plants and equipment online just in case there is an unexpected surge in demand. That’s a quick way to bankruptcy. An even quicker way to bankruptcy is to read the present unusual demand for blanks as a sign that huge new investments need to be made in production facilities to meet it.
Once that is done and demand is satisfied and then falls, the owners of the new equipment would be stuck.
This unfortunate cycle has always been a problem in things like the aluminum industry, the steel industry and iron ore mining. In good times, demand and prices soar. In bad times they both fall off a cliff.
The spectacular run up and then fall in oil prices from $147 a barrel last July is another example of demand rising and falling faster than the underlying infrastructure can adjust.
What’s the Mint to do? Since it can’t take the money and run like a private business, it is pretty much stuck with what it is currently doing.