We are one third of the way through 2023, and it has certainly been interesting in the bullion markets thus far.
The year opened with supply and demand for coins, rounds, and bars pretty well balanced. Demand surged when the failure of Silicon Valley Bank awakened investors to the possibility of systemic problems among smaller and regional banks.
In the background, gold and silver prices have been drifting higher.
For the moment, retail bullion demand has eased, and the markets seem to be taking a breather.
Things can change quickly, however. For example, FDIC regulators just arranged a distressed sale of First Republic Bank to Jp Morgan, and more banks could run into trouble.
Rising interest rates are destroying bank balance sheets, and the problem figures to get worse with the Fed expected to hike rates again this week.
Add plenty of geopolitical uncertainty to the economic uncertainty, and all this points to continued demand for physical bullion.
Here are some factors to consider on the supply side, starting with the U.S. Mint. There are, unfortunately, no signs that our nation's sovereign mint is going to start living up to its charter and produce coins in quantities "sufficient to meet public demand."
Despite the massive spike in demand for bullion coins three years ago, the dysfunctional U.S. Mint has somehow managed to produce fewer coins.
Officials are blaming COVID pandemic and difficulties securing enough blanks, but those excuses ring hollow after so much time. The Mint produced roughly half as many silver American Eagles in 2022 than it did in 2021.
Based on 2023 sales year to date, the Mint is on track to produce roughly 20 million silver Eagles this year. That is just over 4 million more coins than 2022.
For sake of comparison, the U.S. Mint produced 47 million coins in 2015, and overall coin demand in that year was well below the current level.
Premiums for gold and silver Eagles are at all-time highs because of shortages caused by the Mint's embarrassing production failures. This also contributed to demand for alternative products and put pressure under those premiums as well.
The good news is that other producers – both private firms and foreign governments – have been rising to the occasion. Most mints and refiners around the world have added significant capacity.
When demand for bullion first surged in March of 2020, dealer inventories evaporated within days.
Lead times for delivery extended to several weeks.
The recent surge in demand was significantly larger anything we have seen in the past, but lead times at Money Metals Exchange moved out briefly by just a few days.
Putting aside the inexcusable problems at the U.S. Mint, the industry's increase in capacity bodes well for investors. Premiums on physical metal probably aren't going back to pre-pandemic levels, but they are moderating.
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